The minutes from last month’s FOMC meeting just came out this morning (February 20th). Here are some of my thoughts on the release.
Even after a bumper year of investor inflows, high yield bank loans underperformed high yield bonds in 2013. Flows into bank loans, a segment of the overall high yield fixed income market, were north of US$62 billion, and yet the total returns in the high yield bond market were better. Why didn’t all that love from investors translate into better returns? Read more
On December 18, 2013 the Federal Open Market Committee (FOMC) announced they’d taper their massive bond-buying program by US$10 billion per month beginning in January 2014. While market participants and analysts had long obsessed over if and when taper would begin, market interest rates had already begun adjusting to the quickly approaching reality of reduced purchases. But have market interest rates substantially adjusted to a new fundamentally driven equilibrium, or will reduced purchases drive interest rates even higher from here?
From September 2011 through April 2013, long-term interest rates were held down by market confidence in the FOMC’s promise to hold the fed funds rate close to zero indefinitely and an open-ended long-term asset-purchase program. Back in May 2013, Fed Chairman Ben Bernanke brought up the idea that long-term asset purchases may not persist forever, which led ten-year U.S. Treasury rates to rise by 130 basis points (1.3%) over a four-month period. Read more
The reason meteorologists aren’t held accountable for their rain or snow predictions is that weather forecasts are made in terms of probability statements rather than absolute outcomes. This is why we forget the thunderstorms that failed to materialize and forgive the snowstorms that nobody predicted – a 60% chance of rain turns into a sunny day; a 30% chance of flurries culminates as a blizzard. While a probability statement provides an out, it also is a barometer of confidence. And, in the case of financial forecasts, the market itself provides such a measure.
While 2013 has been a fantastic year for equity markets and risk assets in general, a dark cloud looms on the horizon. At some point, the Federal Reserve (Fed) will initiate its plan to taper; the beginning of the end of the latest round of quantitative easing will commence and the support for U.S. Treasurys and mortgage-backed bonds will fade. Rates must rise, “they” say. But does the “market” have a view? Read more
A recent paper published by Principal Financial Group® says it can be possible. (PDF: 694 KB)
It’s a common belief that interest rates have nowhere to go but up. And because bond investments typically go down in value when interest rates go up, plan sponsors may be avoiding investments in bonds in favor of other options. As the duration – that is, the length of the maturity of the bond – extends longer, the larger the decline in the bond investment will likely be if interest rates increase. So plan sponsors that invest in bonds have generally been sticking to shorter duration bond investments.
If a plan sponsor feels interest rates will go up, should they avoid bonds – and in particular longer duration investments? According to this article, that is not necessarily the case. Read more
There’s been a lot of rumbling in the news lately about the bond market.
With interest rates recently bouncing off of historic lows, the economic community is in general consensus that the end of a more than 30-year bull market for bonds is near.
While no one can predict the future of any investment option, there are signs of a sea change for the bond market.
Oh yeah, I’ll tell you something
I think you’ll understand
When I say that something
I want to hold your hand
- “I Want to Hold Your Hand,” The Beatles
Hand-holding is getting to be very popular with the world’s major central banks. Effectively constrained by zero or near-zero interest rates, central banks have been putting greater emphasis on the effectiveness of their communications. Central bank “speak” – if used wisely – holds the power to ease monetary conditions as much as, if not more than, policy rate changes. Read more