LIVE MARKETS-Ahead of Fed, Thornburg taking slightly defensive stance in bond funds

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AHEAD OF FED, THORNBURG TAKING SLIGHTLY DEFENSIVE STANCE IN BOND FUNDS

Lon Erickson, managing director and portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico says he is taking a slightly defensive stance in his fixed income funds ahead of the Federal Reserve's rate decision on Wednesday.

"We have different portfolios, but I think if I characterize them overall, I would say we're on the defensive side of things," Erickson says in an interview with Reuters.

"We're definitely lower on the credit risk that our mandates would allow us ... we're a little bit more positioned for a rainy day, not a monsoon, not a hurricane, or anything like that, but certainly a bit of a rainy weather."

The Fed is widely expected to reduce its benchmark overnight interest rate by 25 basis points (bps) to the 4.00%-4.25% range on Wednesday, at the conclusion of it two-day meeting, as it grapples with a weakening labor market with moderate inflation.

But most importantly, investors will be watching for the Fed's tone in its statement and Fed Chair Jerome Powell's remarks in his press briefing, as to the next step for the Fed.

Some people expect the Fed to signal the resumption of an easing cycle with the 25-bp cut, while some are not ruling out a potentially less dovish Fed. This means that the Fed will still reduce rates, but will reiterate being data-dependent and waiting to see whether tariff-induced inflation finally rears its ugly head in a big way.

"Inflation was a little bit higher and so the Fed certainly will still be watching that, and it will still be a big part of the statement...and how they frame the environment... will lead the Fed to be cautious on the cut and probably rightfully so," Erickson points out.

Bond fund managers like to add so-called "duration" to their portfolios, now that the Fed will resume cutting interest rates, and Thornburg's Erickson is no exception. Duration, measured in years to maturity, indicates how much a bond's price is likely to rise or fall when rates change.

In general, when rates fall, higher-duration bonds experience a greater increase in value compared to those with lower duration.

"We still like duration. Certainly, we've seen real rates come down. That has been one of the things that has led us to take more duration was the increase in real yields that the Treasury market in particular offered."

(Gertrude Chavez-Dreyfuss)

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