Looking for smoke signals on Interest Rates

by Wayne Ferbert on January 30th, 2013

Several investment firms have been positioning themselves for the eventual recovery in interest rates. In fact, many pundits went on TV in 2011 and said they were making that trade. They were wrong. Many also went on TV in 2012 and said the same thing. They were wrong again.
 
If you bet against interest rates going even lower, you got hammered as fixed income positions appreciated in value for two straight years now. In each case, rates seemed like they couldn’t go any lower. The spread between the different grades of fixed income seem compressed to levels that can’t be sustained forever. Or can they?
 
We don’t try to trade anything at Buy & Hedge. We are long-term holders. But at the same time, the appreciation in our fixed income positions is very noticeable – and has been a nice boon to our client’s portfolios.
 
But we are always asking ourselves: at what point do we lock in these gains and trim this asset class some? After all, fixed income is a mainstay of any good retirement portfolio so material changes to that position need to be made in steps: not overnight.
 
So, the planning starts now. We know the Fed is driving the interest rate boat right to the Island of Misfit Fixed Income. They are buying up assets in that category and that is helping to drive interest rates lower. They have a stated policy to keep rates low and have tied that policy to job growth in the economy.
 
Some analysts are saying they think the rate bias could swing back and start tightening as early as October of this year. I’ll be on the lookout for two things: (2) a steady job growth number every month that is consistently increasing. And it must increase to 300,000+ per month to really bring down the unemployment number to the stated Fed target of 6.5%; and, (2) improving corporate earnings numbers that help set the stage for the increasing job hiring.
 
These two things will be my trigger to take our fixed income holdings from a ‘planning stage’ to an ‘action stage’. If we see these two things happen, we could start to slowly trim the fixed income positions and start to look for income alternatives.
 
On the jobs front, the ADP number was 192k jobs. That’s not a bad start if the Fed number affirms it on Friday. It won’t bring unemployment down but it would be a good start to 2013. On the earnings front, we are half-way thru earnings season so you can’t make a conclusion yet. But based on the number so far, it seems like the economy still has a long way to go before it really will start expanding.
 
So, net-net, let’s keep an eye on the jobs numbers and the earnings data. These will be the triggers that give us an idea of when the Fed might start moving rates again – and we can look to make changes to our fixed income portfolio accordingly.


Posted in not categorized    Tagged with no tags


0 Comments


Leave a Comment