Your Money: Firm thinks Fed will taper in 2014

Patrick Coyne, president and CEO of Delaware Investments, and his team gave their views Monday on the equity and bond markets, and Coyne noted that the stock market's record current level is "a little stretched."

Coyne's background is in fixed income, but as head of one of the region's largest institutional asset managers, overseeing $190 billion, his view is that the yield on 10-year U.S. Treasurys should be within a range of 2.75 percent to 3.0 percent, and that the Federal Reserve's efforts to "taper" its unprecedented bond purchases should begin in 2014. The yield on the 10-year note climbed to 2.80 percent Monday, from 2.75 percent.

Two areas of fixed income the firm likes? High-yield - otherwise known as junk bonds - that's about 5 percent these days; "we're also positive on floating-rate instruments," such as bank loans, Coyne says.

On the municipal side, Coyne and his colleague Michael Hogan, chief investment officer, prefer revenue-backed bonds instead of tax-backed bonds or general-obligation muni bonds. A revenue-backed muni bond might be secured by water or sewer payments, or perhaps a tollbooth.

"All risk assets are highly priced, but we're not in a bubble," adds Hogan. Stocks historically have returned 6 percent annually, but going forward, given the big run-up in stock prices, those returns will have to moderate down to about 4 percent annually, many investors believe. "Valuations in U.S. stock are not extreme yet, but they do imply lower rates of return" going forward, Hogan said.

Currently Delaware Investments is staying away from banks in the financial sector, and prefers instead to hold transaction-based financials such as Visa (symbol: V), Mastercard (MA), Chicago Mercantile Exchange, or CME Group (CME) and Intercontinental Exchange Group (ICE).

See Yeng Quek, managing director of fixed income, adds, "This is a very different environment with low rates that are going to be heading back up. That overwhelms any advantage" in playing the difference in bond yields over Treasurys.

Just back from a three-week trip around Asia, Quek says foreign investors "want to wait to invest in fixed income until the market comes down. There's a lot of money on the sidelines." Quek expects incoming Fed Chair Janet Yellen to begin "tapering" at the end of the first quarter 2014, and that short-term interest rates "won't go up for the next few years." Once tapering stops, Quek believes, the yield on the 10-year Treasury could rise to 3.5 percent.