Bond-Focused Fund Manager Isn't Sweating a Fed Rate Hike
The Federal Reserve is sounding increasingly hawkish heading into the final FOMC gathering of the year in December, but Gary Cloud, fixed income portfolio manager for the Hennessy Equity and Income Fund (HEIIX) - Get Report , said he is not overly concerned about the impact its moves will have on his bond holdings.
"We are neutral duration but we do look for the yield curve to flatten, so we are not afraid of the Fed rate hikes," said Cloud.
The Hennessy Equity and Income Fund is down 80 basis points so far this year, according to fund-tracker Morningstar, and sports a trailing twelve-month yield of 1.2%. Cloud, a subadvisor to the fund through FCI, manages the fixed income portion of the portfolio, which accounts for roughly 40% of the assets. The remaining 60% is invested in equity and managed by the London Company.
The strong dollar was a problem for multinationals in the third quarter, many of which missed Wall Street expectations due to currency exchange issues. This will only get worse should the Fed hike rates, but Cloud once again is confident it will not overly impact the credit market.
"There is no doubt that revenues and earnings have been impacted by that. It's tough to keep the margins up on the balance, and that could make it more difficult for credit," said Cloud. "We think that it's manageable."
Cloud said supply has been very large this year as corporations rushed to beat the Fed's rate hike and raise cash at low interest rates. He admitted that spreads have widened due to the huge issuance, and its tougher to bring them down in this environment.
When it comes to the high-yield market specifically, he worries that it may be the proverbial canary in the coal mine.
"Energy credits have been the most impacted by this, they have stabilized, but they haven't improved," said Cloud. "Our view is that you really need to have commodities and currencies stabilize to have a much further improvement in the risk markets."