Since the start of the year the U.S. Federal Reserve (Fed) has been outspoken about their shift in policy to being “data dependent and patient.” The market understood the former but was unclear about the latter, and many economists kept one to two rate hikes in their forecasts for this year. The results of March’s FOMC meeting provided needed clarity that “patience” means no rate hikes in 2019 and possibly one hike at an undetermined time in 2020.
We believe the policy outlook for 2020 is signaling a “glass-half-full” outlook. Effectively, the Fed was as dovish as they could be today without spooking the market into thinking the Fed is forecasting the end of the economic cycle. To the contrary, they are trying to extend the cycle.
Key FOMC Meeting Take-aways:
Our investment conclusion is that interest rates are likely to stay low and in a range, which is good for carry oriented strategies and risky assets. An extension of the economic cycle, along with lower interest rates makes it easier for corporations to delever. As a result, credit default risks should fall, thus supportive of credit products.
However, if the Fed’s policy is successful, then there is a lower limit on how far longer-term yields will fall. This is because inflation expectations should increase and steepen the yield curve, despite the current flattening today. This may be a second half of 2019 story.
There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and may therefore be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks.
Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In the current rising interest rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. Longer-term securities may be more sensitive to interest rate changes. In a declining interest rate environment, the Portfolio may generate less income. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Certain U.S. government securities purchased by the Strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. High-yield securities ("junk bonds") are lower-rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. Foreign securities are subject to currency, political, economic and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).
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