Whats in the news:
In March the Federal Reserve began the process of normalizing interest rates. In a statement, Federal Reserve Chairman Janet Yellen said,
“The simple message is the economy is doing well … we have confidence in the robustness of the economy and its resilience to shocks”
Since Yellen made that statement, expectations for a June rate hike have been fluctuating, falling from 63% on April 10th to 50% April 17th and back up to 67% on April 24th. While the shorter-maturity sector has behaved in direct line with the Fed’s actions and guidance, the longer-maturity sectors have been contracting; causing a flattening of the yield curve. Low interest rates and yield spread contraction present challenges to income-oriented investors who are seeking to maximize cash flows without taking on more risk.
Source: Bloomberg as of 4/25/17
What are we thinking?
Limited clarity from the new administration concerning reforms, the distraction of global diplomacy and the promised re-set of the US healthcare system, paired with anemic economic data points (retail sales, unemployment, CPI) have caused a flight to safety and the yield curve getting stepped on.
So what does this mean for retirees who depend on income generated from their investments? It could mean lower rates for longer.
Our Current Income Portfolio opportunistically manages corporate bonds and preferred securities and is designed to position investors to benefit in a rising rate environment while also generating high and reliable levels of income (without taking on excessive risk) in a low rate environment. We believe that the enhanced current income characteristics of preferred securities continue to offer opportunities for income-focused portfolios when implemented correctly and could be a suitable solution in a lower for longer environment.
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