Insights

Financial Industry Insights from Advisors Asset Management

Publication
Author
Topic
Content Type
Date

AAM Viewpoints — Fed Rate Rise and Bonds; Double Whammy

The overall fixed income market currently looks to many observers as a range bound trading market that has become somewhat less volatile. Other than particular credit issues with some issuers, it seems accurate to say that at least recently there has not been much movement. The last couple quarters have been remarkably uneventful. In the second quarter of 2017, the benchmark 10-year U.S. Treasury posted a high and low of a 2.40% yield and a 2.22% yield respectively. The third quarter came in at a high of a 2.38% and a low of a 2.03%. Pretty uneventful.

However there is definitely awareness and some angst as the Fed is talking about raising rates in December and maybe more than a couple times in 2018. Besides the possibility of overall rates rising thus weakening bond values, there is another consideration. The extreme trading tightness of the credit markets to the U.S. Treasury.

The Bloomberg Barclays US Investment Grade Corporate Index is currently sitting below 100 bps (basis points) at approximately 95bps. In February 2016 the spread to treasuries was 215 bps. The Bloomberg Barclays US High Yield Corporate Index is at a spread to treasuries of 340 bps where in February 2016 it was at 830 bps spread to Treasuries. The point being that if rates rise and demand slackens because of weakening markets, a 50 bps rise in rates in Treasuries may mean a higher than 50 bps decrease in bond values because of a widening of the trading spreads than are currently in the market. For example, in the case of high yield bonds, where the spread range the last couple years was somewhere between the current 340 bps and a high of 830bps, it may be conceivable that the spread between Treasuries and high yield bonds widen 50bps. We think the widening of 50 bps added to the Treasury rise in rates of 50 bps has the potential to result in a drop in value of the bond investment of 100bps. I am not saying this would happen, but it could.

As always, please consult your financial advisor for guidance. 

CRN: 2017-1106-6245R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

topics

×

Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.