Once again, news of the death of the secular bull market in bonds has been greatly exaggerated, especially as the yield on the 10-Year Note dipped below 2.4% on Wednesday. So continues the intellectual gymnastics around the future of fixed-income markets, with key items of contention being, is the multi-decade secular rally over?; how does the Fed go about unwinding a $4 trillion balance sheet?; what happens if monetary policy is behind the curve should incipient inflation rear its ugly head?; and perhaps most vexingly, should an advanced economy really be so dependent upon central bank largesse? The last issue is all the more alarming given that six years of zero-percent-interest-rate policy (ZIRP) and unprecedented financial market intervention has only managed to deliver growth in the neighborhood of 2%.
Given the challenges of a low interest-rate landscape, many a portfolio manager are grappling with novel tactics that enable them to meet client obligations. In doing so, yet another phrase has entered into the already convoluted lexicon of investing: unconstrained fixed-income funds; unconstrained being a euphemism for "where on Earth do I find satisfactorily yielding investments?" In an April note, when the 10-Year Note yielded 2.8%, we turned bullish on bonds, given a lack of viable alternatives… e.g. overheated equities…, an underwhelming recovery in employment, and the expectation that even after the cessation of QE3, the Fed would likely maintain ZIRP deep into 2015. So far we have been proven right. (To continue reading, click here)