Calm in a tempest

The approach to fixed-income: Smooth, steady
Tuesday, May 02, 2006
BY GREG SAITZ
Star-Ledger Staff

Coffee in hand, Robert Tipp wanders the floor of Prudential Financial's fixed-income trading desk with the casual air of someone taking a stroll on a sunny spring day.

The desk's chief investment strategist oversees hundreds of trades each day involving billions of dollars. He must keep up with the machinations of the U.S. markets and those around the world. Yet Tipp appears tranquil.

"That," he says, calmly, "is an illusion."

Despite whatever internal hurricanes may be swirling, Tipp's outward control of emotions seems to parallel an investment approach inherent in fixed income -- smooth and steady. For those who have $170 billion invested with Prudential in fixed-income products, it is a tact they no doubt appreciate.

"We do our best to keep risks under control," Tipp says. "People (traders) are intense. Basically you're being forced to make decisions in portfolios where you don't know what's going to happen in the markets, what's going to happen in the world."

Still, traders of fixed-income investments -- bonds, mortgages, currency and the like -- seem less boisterous at work than their stock-trading brethren. During a visit to Prudential's fixed income trading floor tucked into the third floor of Gateway Center II in downtown Newark, there were just a couple of raised voices from the 50 or so traders spread out on the L-shaped trading floor.

Different clumps of desks focus on various types of fixed-income investments, ranging from high-yield bonds to emerging markets, from U.S. government bonds to money markets. Most of the traders have either two or three flat-screen monitors on their desks, pulsing with continuously changing market data, risk measures for specific portfolios and messages from brokers on Wall Street executing orders.

The billions of dollars they are investing comes from Prudential's insurance division, as well as large institutions such as pension funds -- both outside companies and city and state governments. In addition, the traders manage money for Prudential's JennisonDryden mutual funds.

Late last month, Tipp and the others prepared for the release of two economic indicators: consumer confidence and existing-home sales. The news, released about 10 a.m., showed consumer confidence rose unexpectedly to an almost four-year high. Home sales also managed an increase.

Jumps in either report generally aren't good for bonds, and yields on the 10-year Treasury notes immediately increased, sending bond prices down.

"In the stock market, good news is good news," Tipp says. "In the bond market, bad news is good news."

But Tipp and Ellen Gaske, a market economist for the desk, weren't too concerned. Tipp says individual reports don't generally drive a wholesale change in their investing strategy.

That doesn't mean, however, traders didn't try to use the reports to their advantage.

"I was doing some trades as the numbers came out, sort of anticipating," says Peter Cordrey, a managing director who oversees U.S. Treasuries, high-yield bonds and other investments. "Every time the prices change, it affects valuations, but it also offers opportunities."

Those opportunities may not be in the bond markets, but Tipp says some emerging global markets might be attractive. That's where David Bessey focuses his attention.

Bessey, who heads the emerging markets desk, says bond yields are about 15 percent in Brazil, as high as 14 percent in Turkey and about 9 percent in Mexico.

"All of these seem like pretty good opportunities to us given the lower yields we're finding in other parts of the developed world," Bessey says. "The risk you take in each of these markets is you own those currencies, you own the money so you are exposed to currency risk."

There's no better example of that risk than a 5,000 ruble note taped to the side of Tipp's computer monitor. The note is from before 1998, when interest rates skyrocketed in Russia and the value of its currency crashed.

"That," he says, "is a little reminder."