Thoughts Surrounding Recent Market Volatility

The recent bond market volatility has generated many questions on the market and on fixed income investments in general.  The market has been trading with heightened volatility as investors attempt to position themselves ahead of potential Fed action.  We saw Treasury yields rise last week as the Fed hinted at a potential reduction of quantitative easing later this year.  Interestingly, the investors who are suffering the most are the same investors who were “reaching for yield” throughout much of the past two years.  Leveraged and/or riskier products such as closed-end funds, long duration bonds with 20+ year maturities and corporate bonds with weak underlying fundamentals are the investments being hit the hardest.  An example is 30 year TIPS (treasury inflation-protected securities), which are down 22% since being issued in February.  It is important to note that SNWAM has resisted this reach for yield and does not hold these types of investments in our client portfolios.  We have positioned portfolios in a very conservative manner, with a majority of holdings maturing in the next five years.  These holdings have held their value in this selloff and remain an anchor for portfolios in this environment.  In a sense, we have positioned our clients for this very market. We continue to focus on the fundamentals in the economy, particularly inflation, which remains subdued.  Economic data are not pointing to an extremely robust jobs picture and/or inflationary environment at this time.  Both our assessment of the economy and the view of our investment committee are that the economy is growing slowly. Consumer spending is stuck, growing at roughly 2%, and we are seeing few catalysts for that changing any time soon.  While we could certainly see long rates spike higher on concerns about Fed policy, it is unlikely that we will see a sustained rise in rates without significant improvement in the economy. We are being patient in this market and waiting for opportunities to take advantage of the selloff.  Our shorter maturing bonds act as dry powder, in the sense that they are ever-ready liquidity options to sell and move into bonds trading at what are becoming attractive levels.  We consistently tell our clients that we look forward to periods of market volatility, as it allows us, as investors in individual bonds, to capture the gains associated with forced selling from leveraged and pooled product investors.  Don’t panic, stay disciplined and stay tuned.