Fed Forecasting Low Rate Through 2014
Just a week ago, Fed Chairman Ben Bernanke made a key revision to his standard rhetoric; we can now expect interest rates to remain at record low levels through 2014. U.S. Treasury yields are at historically low levels based on a weak global economic outlook, extraordinary Federal Reserve activity that is temporarily depressing rates, and a flight-to-quality move from domestic and global investors in response to heightened financial market volatility (particularly in Europe).
Holding rates at record lows could ignite inflationary pressures over the next 18-24 months. This would further complicate our languid recovery. In the wake of the latest assertions by the Fed, we now anticipate stable bond yields through 2012 with a bias toward slightly higher rates at the end of 2013. In spite of the risk-on sentiment of late, bonds continue to be a safe haven for investors around the globe. Therefore, current pricing appears to be increasing in risk without commensurate reward potential. Given the continued headwinds (primarily out of Europe) and mixed signals from the latest GDP reports, it may be hard to convince investors to leave bonds, at least for now.
We expect interest rates to stay below historical spreads versus inflation for the foreseeable future. Debt instruments will continue to be a popular choice but that doesn’t justify buying overpriced bonds. In our view, corporate bonds as well as select short-term foreign-government fixed-income securities represent greater value with less risk when compared to Treasuries. Considering the low level interest rates, as well as previously mentioned items, we anticipate reducing our fixed-income securities by as much as 40% from current allocations.
Market Perspectives 02-21-2012
Greece; Throw Them Out
The Greek debt crisis blind-sided U.S. investors who spent most of 2011 trying to avoid the affects of a potentially bankrupt country. Rather than allowing shameless spending and reckless management derail a rising U.S. market, investors vowed to turn away from the constant vacillations of what seems like a never-ending drama (by the way, Drama is the eponymous city in Northeastern Greece). Ostensibly, it appears that a solution is forthcoming.