2013 A Pretty Good Year

This time last year we were bullish about equities and positive on the slow but steady strengthening of the economy. The market did not disappoint. The economy was almost heroic, you might say, with its performance enduring government sequestrations and higher taxes almost a 2% drag on GDP but comporting with our expectations of 2 – 2.5% growth. 2013 is ending with GDP and the markets coming fairly close to what we thought they’d achieve. Now the year is almost out, so let’s take stock of 2013 but look ahead to 2014. Continue reading

What Happens if the Government Shuts Down and Nobody Notices?

Yes, this is a facetiously philosophical title (what is the sound of one hand clapping?) that pokes fun at the current situation in Washington. And we’re well aware that if Republicans and Democrats can’t reach a compromise in a couple of weeks to deal with the debt ceiling “time-bomb”, none of us will be joking around.

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Teenage Melodrama and the Market’s Infatuation with QE

Like a teenager caught between the decision of going to college and leaving friends behind or living in the comfort of home and going nowhere, debt markets have been reeling between taper angst and infinite quantitative easing euphoria.

And like that teenager, investors are wondering, “Where should I go from here?” The problem is the cues we have been trained to watch for. Unemployment (was that a 6.5% or 7% target?), inflation, or, wait . . . no, it’s housing prices, right? We are now all confused, adrift without anchorage! Continue reading

The Next Big Challenge to Investors: Rising Rates

Many investors were conditioned to accept that the economy would be in the rehabilitation ward for the foreseeable future, rates would remain low, and monetary stimulus would continue unabated. It was an increasingly dangerous mindset. Now that’s changing with the slow but steady recovery of the economy and the Federal Reserve’s announcement in August that it may begin “tapering” its billions in monthly bond purchases designed to keep rates low and boost asset prices. These fiscal, financial and policy changes usher in the next great risk for bond investors: the potential return of higher interest rates. So I continue on the subject of “duration” and the risk that it poses to fixed income investors. Continue reading

Four Interest Rate Scenarios We Could Face

I’ve written a lot lately on the subject of “duration” and its potential impact on investor portfolios, now that the initial goals of the Federal Reserve’s “Great Monetary Experiment” appear largely accomplished — and tapering of its monthly purchase of Treasuries to keep rates low is on the table. The era of lowering interest rates and rising bond prices looks finally at an end, with no place for rates to go but up. It’s vital, then, that investors think about the impact that rising bond yields could have on their portfolios. Here are a few scenarios we might see. Continue reading

Detroit: Teetering Domino of the Municipal Bond Market?

My colleague, Jonathan Chirunga, is a municipal bond credit analyst and portfolio manager at Pioneer who offered these thoughts on Detroit and the impact of its potential bankruptcy on the municipal bond market.

Pundits have been calling for Municipal Armageddon since the Great Financial Crisis (GFC) of 2008. A combination of runaway debt issuance, plummeting tax receipts, massively underfunded pensions, and, in some cases, outright corruption, were all elements of the plotline. In 2010, a now notorious “Chicken Little” alarm sent the Municipal market into a tailspin, auguring default for hundreds of billions in municipal securities as cities and municipalities collapsed in domino-like fashion. Just recently, the municipal market took another hit – this time as a result of a violent back up in treasuries as investors (ironically) now see a greater risk in faster-than-expected economic recovery. But during this period of time the poster child of the Domino crowd—Detroit sought bankruptcy protection. Thus, the question remains: is this the beginning of a larger default wave? In which case, could municipal securities get slammed from both a simultaneous rise in interest rate risk and credit risk? Continue reading

The Damage Potential of Rising Rates

The initial goals of the Federal Reserve’s “Great Monetary Experiment”— to keep rates low, create negative real yields, spur consumption and cushion the budgetary consequences of fiscal stimulus — have largely been accomplished. Investors could now face the threat of rising bond yields. Various bull and bear scenarios might ensue. What are they and what could trigger them? What are the risks to portfolios? Continue reading

The Fed’s Prisoner Dilemma: Interest Rates Too Low for Too Long

The Prisoner Dilemma is based on the example of two prisoners who are told that if one testifies against the other, the one who testified will go free, but if both testify against the other, both will be jailed – a conundrum about courses of action that don’t result in the ideal outcome. We believe the Federal Reserve (Fed) will try to manage expectations so that the Treasury yield curve does not adjust too violently. They may point to large underemployment, which could still look ugly for a while, to justify holding rates down. Maintaining zero for as long as possible reduces the probability of exploding debt service costs, but the math is grim. Continue reading

How Bonds Will Suffer Before the Fed Raises Rates

The Federal Reserve’s years-long zero-interest rate policy has flattened Treasury yields to where rising interest rates and inflation are almost assured manifestations. Investors may have to face the threat of rising bond yields. Damage to high quality, long-duration debt instruments would likely happen far in advance of a rise in interest rates with periods of significant volatility. What are the risks to portfolios? The first in a series of three papers that examines this questions is now available. Continue reading

What’s Next for U.S. and European Markets?

I was asked recently to provide some color around the state of global fixed income markets as we close out the first quarter of 2013. Of course, one of the more watched situations in the global markets has been Cyprus’s banking crisis. I won’t go into too much depth on the subject here, as my colleague, Cosimo Marasciulo, has recently provided a comprehensive analysis.

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