Given the climate of rising rates — and the degree to which rates have shown their ability to back up on fears of the eventual quantitative easing (QE) withdrawal — we believe term structure risk is best avoided in favor of sectors with more attractive risk-and-return profiles. In the second quarter of 2013, the debate
Based on its internal dynamics, the U.S. economy continues to be one of the most attractive for investors. One of the key pillars of support for the U.S. economy has been the housing market. Dynamics of the housing market include low prices, low mortgage rates, high pent-up demand due to rising household formation, and institutional
The Fed’s comments in May and June about reducing its asset purchase program generated significant interest-rate volatility in the United States, changing the opportunity set for fixed-income investors. Spread sectors — meaning sectors that trade at a yield premium to U.S. Treasuries — that had been buoyed by the massive liquidity created by the Fed’s
A common misperception of the convertibles market is that the returns of these securities are more dependent on interest rates than on other factors. Over time, data have suggested that convertibles are driven more by the strength or weakness of the equity markets, and corporate credit spreads. And because the convertibles are short-duration instruments, there
While the U.S. economy merits a degree of optimism, as the recovering housing sector has supported improvement in the labor market and consumer spending, we question the outlook for the balance of 2013. A key indicator in our research reveals that expectations are getting ahead of themselves. The Economic Surprise Index measures the difference between
The year began with a flourish in stocks, which soared more than 10% on a mix of fundamentals and optimism. The Dow Jones Industrial Average and the S&P 500 Index set new records above levels they had last reached before the 2008 crisis. We view this advance somewhat skeptically, because the behavior of other asset
With the automatic spending cuts, or sequestration, required by the Budget Control Act of 2011 still on track to go into effect starting Friday, March 1, we believe it’s important to keep the full impact in perspective. Even if we do go into a sequestration mode in the United States, or get bogged down in
There is little question that interest rates would be significantly higher in the absence of Fed purchases. It is important to understand how potentially damaging a long-duration strategy could be in this environment. The duration, or sensitivity to rate movements, of a 10-year Treasury bond is about nine years, which means that an increase in
We are watching for a possible shift, although it is not yet evident, in the correlation between stocks and bonds, which measures how similarly or differently these asset classes perform. For the past 10 years, this correlation has been consistently negative — when stocks have struggled, bonds have done well, and vice versa (a correlation