Interest RatesJanet Yellen will become the new FED Chairwoman in early 2014. Judging from her writings, employment will be her major theme for the FED. The FED Funds Rate will remain low since unemployment is still elevated while inflation remains low.On the other hand, the issue of tapering Quantitative Easing will greatly affect markets. Since 2008, cessations of QE have tended to cause interest rates to decline, not rise. But should the FED pull back too soon or too strongly, longer term interest rates could jump dramatically and would likely signal the end of our 30-year bond bull market. To reduce volatility and preserve capital in the fixed income area, new strategies should be implemented in 2014. Investors should consider positioning portfolios with lower durations than in the past. New types of securities, such as Floating Rate Notes could be added. In order to earn income, investors may look to bonds with higher coupons. Many highly rated Municipal Bonds offer yields superior to that of an equivalent Treasury while their tax free income is an added plus. 2014 will likely prove to be a challenging year for bond investors. |
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