Morgan Stanley Investment Says Fed on Track to Raise in December

  • Fed will probably move next month, bond chief Kushma says
  • Company bonds seen offering protection as U.S. rates rise

The Federal Reserve will probably raise interest rates next month, making corporate bonds outside the U.S. the place for bond investors, according to Morgan Stanley Investment Management.

The company’s Global Fixed Income Opportunities Fund is loading up on company debt denominated mostly in euros, said Michael Kushma, the chief investment officer for global fixed income. In contrast to the U.S., yields can go down in Europe, he said. 

“We are a bit worried that U.S. rates are on the low side, and the risk is for
them to go up,” Kushma said Wednesday in an interview in Singapore. “We’re leaning strongly toward credit risk and away from interest-rate risk. It’s also a global portfolio. Approximately 40 percent of the assets are outside the United States.”

The strategy highlights the steps bond managers are taking to protect holdings as Fed policy makers contemplate pushing their benchmark higher for the first time in almost a decade. Central bank officials inserted language into their October statement to stress that “it may well become appropriate” to raise the lending rate at their next meeting in December, the minutes of the session issued Wednesday showed.

‘Just Fine’

“The U.S. economy is doing just fine,” said Kushma, who spoke before the central bank issued the minutes. “It’s not booming. It’s not doing poorly. The Fed is likely to raise rates next month.”

Global Fixed Income Opportunities Fund has hedged all its currency risk, meaning it is betting the dollar will advance as the Fed increases rates, Kushma said. “It’s gone up a lot already but it still looks like it has upside potential.”

The Bloomberg Dollar Spot Index rose Wednesday to the highest level since its inception on Dec. 31, 2004.

The Bloomberg U.S. Treasury Bond Index has fallen 0.7 percent in November, paring its gain for 2015 to 0.7 percent. Benchmark 10-year yields were little changed at 2.26 percent as of 2:02 p.m. in Tokyo.

The $323.5 million Global Fixed Income Opportunities Fund is little changed over the past month, beating 81 percent of its competitors, according to data compiled by Bloomberg. The average annual return over the past five years is 5.7 percent, outperforming 98 percent of its peers.

Before it's here, it's on the Bloomberg Terminal.