When the Federal Reserve raises rates and the cost of capital increases, corporate bond issuers will have to instate covenants and protections for buyers that have fallen to the wayside in recent years, according to Mark Kiesel, the chief investment officer for global credit at Pacific Investment Management Co.

“Companies have had it easy for the last several years,” and “you’re seeing companies increasingly test the markets” for what bond buyers will accept in a deal, he said in an interview at the Morningstar Inc. exchange-traded fund conference in Chicago.

“As capital tightens, you’ll start to see bondholder rights resurface. The pendulum is going to shift from issuer to investor,” which will “allow Pimco and other investors to capitalize on higher rates, higher spreads, and more protection.”

Pimco, which oversees $1.52 trillion in assets from Newport Beach, California, is bullish on the U.S. corporate bond market, excluding commodity-related securities, and says volatility should be seen as a buying opportunity. Investment-grade company debt returned 2.3 percent in the first quarter before losing 2.7 percent in the second, according to the Bank of America Merrill Lynch U.S. Corporate Index, as investors looked for ripple effects from lower commodity prices and speculate on when the Fed will lift benchmark interest rates.

Total Return

Kiesel oversees the $98 billion Pimco Total Return Fund with Scott Mather and Mihir Worah. That fund, run for decades by Pimco co-founder Bill Gross before he left abruptly last year, returned 0.1 percent in 2015 through Sept. 29, beating 34 percent of its peers, according to data compiled by Bloomberg. In the past one year, it’s returned 1.5 percent, outperforming half of comparable funds. It’s been reduced to a third of its peak after 28 straight months of outflows.

The extra yield investors demand to hold corporate bonds instead of government debt increased this year as companies issued new debt, seeking to lock in the lower rates, while at the same time, investors were hesitant to buy ahead of rates moving higher, Kiesel said. So a ton of new bonds arrived to a market unwilling to buy them.

“It’s like Thanksgiving,” he said. “That’s really why credit spreads are where they are — people ate too much. It’s called indigestion.”

As rates increase, new buyers who’d been constrained with yields below a certain “trigger point” will step in, he said. Insurance companies, which make up about a quarter of the market, are loath to buy any investment-grade company bond below 5 percent, he said.

Health Care

Kiesel recommends seeking companies in industries that have a high barrier to entry and that are growing faster than the overall economy — such as companies in finance and health care as well as real estate investment trusts.

Slower corporate profit growth, inflation under control, and a decent but not impressive rate of growth for the U.S. economy is a Goldilocks scenario: “not too hot, it’s not too cold” for fixed-income investors, he said.

“Pimco thinks we’re mid-cycle. Housing’s in the fourth inning,” he said. “It’s perfect for bonds.”