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…

Gut check: The outlook on fixed income

Colin J. Lundgren, CFA, Head of U.S. Fixed Income | February 24, 2014

…se — but defaults remain very low by historical standards at less than 2%. Valuations are pricing in low default rates to persist at or near current levels. The reason we pick high-yield bonds over loans may seem counter intuitive, but it is mostly about technicals. Both sectors experienced strong inflows in 2013, but the pace of flows into bank loans has been extreme. Given our own rate concerns, we sympathize with investors who are attracted to…

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

…hich are suitable for investment, including: – Common stocks with safe, stable or rising dividends – Floating rate bonds – Bank loans – Preferred stocks and bonds with interest rate reset features – Master Limited Partnerships Without question, some of these asset classes are more volatile than investment-grade bonds or the like. However, this may be offset by the potential for either income or capital return to exce…

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…