While much of the current economic news has been positive, there are signs that rising interest rates are starting to take a bite out of the economy. Recently, the Atlanta Federal Reserve revised its forecast for 1Q Gross Domestic Product (GDP) growth down from more than 5% to a mere 1.9%. Despite this, The Federal Reserve (“Fed”) seems intent on continuing their path of least resistance by raising rates, despite the fact they acknowledge that inflation, as measured by CPI, isn’t a risk at this time. While most market watchers agree that interest rates have remained too low for too long, investors should be aware of the long-term market trends we are now testing.
Examining the chart below for the U.S. Treasury 2-year and 10-year bond yields illustrates the market is testing a long-term resistance level dating back to the early 1990s. It’s interesting to note that when the spread between the 2-year and 10-year rates compresses to near zero, it has historically been a reliable precursor to an economic recession (highlighted by the gray bars). Said differently, while the Fed may control short-term interest rates, long-term rates are based on the market’s expectations for future growth. Essentially, the yield curve shifts from its normal upward sloping direction, where long-term rates are higher, to a downward sloping curve, where short-term rates are higher. During this type of market environment, investors generally tend to place a higher priority on preservation of capital and, as such, rush to buy long-term Treasury bonds. Given the current market environment, we believe investors should pause and consider the following three potential scenarios:
While the recent spate of equity market volatility has gotten a lot of attention, it would be wise for investors not to forget what is happening in the “less flashy” bond market and corresponding interest rate environment. While we don’t believe that the market is poised for a break-out in rising rates, investors should remain mindful of rate trends, and as always, cautious of seemingly certain outcomes. Talk to your consultant or advisor about the differences between core and intermediate fixed income allocations along with high quality corporate debt relative to high yield. If you are considering more risk, you may wish to consider investments like bank loans (floating-rate securities) as a way to try to benefit from rising interest rates while providing potentially better recovery profiles and lower default rates than alternative traditional high yield bonds.
Important Disclosure Information:
The views and opinions expressed are solely those of AndCo Consulting. This should not be regarded as investment advice or as a recommendation regarding any particular course of action. AndCo does not provide investment advice to individual participants and you should confer with your financial advisor for additional information.
This document has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon, for legal or tax advice. Certain information is based on sources and data believed to be reliable, but AndCo cannot guarantee the accuracy, adequacy or completeness of the information.
This article may contain statements of future expectations, estimate, projections, and other forward-looking statements that are based on available information and AndCo Consulting’s view as of the time of those statements. Such forward-looking statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
Opinions expressed reflect prevailing market conditions at the time this material was completed and are subject to change. Moreover, the material provided herein is valid as of the date of posting and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after such date.
AndCo Consulting is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.
June 24-27, 2018
The FPPTA Annual Conference draws approximately 2,000 people every year. The conference focuses on a macro-perspective of the industry and public pension landscape over two and one-half days of speakers. Attendees spend time learning from one another ways to protect and grow municipal pension plans.
AndCo Conference Speaker: Mike Welker, CEO
June 16-20, 2018
The FGFOA annual conference is held each June in various locations throughout the state. Approximately 1,200 local government finance officials from across Florida attend this meeting to share ideas, attend educational workshops and sessions, and earn continuing education credits.
The Pennsylvania State Building & Construction Trades Council is made up of 16 Regional Council and more than 115 local unions from 15 International Building Trades Unions.
May 22-23, 2018
The annual PAPERS Forum provides both pension plan and corporate representatives with an opportunity for networking and education on a wide variety of pension topics.
May 19-22, 2018
Mt. Pleasant, MI
Michigan Association of Public Employee Retirement Systems (MAPERS) was established to provide educational training and legislative updates to trustees of Public Employee Retirement Systems within the State of Michigan.
May 16, 2018
Join leaders from Endowments and Foundations, investment consultants, money managers, and subject experts for this full-day educational conference covering today’s critical investment and governance issues.
This year’s conference will include a mix of regional and national speakers from investment organizations and the Endowments and Foundations community, a keynote lunch presentation, and a CIO Roundtable.
AndCo Conference Speaker: Tim Walters, Senior Consultant
May 13-16, 2018
New York, NY
More than 1,000 trustees, administrators, state and local officials, investment, financial and union officers, pension staff and regulators attend the NCPERS Annual Conference & Exhibition each year. Attendees benefit from the comprehensive educational programming, dynamic speakers, and networking opportunities with money managers, investment service providers and public fund colleagues from across the nation.
May 6-9, 2018
St. Louis, MO
GFOA’s 112th Annual Conference offers an opportunity for public finance professionals from across the United States, Canada, and the world to share ideas, develop technical and managerial skills, view new products, and network with peers.
May 1-4, 2018
East Peoria, IL
IPPFA’s Spring Conference offers trustee training to public pension trustees. With the recent far reaching changes in pension law and with the difficult challenges yet to come, the IPPFA strives to prepare pension trustees for the future.