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Market Perspectives - April 2019


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Market Perspectives - April 2019

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Market Perspectives - April 2019

  1. 1. Market Perspective – April 2019 Experience Insight Impact Overview: Since the financial crisis, interest rates have lingered at very low absolute levels, offering investors limited yield. The concern amongst bond investors was that as inflation rose, the Federal Reserve (Fed) would raise interest rates. In turn, minimal yields would be eroded by the resulting negative price movement of the bond market. While the Fed may have partly created the equity market swoon of late 2018 due to the continued rate increase promises, recent policy statements suggest that increases may have halted. This could offer an opportunity to embrace traditional fixed income securities at modestly higher interest rate levels (albeit at low levels vs. history). 1
  2. 2. Current Domestic Interest Rates Experience Insight Impact The above charts represent the current levels of income available on U.S. Government bonds across the range of maturities ranging from 1 month to 30 years (as of 4/15/19). With history as a guide, fixed income has served as a ballast vs. equity exposure, and for clients seeking multi-asset diversification, it can make sense to own bonds in a broader portfolio management context. Source: Bloomberg 2
  3. 3. Fed Expectations Flipped Experience Insight Impact As recently as the 4th quarter 2018, market expectations were that the Fed would raise interest rates multiple times over the next year. Today, current expectations have changed. As you can see above, the probability the Fed will cut interest rates over the next year is nearly 50%. This type of environment is positive for bond investors. Falling bond yields increase bond prices, which can enhance total returns above and beyond the pure yield generated by bonds. Source: Bloomberg 3
  4. 4. Other Factors that May Keep Rates from Rising Experience Insight Impact Across the globe, there is over $10 trillion of debt with negative yields. U.S. Treasuries (and a broader spectrum of domestic bonds) remain a viable alternative to pick up some additional yield vs. many other parts of the world. 4 Source: Bloomberg
  5. 5. Extreme Conditions Elsewhere in the World Experience Insight Impact Surprisingly, Greece’s 5-year bonds recently began yielding lower on a percentage basis than 5-year U.S. bonds, despite the obvious disparity in credit quality (shown above in the red box). This is due largely to the support of the European Central Bank along with differences in inflation expectations. 5 Source: Bloomberg
  6. 6. Inflation Expectations Remain Muted Experience Insight Impact Low inflation in the U.S. allows the Fed to keep rates from rising in the near term. 6 Source: Bloomberg
  7. 7. Market Perspective – April 2019 Experience Insight Impact Conclusion: High quality fixed income has traditionally served investors by providing income, a reasonable total return, and acting as a tool to potentially help control overall portfolio volatility and value when most needed. In recent years, the total returns of bonds were low. With the threat of rate increases over the past few years, even the income component was potentially cancelled out by downward price movements. More recently this threat has diminished. While current yields and total return are not overly compelling compared to long-term historical levels, the pieces are in place for fixed income to return to a more traditional place in balanced portfolios. 7
  8. 8. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and are for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy. 8