What's in the News:
Last week was a busy week for the fixed income markets.
Federal Reserve policy makers chose to keep interest rates unchanged. The Fed believes that the economy is growing at a “solid rate”, however, core inflation remains below their target of 2% and expected labor market conditions gave them pause.
Before jetting off to Asia, President Trump officially nominated Jerome Powell to replace Janet Yellen in February as the new Federal Reserve Chairperson.
And lastly, Republicans unveiled a new tax bill which, if passed, could widen the budget deficit - potentially forcing the Treasury Department to issue more debt, which would weigh on bond prices. This immediately led to a decline of the 10yr Treasury yield.
Amongst all of these newsworthy bits, one thing seems clear, lower for longer will remain the mantra for the income investor.
What are we thinking?
As we touched on in our most recent quarterly commentary, “this slow and steady market mentality toward future interest rate hikes has worked to compress yields along the US Treasury maturity curve, as well as yield differences between government and investment grade corporate debt. Domestic interest rates remain very low by historical standards, and as a result, the hunt for additional yield persistently dominates credit market activities – as it has since the financial crisis prompted strong monetary policy response. If interest rate increases are believed to occur only sporadically, then market participants will likely become increasingly content with making the best of their steadily shrinking options."
It feels like we have been talking about interest rate hikes forever and that that may not change anytime soon. While income investors are forced to remain patient they shouldn’t be doing so on the sideline. A portfolio designed to provide high income without taking excessive risk during low rate periods, and positioned to benefit when rates start to rise could be just the spoonful of sugar to help this bitter pill go down.
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