Content provided by Marc Pfeffer, CLS Senior Portfolio Manager
One of the biggest surprises of the past year has to be the DECLINE of long-term interest rates around the world. While economic growth has been subpar in most countries, after a mostly weather-induced slowdown to start the year, growth in the U.S. has been solid. Now, as the Fed has finally ended its Quantitative Easing, all eyes will watch closely as to the timing of the Fed raising short-term rates for the first time since 2007.
We have mentioned before that we have shortened up the duration on many of our portfolios, but more importantly is what we have been investing in. In particular two names will show up prominently in many of the CLS mutual funds and separate accounts: MINT and FLOT.
These ETFs have a large component in floating rate securities. These securities are investment grade bonds that pay a floating-rate coupon, rather than a fixed-rate coupon. As a result, the value of these bonds fluctuates much less in response to market interest rate movements, and may therefore be used to help fixed income investors insulate their portfolios in a rising rate environment.
Additionally, we view these securities as a way to reduce overall interest rate risk and to gain exposure to credit with less interest rate exposure. The securities also complement other shorter duration strategies and help diversify traditional fixed income.
This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. Quantitative Easing involves a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.