Content provided by Matt Santini, CLS Portfolio Manager
Yields are hot, hot, hot! The opening line of Paul McCartney’s 1967 hit for the Beatles, “Sgt. Pepper’s Lonely Hearts Club Band,” chants something about “20 years ago today.” Well almost 20 years ago, bond investors were feeling the same effects from a volatile rates market. Investors were getting burned. Yields haven’t backed up to this magnitude in so few trading sessions since 1994. What’s different? In ’94 people were ditching bonds because of what the Fed was actually doing (tightening). There were real inflation concerns. Today investors are selling paper because of market perception; what the Fed will most likely do. Unlike then, according to the current inflation market, concern is moot. Investors are counting on the Fed’s transparency to eventually quell ongoing concerns, so when they actually do commence tightening, bids will already be reflected. We can only hope that Ben Bernanke will offer a well-telegraphed approach in the coming quarters, unlike, many will argue, his predecessor Alan Greenspan. One thing that is not in our favor is that this economy finds itself much more levered to interest rates today than in 1994. In January of 1994, rates were around 550 basis points*, and that was above the rate of inflation. Currently, Bernanke and Co. are keeping real interest rates negative. Will Mr. Taper arrive in September? One camp is saying that the lack of issuance going forward will force more easing, while the other camp is saying this recent Fed manufactured back up in rates is just what the doctor ordered. Sounds like we should go to the next song on that same album, “With A Little Help from My Friends.”
*Basis Points, as defined by Investopedia, is the unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument.