As recently as December, the Federal Open Market Committee (FOMC) seemed to be on track for reaching four upticks in the federal funds rate in 2016. By January, amidst a stock market slump, the FOMC was already thinking better of the idea and conversations on the prospect of negative rates were even appearing in market headlines.
Then spring sprung and Yellen and company again prepared the market for an uptick in rates, if the data so allowed. Yet all along, the bond market has not been so sure. Rates have remained low, but perhaps of more significance, the yield curve flattened. This is an oft-seen sign of economic slowing rather than acceleration.
The most recent employment report in early June showed a drop in the unemployment rate to 4.7%. This number is at the low end of the Fed’s projections for “full employment”, at which point inflation is likely to be triggered. As such, this would seem to be an unambiguous signal that the policy rate is ready to be increased. However, at the same time, the report also showed an anemic gain in payrolls and a marked decline in the labor force. Erratic numbers at best. We anticipate the report in its entirety will prompt the Fed to respond as they usually do: to wait.
This episode would seem to mark the bond market’s views as prescient, continuing its tenure as the FOMC’s most dovish member. While expectations for the fed funds rate indicated an interest rate increase in June, the bond market, as represented by the yield curve, was pointing towards the end of the year. Once the employment report hit, expectations reset, and now both indicators seem to be in synch with the Fed waiting.
That said, the macroeconomic future is not an open book, and nobody knows exactly what will happen next. As investment managers, we can and do weigh the evidence, calculate the odds, make forecasts, and construct portfolios based on those judgments. Frankly, that primarily teaches us humility and flexibility.
Nevertheless, in a low yield world that is ever waiting for higher yields, income continues to be a primary need for many investors. In this regard, we continue to be wary of taking on excessive risks to generate higher yields. Instead, we advocate an intermediate term portfolio of investment grade corporate bonds and preferred securities as a way to enhance yield without diminishing credit quality. We view this risk-conscious approach as the best way to structure a portfolio for yield in a world that offers very little of it.
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.