Perspectives Blog

Interest rates in a highly indebted economy

Zach Pandl, Portfolio Manager and Strategist | October 13, 2014

In a highly indebted economy, there is no fixed cap on the level of interest rates. Any increase in interest rates must be consistent with tolerable debt service ratios, the existing stock of debt and private sector savings. It’s in this context where Fed officials’ delicate approach to the exit process looks most understandable. The deleveraging constraint Last week the Federal Reserve reported that U.S. households’ mortgage debt service rati…

Bond yields are too low somewhere

Zach Pandl, Portfolio Manager and Strategist | July 14, 2014

…iverse set of countries year-to-date (Exhibit 1). This comovement should come as no surprise: changes in forward rates are always highly correlated across countries. And we can use these cross-country relationships to shed some light on today’s low bond yields. Exhibit 1: Cumulative change in 5y5y yields since December 2012 There’s a well-known relationship between nominal growth and forward interest rates, which holds in both theory and practic…

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

…how our recommendation has played out, we understand why investors remain hyper-cautious about the impact rising rates may have on their bond investments, particularly with interest rates hovering near 14 month lows and the significant year-to-date outperformance of long muni bonds. Admittedly, there are conditions in place that could anchor interest rates at low levels for some time, namely comparatively lower eurozone rates, dormant wage and pr…

Rising rates and REIT returns

Arthur Hurley, CFA, Senior Portfolio Manager | September 15, 2014

While REITs typically demonstrate some interest rate sensitivity and sometimes have a “knee-jerk” reaction down when rates first move up, performance has often rebounded. An improving economy has the potential to dampen the effects of duration risk and interest rate sensitivity, given the increased earnings and dividend growth REITs can produce. The balance of income and organic growth attributable to REITs can offer an attractive investment op…

U.S. rates — When the facts change

Zach Pandl, Portfolio Manager and Strategist | September 10, 2014

…poor across the curve—not just at the front end. Yield curves tend to flatten as central banks raise short-term rates, but valuations have now moved beyond the point where these trades make sense. Investors should brace for higher interest rates, not just a flattening yield curve. When the facts change At the start of this year our views on U.S. interest rates were underpinned by two main facts: (1) reasonable valuations for longer-maturity Tre…

Duration for diversification

Columbia Management, Investment Team | November 19, 2013

…ue many investors are struggling with today: the appropriate amount of bond duration in an environment of rising interest rates. For bonds themselves, the implications of rising interest rates are straightforward: higher rates reduce prices and erode total returns.* But what do rising rates mean in a portfolio context? What is the right amount of duration in a world with lower expected bond returns? The answer, it turns out, relates to diversific…

U.S. rates – Headwinds

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

…eal 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 they begin, and (3) that short-term rates could remain below pre-crisis levels even when the economy returns to normal. At this week’s meeting the FOMC looks likely to rework its forward guidance for short-term interest rates once again. By our count this will be the seventh variat…