Perspectives Blog

Neutral funds rate going up?

Zach Pandl, Portfolio Manager and Strategist | May 16, 2014

The idea of low neutral funds rate has surprising currency, but could erode with more evidence of solid growth. We believe incoming information suggests the neutral funds rate would be moving higher, not lower. We see neutral funds rate at 3.75-4.00%, which implies an overvalued Treasury market. The hottest topic in the bond market at the moment is the idea that the “neutral funds rate”—where the Fed will rest short-term interest rates when th…

Gaps, not growth

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

…apacity in the economy, not bring about a rapid expansion per se. This is why the Fed’s guidance about the funds rate and the statement on longer-run goals and objectives are both expressed in terms of the unemployment rate, not the pace of job creation. In our view, the steadily shrinking output gap is what put the exit wheels in motion, and there’s little sign that this persistent trend has changed. Economists think about the relationship betwe…

A question for Jackson Hole

Zach Pandl, Portfolio Manager and Strategist | August 20, 2014

…at this week’s Jackson Hole conference. A consensus among Fed officials holds that the standard U3 unemployment rate—now at 6.2%—“considerably” understates slack in the labor market. As a result, policy should focus on broader measures like the U6 unemployment rate—which includes discouraged workers and part-time workers who would prefer full-time work—or statistical estimates of the total “employment gap” (such as that from economist Andrew Lev…

A port in the storm — Short muni funds can offer refuge in the face of rising rates

Catherine Stienstra, Senior Portfolio Manager | October 2, 2014

Short term munis may make sense in a rising rate environment. They provide attractive yields and investment flexibility vs. cash investments and interest rate protection vs. longer assets. Cash investments have come with considerable opportunity cost in recent years. Co-authored by James Dearborn, Head of Municipal Bond Investments 2014 has offered many investment surprises, perhaps none bigger than the downward move in yields across virtuall…

Should your income be fixed?

David King, CFA, Senior Portfolio Manager | December 16, 2013

…s. Recipients of government payments linked to inflation are receiving nominal or no increases. Nominal interest rates, which factor in inflation expectations, are very low. Low nominal interest rates would be of little concern if real interest rates (defined as the total interest rate minus expected inflation) were high. However, Federal Reserve policy has been waging war on real interest rates for years, with success. Constant, large-scale buyi…

A primer on preferred securities

Carl Pappo, Head of Core Fixed Income | March 10, 2014

…equity, preferred securities provide diversification to core fixed-income portfolios, which can be very interest rate sensitive. Additionally, since many securities have fixed-to-float or pure floating rate structures, the coupons will increase with rates, providing a hedge against a rising rate environment. How do we find value in the preferred market? Given the nuances of the preferred market, we find that investors who are equipped to analyze…

U.S. rates — Data dependence

Zach Pandl, Portfolio Manager and Strategist | June 23, 2014

…he Fed’s reaction function is (nearly) done moving. We therefore remain cautious about exposure to U.S. interest rate risk, especially at the middle of the yield curve. The June FOMC meeting contained a little bit for everyone and interest rates reacted only marginally after the announcements. But looking across asset markets—including nominal and inflation-linked bonds, equities, commodities and the dollar—it’s clear that investors interpreted…