Perspectives Blog

U.S. rates — When the facts change

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

…or higher interest rates, not just a flattening yield curve. The deterioration in valuations for longer-maturity Treasuries is clear to see. Our estimate of the term premium for 10-year Treasuries—i.e. the bond’s expected yield return over cash—fell from +85 basis points (bps) at the end of December to -5bps at the end of August (Exhibit 1; it has picked up a bit in the last few days). At these levels, Treasury yields do not adequately compensate…

Credit alternatives in government-backed debt

Columbia Management, Investment Team | June 23, 2014

…Aggregate Index — made up largely of Fannie Mae, Freddie Mac and Federal Home Loan Banks debt — only out-yields Treasuries by 12 basis points. However, there are other types of agency debt that can offer significant spreads to Treasuries with a modest decline in liquidity. At Columbia Management, we have been increasing our allocation to the agency market in core portfolios as a way to reduce credit risk while maintaining competitive yields. In…

Interest rates — Farewell, liquidity trap

Zach Pandl, Portfolio Manager and Strategist | December 15, 2014

…rates and (2) similar long-run growth and inflation expectations. With cash rates depressed in most places, U.S. Treasuries can seem to offer an attractive yield pick-up compared to German Bunds, for example. However, if cash rates in the U.S. start to rise or long-term macroeconomic fundamentals begin to diverge, Treasuries and Bunds will decouple. Lastly, while it’s difficult to have strong convictions about the secular stagnation thesis, we ca…

Global asset allocation outlook (September 2014)

Columbia Management Global Asset Allocation Team, | October 6, 2014

…tially ends monetary accommodation. U.S. rates are expensive by our measures, and we recommend an underweight to Treasuries. So far this year, global developments have kept a lid on U.S. yields as Treasuries appear attractive to other developed market bond markets, particularly as the dollar appreciates. But we expect rates to rise in response to cyclical improvement in U.S. growth. We have downgraded some of our non-U.S. overweights, particularl…

U.S. rates — View update

Zach Pandl, Portfolio Manager and Strategist | April 4, 2014

Compared to the market consensus, our views have been more negative on three key duration fundamentals. Following recent remarks by Fed Chair Janet Yellen, we are now less confident about how to read Yellen’s policy strategy. We are still expecting higher rates; however, we now have less conviction that 3-5yr Treasuries will continue to underperform on the curve. For the last couple of months we have argued that portfolios should remain underw…

What’s the outlook for muni bonds?

James Dearborn, Head of Municipal Bonds | June 19, 2014

Strong YTD performance resulted from falling rates, a dearth of new supply and a resurgent demand by investors seeking attractive taxable-equivalent yields. We believe municipal bonds should continue to perform well in the second half of 2014. Yields on muni bonds are compelling when considering the impact of taxes on non-exempt securities. As we reach the halfway point of 2014, it’s a good opportunity to review our full-year outlook for the m…

Asset allocation: The conundrum of 2014

Jeffrey Knight, CFA, Global Head of Investment Solutions and Asset Allocation | March 3, 2014

When economic growth levels off, the headwinds for bonds subside, which fits the patterns of 2014 so far. With bond yields at current levels, the attractiveness of interest rate risk from a valuation standpoint is meager. Should the economic data reaccelerate, we would expect equities to perform well and rate sensitive bonds to struggle. In 2013, both the S&P 500 Index and the yield on 10-year Treasury bonds finished the year at their high…