With Federal Reserve decisions front and center in the financial press, we continue to pay close attention to their impact on the bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market. Chief Investment Officer Jim Lowell and Vice President Steve Johnson shared their perspectives on how these policy decisions affect fixed-income investors in our recent quarterly webinar: Tariffs, Trade and Trump.* Please enjoy the excerpt below and click herefor the full webinar replay to hear more.
What we’re talking about really are bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates., U.S. Treasurys in the one to three-year period. While the Fed can control the short-end, the long-end has nothing to do with the Fed but with inflation expectations.
In December, the Federal Reserve raised short-term interest rates, and we know the market had a little bit of a hiccup. Then in January, we saw a complete 180, and the Fed became very dovish and really took back their language about raising interest rates.
Over the last several weeks, there have even been calls for cuts next week of 50 basis points or 0.50%, even though our economy is doing quite well.* It begs the question for people:
‘Why would the Fed be interested in cutting rates with our economy really doing what it’s doing right now?’
I guess that’s the million-dollar question.
We’ve seen the Bank of Korea as well as the Bank of Indonesia cut rates last week. We’re in this period where, right now, the odds are there’s an 80% chance that the Fed cuts by 25 basis points next week—20% chance that they cut by 50 basis points. We are in this period where I think we’re all anticipating that rates go lower, especially on the short-end.
Jim Lowell: The bond market is clearly signaling to the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market that caution is its byword. In gold prices, we see them clearly signaling caution, but the stock market continues to go up. One of the things that I like about how we position our portfolios is that we tend to include some bonds on the short-end as buffers. Do you think that for income investors, there’s a better answer than the short-end?
Steve Johnson: With all the pundits going on about interest rates, you’re never going to get that call right. We want to make sure that you own bonds, regardless of what people say in the media—both on the short-end and on the intermediate side as well. This means that in that five-to-seven-year range, that’s how our portfolios are positioned because you’re going to be able to get the income regardless of what the Fed does.
*Webinar recorded after the market closed on July 24, 2019.
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