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CIP Quips

Fed Up

What's in the news...

Recent political, economic, and market volatility continues to keep everyone on their toes.  

After climbing to 2.95% on February 21, the 10 year Treasury dipped to 2.73% last week before settling at about 2.78% [1]. With the Fed continuing rate hikes and unwinding of QE, recent tax cuts, an implied increase in government spending and a healthy economy, what gives? Is the market over valued at its current level or could the recent spike in yields be a flight to safety after President Trump initiated tariffs on China, threatening a trade war and commented on Amazon? And most importantly, where will rates go from here? 

Disparity among global interest rates could be a headwind on the Fed’s path.  “The US continues to attract world-wide demand for its bonds…this difference creates a headwind for higher domestic rates.”[2] Meanwhile the balance sheets of the Bank of Japan, the European Central Bank and the Peoples Bank of China each have surpassed the size of the Fed’s balance sheet. This increased money supply could prolong lower rates globally. 

Also, it is important to remember that Fed policy does not necessarily influence the intermediate and long ends of the yield curve and, as of now, spreads between short and long term rates are shrinking, making shorter duration bonds more attractive.


Source: Raymond James

What are we thinking?

Investors have steadily been offered less incentive to extend the maturities of their investments and simultaneously are having to assume more credit risk to obtain the same returns which were available to them two years prior. Income investors have waited a long time to see bond yields rise, and while there is opportunity for these investors they are forced to remain patient as the market faces volatility.

Investment decisions should be influenced by long term plans with risk tolerance in mind. While some variables are uncertain, we think the Fed will more than likely continue to increase rates. As active managers, we seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying the portfolio in preparation for interest rates to trend higher.  CIP is currently designed to benefit from rising interest rates, with about 30% of the corporate bond allocation currently due to mature in 1-3 years, which may enable reinvestment at higher rates. 


[1] As of 4/9/18

[2] Source: Raymond James, Fixed Income Quarterly 



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