Join        Login             Stock Quote

Fixed Income Investors May Be In For A Surprise

 January 07, 2013 09:29 AM

Since the financial crisis that saw the market (S&P 500 Index) bottom in March of 2009, investors have allocated more of their investment dollars to bonds versus stocks. This allocation decision has resulted in investors missing out on the much stronger returns generated by stocks. Out of the last four years only 2011 saw bonds beat stocks in the U.S. investment market.

This allocation decision made by investors is confirmed by fund flow data as shown below.

[Related -Automating Ourselves To Unemployment]

[Related -Fed: Waiting For June… Or Godot?]

Complicating the analysis for investors on where to allocate investment dollars has been the Federal Reserve's involvement in artificially forcing interest rates lower through Quantitative Easing activities. Looking at the monetary base, however, it appears the Fed may have stepped away from easing recently in spite of the Fed's rhetoric.

The monetary base expansion has not led to higher inflation as the turnover or velocity continues to decline. The significance of velocity is outlined in an earlier blog article,  Money Supply Causing Concern With Future Inflation.

In fact, St. Louis Fed President James Bullard indicated as much in a recent interview on CNBC. A part of his concern is the improving unemployment situation, albeit at a very slow pace, and maybe improved commercial lending activity at commercial banks. It is the banks' deployment of excess reserve into loans that will have a positive impact on the velocity of the monetary base.

Then what is the significance to investors? Potentially higher interest rates. The consequence of higher interest rates is a decline in the price of fixed income (bonds) prices as prices move inversely to interest rates. In the short term this appears to be occurring. Since early December, the price of the 10-year treasury has declined by 2.18%. Investors underweight equities should consider the negative impact of higher interest rates on their fixed income investments.

With the fiscal cliff recently avoided, equities responded favorably. However, Washington has ensured investors of more uncertainty in the near term with debate on the debt ceiling, cuts associated with sequestration and the federal budget's continuing resolution negotiation. All of these may provide investors the opportunity to consider higher equity exposure if they are underweight this asset class. Keep in mind the higher taxes associated with the fiscal cliff agreement and additional taxes associated with the health reform act have the potential to reduce economic growth. This alone could be negative for the equity markets though.



Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

article imageThe Single Best Place To Invest Your Money For Retirement

It was never supposed to be this daunting. At least that's what we were read on...

article imageNegative Blowback From Negative Interest Rates

The Federal Reserve is widely expected to leave interest rates unchanged today. But perhaps standing pat read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.