Bonds
In 2019, we saw a reversal of the rate hikes in 2018. This provided an opportunity in bonds as investors worried about the manufacturing slowdown. The delayed action from the Federal Reserve (Fed) caused the Yield Curve to invert and later forced them to cut rates as a “Mid Cycle Adjustment”. All of this led to strong returns for bondholders, but as we have seen in the past, these are rarely repeated in the following year.
Due to issues with liquidity in the Money Market, the Federal Reserve started buying short-term securities. While not exactly Quantitative Easing, they have been purchasing $60 billion per month. The Fed has stated those purchases will continue well into the second quarter of 2020. Contrary to common belief, this action has often been a precursor to higher rates as opposed to falling ones.
Municipal bonds had a good year but became less attractive by late August. We cannot find much opportunity in muni bonds at this time, as they appear to be fairly priced. Corporate bonds have also done well but one area of concern could be the contagion effect from the low quality, CCC bonds. They have begun to lag other corporates which could be an early warning for higher quality bonds.
The economy is still growing albeit at a slower pace, and we expect some volatility and this could have a marked effect on bonds. The aging population and the lateness in the economic cycle should cause rates to remain low for a considerable length of time. We advise against chasing the “hot” trends in bonds.
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Positives |
Negatives |
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Inflation Is Contained |
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2019 Great Year For Bonds: Rarely Repeats |
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Continued Foreign Interest In U.S. Bonds |
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Fed Balance Sheet Growing Again |
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Low To Negative Yields Around The World |
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Fed Interest Rate Policy On “Pause” |
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Aging Population |
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Economy Still Growing |
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Record Corporate Debt Levels |
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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. or James Capital Alliance, Inc.
Quantitative Easing: a course of action undertaken by the Federal Reserve to increase the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
Yield Curve: a line that plots interest rates of bonds.
Contagion effect: a situation where a shock in a particular economy spreads out and affects others.
CCC Bond: Represents an extremely high risk bond or investment.
JAF000587 Exp. 12/31/2020
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