Bonds
The Federal Reserve Bank (Fed) will look different in 2018 with four empty seats and a new Chair, Jerome Powell. He has voted in line with Chairwoman Yellen and is likely to maintain his dovish stance while returning rates to a more “normal” position. Quantitative Tightening* could push rates higher, however if the economy slows, this would be put on hold.
Eight years of low rates have encouraged more risk taking, even in the bond market. As a result, investors are no longer being adequately compensated for investment in lower quality bonds. The recent high-yield bond sell-off suggests focusing more on higher quality bonds.
Tax law changes may impact municipal bonds. Supply may be diminished as Congress looks to disallow some previous issuers from offering new tax-exempt bonds. Furthermore, tax rate changes for the top bracket are not significant enough to warrant a sell-off in municipal bonds. In fact, we believe any pull back could represent a buying opportunity.
We will continue to watch inflation as it has remained low. Unemployment is also approaching cyclical lows and a further dip could trigger higher wage inflation. Our research indicates the historic bond bull market is intact and historically tax cuts have been positive for bonds the year after the law is signed. Still, we will watch for any break in the trend and prepare to take action if needed.
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Positives |
Negatives |
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Accommodating future Fed leadership |
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Quantitative Tightening |
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Moderate inflation |
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Lower quality at risk |
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Lower interest rate trend intact |
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Extremely low unemployment |
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Worldwide demand strong |
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Disclosure
This information is of a general nature and does not constitute financial advice. It does not take into account your individual financial situation, objectives or needs, and should not be relied upon as a substitute for financial or other professional advice to assess, among other things, whether any such information is appropriate for you and/or applicable to your particular circumstances. In addition, this does not constitute an offer to sell, or the solicitation of an offer to buy, any financial product, service or program. The information contained herein is based on public information we believe to be reliable, but its accuracy is not guaranteed.
Investing involves risks, including loss of principal.
Past performance is no guarantee of future results.
ALPS Distributors, Inc. 1290 Broadway, Ste. 1100, Denver, CO 80203 (Member FINRA). ALPS is not affiliated with James Investment Research, Inc.
*Quantitative Tightening is a course of action undertaken by the Federal Reserve to constrict spending in an economy that is seen to be growing too quickly or to curb inflation when it is rising too fast. *Yield Curve Spread is a metric bond investors use when gauging the level of expense for a bond or group of bonds. *Price-to-Sales ratio is an indicator of the value placed on each dollar of a company's sales or revenue. *Cryptocurrency is a digital or virtual currency that uses cryptography for security.
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