High Grade Review and Outlook 4th Quarter 2014
The commentary reviews the previous quarter and discusses our outlook and investment approach for the next quarter for our high quality taxable fixed income strategies for endowments, foundations and other non-taxable entities.
- Corporate spread widening has created opportunities. Balance sheets remain strong and spread widening has spilled over from the high yield sector dealing with the drop in oil prices.
- Events overseas have driven longer Treasury yields lower. US Treasury yields continue to look attractive when compared to the low yields of Japan and Europe.
- The Front-end of the curve appears cheaply valued. The market has priced in a fed tightening in 2015, though global weakness and low inflation lead us to not see this occurring this year.
- TIPS are historically cheap and fundamentally attractive. Although commodities continue to feel pressure, central banks remain accommodative and break-evens have moved significantly lower.
Outlook for 2015:
- We expect the front-end of the curve to continue to perform well, anchored by falling expectations for the Fed tightening anytime soon.
- Should municipals continue to cheapen relative to taxable, we may use that as an opportunity to add them to our portfolios.
- Central bankers continue to make unilateral and unexpected decisions creating more volatility in the markets.
- We believe this is a time for caution and continue to emphasize the importance of high quality liquid securities.