Thoughts from our Domestic Fixed Income Team
The U. S. Treasury and credit markets remained on a steadying trek for the early part of the New Year toward stable prices at historical low yield levels. The fears of rising bond yields and falling fixed income prices which dominated the domestic credit markets throughout the closing autumn months of 2013 have been largely replaced with the realization that massive, worldwide monetary accommodation is seemingly quite far from an apparent conclusion. At home, Federal Reserve Bank Board policymakers have maintained a very drawn-out tapering of its Quantitative Easing (QE) bond buying program, and slow (if any) economic growth across Europe and Japan seems to have most central bankers around the world content for the time being with policies intent on promoting and sustaining business activities - however long that may take. We think there have been glimmers of possible changes to these policies, a series of promising economic releases here, a policy speech or jobs report there; but each potential harbinger of a big interest rate change has been complicated or supplanted by unbreakable cold-weather patterns freezing green shoots of possible growth in place, or by geopolitical unrest in Syria and then the Ukraine, spurring flights-to-safety into U. S. bond markets.
As a result, U. S. interest rates are actually somewhat lower today than on January 1st and the yield spreads between government and corporate issues have continued to shrink, as they have for a very long time. While most observers, including the new Federal Reserve Board Chairwoman, Janet Yellen, remain optimistic for slowly improving economic growth and employment gains, too much uncertainty persists over the precise timing of these hoped-for trends. We are looking for significantly clearer macroeconomic data and monetary design to be gleaned before we think substantial bond repositioning can be meaningfully incorporated into credit market portfolios. Officially, the Federal Open Market Committee (FOMC) has set expectations that the first change to short-term rates will most likely not be before mid- 2015. They then suggest that further rate raises would be slight by historical standards. Such projections are very difficult for investors to incorporate into their immediate objectives and planning. The passage of time is fundamental to earning money in the bond market. Waiting idly by for things to fall into place has the potential to become too expensive and risky for most investors. Our fixed income investing is therefore much more presently focused on maximizing available opportunities, positioning portfolios for maximum flexibility, and managing various risk elements, than it is about speculating on interest rate changes which are potentially years away.
Submitted by: Howard Potter, Senior Fixed Income Portfolio Manager
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