Changing triggers, same message: stay the course
by Doug Drabik, Fixed Income, Raymond James
April 18, 2016
It has been an unconventional period of economic times. Central bank intervention has summited to unforeseen levels. Bond market reactions seem fixated on the Fedās every move. Global politics and economic activity are intermingled with domestic practice and affecting domestic corporate profits, exploration and even financial strategies such as stock repurchase programs. Inflation, a huge non-factor, is somehow playing an influential role in investor decisions. Now oil talks seem to be replacing Fed rate hike talks as the daily driver in rate direction. This weekend, talks of cutting oil production has stalled as Iran doesnāt want to play with Saudi Arabia and their plans as they maneuver to recapture some of their market share post sanctions.
Despite all the global commotion and central bank manipulation, the U.S. markets have fared pretty well. Since the end of the recession in 2009, the U.S. GDP has averaged 3.6%, inflation has averaged 1.7% and unemployment 7.56%. Both, inflation and unemployment have continued to trend down (.9% and 4.93% respectively) while the GDP has been more steady (3.1%).
The yield curve, despite the short-term rate stimulus, has remained relatively steep. As measured by the difference between the 2-year and 30-year Treasury securities, the spread is currently 197 basis points (bp). More than half of that spread can be captured in the 10-year maturity range. More importantly, most individual investors are not participating in the Treasury markets but rather invest in spread products such as corporate bonds, municipal bonds, preferred securities and CDs. The trend over the last year in spreads has been a widening. All this has been good news in a headline world fraught with negativity.Ā Wider spreads in investor friendly products built to preserve wealth, distribute defined cash flow, provide stable predictable income and have a defined termination date are very respectable and functional attributes.
Until things change, it is suitable for investors to stay the course. Too often, investors get caught up in what may happen, what is predicted to happen and what they think will protect their portfolio from an event or prophesied occurrence. Bonds are meant to protect Principal and provide cash flow and typically should not include the speculation embedded in other types of investments.. Wide spreads with a healthy sloped yield curve and low inflation are providing even more benefits than wealth preservation. Stay the course.
Copyright Ā© Raymond James
