Perspectives Blog

When do floating rate loans begin to float?

Columbia Management, Investment Team | July 11, 2013

e low by establishing a minimum level under which the base rate cannot fall. This feature became a fixture in the floating rate market during the Financial Crisis as the ultra-low interest rate environment took hold. When the Federal Reserve anchored short-term interest rates near zero, LIBOR fell in lock-step and bank loan issuers were forced to identify a new way to entice investors to assume their debt. The introduction of LIBOR floors enhance…

Gaps, not growth

Zach Pandl, Portfolio Manager and Strategist | February 25, 2014

Monetary policy is primarily about “gaps” not growth: the Fed is trying to reduce spare capacity in the economy, not bring about a rapid expansion per se. Despite concerns over cyclical weakness in labor force participation, the unemployment rate is sending similar signals as most other output gap proxies. The output gap improved despite a relatively slow expansion, suggesting weak potential growth. While it’s far too soon to revise any medium…

U.S. rates – Headwinds

Zach Pandl, Portfolio Manager and Strategist | March 17, 2014

At this week’s meeting, the Federal Open Market Committee looks likely to rework its forward guidance for short-term interest rates once again. We expect revised forward guidance to lean heavily on the idea of “headwinds”; this is a stand-in term for a low equilibrium real rate. We expect that the new guidance will make three main points: (1) that the FOMC is in no hurry to raise rates, (2) that rate hikes can proceed gradually once…

What investors should know about Fed forward guidance

Zach Pandl, Portfolio Manager and Strategist | March 24, 2014

The Fed’s communication for 2014 looks like the strongest type of forward guidance, one that clarifies the existing policy approach and backs up its statements. Current statements for 2015 and beyond are closer to the weakest type of forward guidance, which means they should be considered less credible. Look for the market’s heavy reliance on Summary of Economic Projections (SEP) forecasts to fade over time. Last week, at Janet Yellen’s first…

U.S. rates – Forward guidance taxonomy

Zach Pandl, Portfolio Manager and Strategist | March 17, 2014

The Fed’s communication for 2014 looks like the strongest type of forward guidance, one that clarifies the existing policy approach and backs up statements with some type of commitment. Current statements for 2015 and beyond are closer to the weakest type of forward guidance, a forecast that the central bank will behave in the future differently than it has behaved in the past. Look for the market’s heavy reliance on the SEP forecasts to fade o…

The Fed’s outlook and leadership in flux

Zach Pandl, Portfolio Manager and Strategist | August 1, 2013

Fed policy outlook looks increasingly fluid, including changes in the consensus on the leading candidate for next Fed Chair. There has been increasing speculation around changes to the so-called “Evans Rule”—the Fed’s commitment to keep short-term interest rates low as long as the unemployment rate remains above 6.5%. For the upcoming FOMC meeting, we think a likely outcome would be emphasis that the QE tapering decision will depend on the inco…

Fed outlook over the short and longer run

Zach Pandl, Portfolio Manager and Strategist | October 23, 2013

Heightened uncertainty around quantitative easing is mostly a short run problem. We see roughly flat odds of 20% for tapering at each of the next four meetings—December, January, March and April—and an additional 20% chance that the current QE pace continues beyond that. We have turned modestly more cautious about interest rate risk in our portfolios. One of the ironies of Ben Bernanke’s tenure is that he set out with a goal to improve Fed com…