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How the Fed's moves are impacting bonds

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Treasury yields have been stuck near all-time lows ahead of the Fed’s new Main Street Lending Program that is supposed to roll out by the end of this week. Guy Benstead, portfolio manager at Shelton Capital Management joins Yahoo Finance's Brian Sozzi and Alexis Christoforous to discuss.

Video Transcript

BRIAN SOZZI: We're also keeping a close eye on the bond markets this morning. Treasury yields have been stuck near all-time lows ahead of the Fed's new Main Street Lending Program that's supposed to be ready to roll, finally, by the end of this week.

Let's talk about all this with Guy Benstead, Portfolio Manager at Shelton Capital Management. Good to speak with you again.

The yields really have been near record lows again. What is the Treasury market telling you about what the Federal Reserve may or may not do at its next couple meetings?

GUY BENSTEAD: Well I think the Treasury market is displaying some of the same signals of confidence that we're seeing in equities and in credit. So we're seeing front-end rates anchored to record lows. We've seen limited volatility but a little increased volatility in the 10-year sector, and we're seeing the curve steepening. All those things are positive signals economically that are consistent with the thought that maybe the markets are a little bit ahead of the real economy. But what we're seeing in the other credit markets of risk, of corporate bonds and the like, is some significant confidence showing up there.

ALEXIS CHRISTOFOROUS: Guy, what about investors who want to have a little more exposure to the bond market? Is it a good time to buy Treasurys? Should they maybe be looking at corporate debt right now?

GUY BENSTEAD: Well, I'm biased. I think corporate debt is significantly better valued than Treasurys. I think Treasurys as a risk-protection asset are OK. I don't think there's a tremendous risk of higher rates, particularly in the front end of the curve. The Fed may even begin to fix rates out the three to five years, but you're going to see some volatility in the long end.

I think that a better place for extra money is either high-quality corporates or high-quality municipal bonds. The tax-exempt yields there are attractive. And for more adventurous investors, we like certain high-yield credits. Higher managers can do their homework and sort through. There's been a lot-- there's going to be increased defaults. There's going to be increased restructurings, but I think there are a number of companies that have bolstered their liquidity to a point where they're going to make it through the economic dip that we're inevitably going to see in the second and probably the third quarter and come out of it fine on the other side.

BRIAN SOZZI: Guy, you're scaring me a little bit with the bull call on munis and high-yield debt. Why that confidence? Is it a broad-- just a broad-based stroke here where you're saying that the Fed has backed up these markets, so these companies and states are OK?

GUY BENSTEAD: Well, the Fed has backed up the markets, that's for sure. They've come out with a bit of an alphabet soup of programs to support both the primary and secondary credit markets.

They're being very judicious with that credit, however. They're bleeding it into the market slowly. A lot of the programs they've announced they haven't even begun to implement yet, yet the market's taking a lot of comfort from those.

It's important to not paint the market, especially the credit markets, with one broad brush, and the muni market's a great example. There's not just one muni market. There is 50 states. It's countless counties. It's countless agencies, and so there are definitely going to be strains and stress, and some of those are going to be headline worthy. But the bulk of quality borrowers in both municipal and corporates are going to be OK.

And if you just go back a few months ago, back in-- way back in January and February, risk premiums were at historic heights. Now we're not still at the wides, but March certainly provided a blowout of spreads, and we're still finding things that we think are pretty relevant-- relative-- on a relative-value basis attractive.

ALEXIS CHRISTOFOROUS: You know, Guy, if we see-- I guess a few different scenarios could play out here as more states begin to reopen. If we see a moderate recovery, what do you think risk appetite is going to be on the part of investors? Are we still going to see healthy spots relative to equities in the bond market? I'm talking investment-grade debt, maybe even emerging-market bonds. What do you think the fate of those assets will be if we experience a moderate economic recovery?

GUY BENSTEAD: I think it's going to be a tale of haves and have nots. There are a lot of companies that right now are grabbing headlines, bankruptcies left and right, whether it's retail-- you had your Hertz Rent a Car over the weekend. And those are companies that were stressed even before the pandemic, and I think a lot of those companies are going to have to be restructured. They may live on, but they're going to be stressed.

Again, in the credit markets, it's all about where the bond's priced. It's all about relative value. And so if you can buy companies that are money good at discount prices, then that's a good investment opportunity the way we see it.

I think that it's important to not be too risk averse. And again, I think an economic recovery is going to occur. It's a matter of when and how long. And what we don't know is as the economy gradually opens up, where are consumer preferences? Where's the appetite going to be? Are people still going to go out? Are people going to fly?

I'll tell you, I flew last week, and it was a ghost town in each airport and on the airplanes, and I think airlines are going to struggle. I think there are significant changes in business models that are going to have to take place, and there's a lot of uncertainty to how that's going to play out.

BRIAN SOZZI: All right, let's leave it there. Guy Benstead, portfolio manager at Shelton Capital Management, thank you for taking some time this morning.

GUY BENSTEAD: Thank you, Brian.