Jonathan Terry, portfolio manager with the Premier Income Strategies Team, addresses tax reform and global flows into the U.S. investment-grade [IG] space.


Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. In November of this year, a panel of fixed-income portfolio managers with Wells Fargo Asset Management addressed an audience and discussed their strategies and how they’re navigating current events. We wanted to bring you their insights in a series of brief perspectives on the spaces in which they manage.

This week we hear from portfolio manager Jonathan Terry of the Premier Income Strategies Team. Located in San Francisco, the team focuses on high-quality, investment-grade securities with key expertise in investment-grade credit and structured products with an emphasis on security selection.

As the tax reform story played out, the team tracked it carefully—specifically looking at potential changes to the corporate rate and deductibility of interest—to see what effect it could have on their markets.

Jonathan Terry: Yeah, it is very important for us as an investment-grade credit-oriented team—very topical thing for the market. Now at a very high level, it is positive for the U.S. corporate bond market, both from a fundamental and a technical perspective.

On the fundamental side, the key thing we’re looking at is the corporate tax rate. So to the extent that it’s lowered and the magnitude by which it’s lowered will lead to increased earnings for U.S. corporations. That’s positive from a credit fundamental perspective.

And then on the technical side of the equation, we’re looking at the tax deductibility of interest; just because that’ll incentivize issuers to issue less debt, favor equity in the capital structure. And then this notion of tax repatriation—so if a lot of these billions of cash that resides outside of the U.S. comes onshore, issuers will not need to issue to the same extent they have in the past few years.

Laurie: The team has been successful in attracting assets from around the world. Jonathan was asked where those assets have been coming from and why, as well as the reasons investors may have found their style and approach compelling.

Jonathan: Well, we have been the beneficiary of positive flows into the asset class, and it’s, quite simply, a paradigm of low and negative interest rates in these jurisdictions—Japanese investors and European investors primarily trying to get out of low-yielding assets there. And what they want is a liquid market where money can be put to work, but also a relatively safe alternative—and investment-grade credit, quite simply, fits that bill.

So, when you look at our market and see an all-in yield profile of 3, 3.5%, that fairs pretty favorably. I think the Euro IG market is 65 basis points. You know, 10-year JGB [Japanese Government Bond] is at essentially 0. A 3%-yielding IG portfolio, even minus 150 basis points of currency hedge, is net 150 basis points positive. [It] is quite attractive versus low and negative.

And then specifically for us, I think our success has fit very nicely into that trend because we focus on yield and security selection process. Global investors, recognizing the low yielding environment, are a little bit concerned with duration and interest rates, and we are, quite simply, not a big duration player.

So what they want is yield, good credit, risk management, and we’ve been a nice style to accommodate that.

Laurie: In closing, Jonathan mentioned liquidity as one aspect the team is paying close attention to, both in terms of putting those inflows to work, but also, in navigating a jittery market and exiting positions as well.

If you’d like to learn more about the Premier Income Strategies Team visit I’d like to thank Jonathan Terry for sharing his insight. But for now I’ll thank you for listening to us.

Until next time, I’m Laurie King; take care.


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