How does the Fed hold affect fixed income sectors?
As investors’ focus now shifts toward the November elections and December’s FOMC meeting, Standish portfolio managers provide their thoughts on how the Fed’s decision to sit tight for now will affect the various types of fixed income assets they manage.
The Fed eFFecT:
how does the Fed hold affect fixed income sectors?
Timing is everything...
As was widely expected, the Federal Reserve’s Open Market Committee opted this week to keep the federal funds rate unchanged for the time being. Though
three members of the committee voted to raise the rate, Fed Chair Janet Yellen and her allies maintain that employment and inflation data do not warrant an
increase and they continue to resist pressures to tighten monetary policy.
While the Fed was reluctant to act at the most recent meeting, the end of the lower-for-longer era of US central bank policy appears to be drawing closer and a
December rate hike looks likely. The FOMC has upgraded their assessment of near-term risks, describing them now as “roughly balanced.” The Fed also clearly
signaled its intent this week in its Summary of Economic Projections by showing a preponderance of participants still expect an increase in 2016. As investors’
focus now shifts toward the November elections and December’s FOMC meeting, Standish portfolio managers provide their thoughts on how the Fed’s decision
to sit tight for now will affect the various types of fixed income assets they manage.
emerging markeTs
The Fed decision will
likely not dim prospects
for a sustained recovery.
[+]
Us mUnicpal Bonds
We believe we will
continue to see tight
muni bond spreads
and a low, flat curve
as a result of the Fed
decision.
[+]
gloBal
sTraTegies
Overall global rates
likely won’t be affected
if longer-term rate hike
expectations trend lower.
[+]
cash/shorT dUraTion
The Fed decision will likely have
little impact on cash strategies,
but FOMC projections about
the likely future direction of
policy could have an impact.
[+]
invesTmenT grade
crediT
In our view, the
investment grade
corporate bond market
will remain fairly valued
with strong demand.
[+]
core Bonds
We expect status
quo in spread sectors
and little impact on
relative performance in
aggregate portfolios.
[+]
u
gloBal
sTraTegies
The market has already largely priced
in this delay in tightening, but what
the Fed communicates about its future
plans is what matters now. If they
strongly indicate that a hike is coming
in December, a moderate sell-off could
ensue while curves flatten, the dollar
rises somewhat and TIPS lag nominal
bonds slightly. However, overall global
rates won’t likely be affected despite a
December hike if the dot plot shows that
longer-term rate hike expectations are
trending down.
Raman Srivastava, CFA
Deputy Chief Investment Officer
We don’t believe the Fed’s decision
dims prospects for a sustained recovery
in battered emerging market debt. There
are many positives in the market and
traditional drivers for the asset class
appear more supportive than they have
been during the past three years. Low
yields and low global interest rates seem
to be here to stay the US as well as in
Europe and Japan. We believe those are
factors that will support the EM asset
class.
Federico Garcia Zamora
Director of Emerging Markets
invesTmenT
grade crediT
The Fed’s decision to leave rates alone
means the investment grade corporate
bond market will remain fairly valued with
strong demand, despite deteriorating
fundamentals. After widening during the
first six weeks of the year, spreads have
tightened significantly. We believe spreads
are currently rich, but that is driven by
investors’ expectations that the VIX will
move closer to its longer-term average
levels. We think that is unlikely given global
central banks’ current level of involvement
in markets.
David Morse, CFA
Director of Investment Grade Credit
em
erging
markeTs
t
u
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What the Fed communicates
about its future plans is
what matters now
Traditional drivers for the asset
class appear more supportive
than they have been
Will likely remain fairly valued
with strong demand, despite
deteriorating fundamentals
Us
mUnicipal
Bonds
Muni yields tend to follow
Treasuries’ direction with
lower beta
Impending money market
reform makes the Fed decision
almost an afterthought
The Fed’s decision to remain on hold
means continued tight muni bond spreads
and a low, flat curve. Muni yields tend
to follow Treasuries’ direction with lower
beta. Short term rates will likely remain
under pressure as impending SEC money
market fund reforms fuel selling of short
bonds. Continued strong retail flows into
muni bonds and growing interest from
global institutional buyers should continue
to mitigate rising rate pressures on bond
prices.
Christine Todd, CFA
Head of Tax Sensitive and
Insurance Strategies
The Fed’s decision to delay a hike will have
little impact on cash-like strategies. For
short duration strategies, the primary driver
of yields and returns is a combination of
monetary policy decisions and market
expectations. For strategies with duration
exposure, the timing of a Fed hike may
matter less than FOMC projections about
the likely future direction of policy. For
those who manage cash, the Fed’s decision
is almost an afterthought compared with
the impending October 14th money fund
reforms.
Stephan Bonte, CFA
Senior Portfolio Specialist
for Short Duration Strategies
shorT
dUraTion
sTraTegies
Us
core
Bonds
The delay in raising rates will
also delay any flattening of
the yield curve
The Fed’s decision prolongs the status
quo in spread sectors and we expect little
impact on the relative performance of US
aggregate portfolios. This delay in raising
rates will also delay any flattening of the
yield curve. Our strategy has very little
tracking error risk versus the benchmark,
except for TIPs exposure. We will likely stay
close to the benchmark, but are positioned
to take advantage of any value created
by volatility resulting from a hike when it
comes.
David Bowser, CFA
Managing Director of US Core Strategies
t
[home]
[important
disclosures]
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The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not
provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security. Similarly, this information is not
intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish). These
views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed
by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of
such information. Please contact Standish for current information about our views of the economy and the markets. Portfolio composition is subject to change, and past
performance is no indication of future performance.
BNY Mellon is one of the world’s leading asset management organizations, encompassing BNY Mellon’s affiliated investment management firms, wealth management
services and global distribution companies. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation. Standish is a registered investment adviser and
BNY Mellon subsidiary.
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