Perspectives Blog

Could tapering be good for stocks?

Fred Copper, Senior Portfolio Manager | December 16, 2013

…of QE is cut (tapered), the market may actually be cheered by the end of what has always been perceived as a temporary and extreme form of life support. Few issues currently cause as much investor angst as the timing of the Fed’s eventual reduction in the pace of quantitative easing, aka tapering. In May, when the Fed first spoke concretely about slowing the rate at which they are buying government and mortgage securities, interest rates around…

U.S. rates – Headwinds

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

At this week’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…

Volatility and Goodhart’s Law

Zach Pandl, Portfolio Manager and Strategist | May 21, 2014

Markets are starting to make understandable inference that Fed officials see a fixed timeline for rate hikes. Implied volatility is low because perceived policy uncertainty is low. We remain focused on modest slack and sturdy growth. Recent Fed communication brings to mind Goodhart’s Law: “When a measure becomes a target, it ceases to be a good measure.” In a speech Tuesday, New York Fed President Dudley noted that Eurodollar futures are prici…

Flexible income strategies — Avoiding side effects from the Fed’s medicine

David King, CFA, Senior Portfolio Manager | August 11, 2014

In today’s low interest rate environment, investors with cash on hand and a limited appetite for risk aren’t having an easy time growing their wealth. The Fed’s strong influence throughout the government and corporate bond markets makes it hard to find attractive fixed-income instruments of low or moderate risk. To increase an investor’s chances of success, an investment strategy needs the flexibility to look beyond the most visible asset class…

U.S. rates — Data dependence

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

Evidence of data dependency at the June FOMC meeting suggests policy will respond to unemployment and inflation surprises. We are more confident the 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 lo…

Dovish feathers showing through

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

Dovish comments by Fed officials lead us to believe that normalization in interest rates could take a more circuitous route. While the steady economic recovery makes higher yields inevitable, the path we take to get there is dependent on the Yellen Fed’s policy approach. We remain underweight duration, but are now less sure 3-5yr yields will lead the way over the near-term. Textbooks would have us believe that monetary policy is a hard science…

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…