Fixed Income: Northern Trust is Betting Against PIMCO's Bill gross

From Barron's Penta blog:

Katie Nixon, chief investment officer of Northern Trust Wealth Management, grabbed our attention when she started explaining the firm’s fixed income strategy.

Rising interest rates, on long-dated Treasuries and munis, are “baked in the cake,” she says. In other words, the market is anticipating and pricing that the Fed, led by presumed Chairman Janet Yellen, will tie rising interest rates to an improving jobs market. So Nixon’s research team is betting long-dated Treasuries will prove an excellent place to camp-out for yield, figuring the highest volatility will be in the middle of the yield curve.

That’s a bet against most bond experts, including bond king Bill Gross.

Intrigued by this call, we asked Nixon for further clarification. Her position starts with a push-back against clients seeking yield in precarious places. “There’s a growing bubble in certain areas of fixed income,” she says. For example, the market for leveraged loans – which are often floating rate loans extended to indebted corporate issuers of less-than-investment-grade quality – has been hot lately.  (To better understand the run-up of the leveraged loan market, read Michael Aneiro’s column on Barron’s Income Investing blog).

Danger signs in this market now abound, she claims. “In leveraged loans, investors are trading one risk for another. Investors, who are searching for yield, are trading interest rate risk for credit risk, a risk that they’re perhaps not aware of.”

In other words, this broad search for yield and diversification across credit-types could be misplaced if clients aren’t acutely aware of the underlying fundamentals of each individual bond, she argues....MUCH MORE