Monday Money Tip: On interest rates, he sees 1 percent solution

Haverford Trust's John Donaldson has prepared his client portfolios for an interest-rate hike - but he doesn't think it's going to be severe, or happen any time soon.

"Rates are still very low by historical measures. We feel fairly confident the Fed is not going to do a repeat of the 2004-2006 years with 17 meetings of increases. That's not going to happen," says Donaldson, Radnor-based director of fixed income.

"But it's reasonable to go from zero to 1 percent," he says, perhaps even by next year, at which point the central bank could pause and consider the effect of the rate hikes.

Donaldson likes taxable municipal bonds for their low correlation to stocks, as well as corporate bonds. He has let agency bonds such as Fannie Mae and Freddie Mac mature and hasn't bought any more.

"There's almost no extra yield over Treasurys, and I don't know what the end game is" for these controversial housing entities, he adds. "They're out of the portfolio."

Among high-grade municipals, Donaldson likes states such as Wisconsin, Texas, and Georgia, as well as Commonwealth of Pennsylvania and Montgomery County bonds, but not Puerto Rico.

In corporate paper, he has added to positions in Verizon and Amazon.com 10-year bonds, with coupons of 3.5 percent and 3.8 percent, respectively. "There are divergent ratings on these corporate bonds, and that's an opportunity," he adds.

On the sell-off in energy, he purchased some Phillips Petroleum corporate bonds, "which have snapped back in price very quickly."

The Pennsylvania Institute of CPAs last week issued a Fiscal Responsibility Task Force report that details the state's pension underfunding. A copy was presented in Harrisburg and is available online at http://goo.gl/lLa3EZ. (Hat tip to Jerry Maginnis, KPMG office managing partner in Philadelphia, for alerting us to this presentation.)

Pennsylvania's pension crisis has worsened since the PICPA's initial report in 2011. At the state level, retirement-system payments due from the commonwealth are projected to increase from about $1.7 billion (6 percent of general-fund appropriations) in the current 2014-15 fiscal year to $3.3 billion (nearly 10 percent of appropriations) by fiscal year 2019-20.

At the municipal level, the unfunded liability is nearly $8 billion.