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…

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…

U.S. rates – Headwinds

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

…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 they begin, and (3)…

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…

Should your income be fixed?

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

…ve investment vehicles, but today there is basis for doing so. The historical role of bonds, bank term deposits, savings accounts, etc. has been to provide an adequate rate of return with low risk. If these investments will do that today, this discussion is over; but will they? The event we now call The Great Recession have wrung inflationary expectations out of the global economy. All major commodities, whether gold or oil, cotton or corn, are p…