Fixed Income Archives

3 Key Macro Themes for the First Half of 2017

Posted on February 2, 2017February 2, 2017 by Sage Advisory

While politics and fundamentals continue to drive the investment outlook, at Sage, we believe it is the global macro landscape which is central to investing in the first half of 2017. As the new year unwinds, we see an overall favorable backdrop for risk assets given improving global data, robust earnings outlooks, and fiscal stimulus expectations. At the same time, we anticipate slowdown in the “trump trade” – or bullish near-term momentum – given that much of the optimism is already priced into markets. Still, the macro picture remains dominated by global monetary policy, fiscal policy follow-through and a volatile political landscape, leaving markets vulnerable to wide swings, overshooting and undershooting fair value. In greater detail, here is what we at Sage see as the three main factors influencing the next six months – and how we are adjusting accordingly:

Expect a more stable first half for fixed income

After the historically poor fourth quarter for fixed income, we expect both a more stable first half and some upside potential in the first quarter. We believe the rate sell-off was overdone into year-end and expect yields to remain in a fair value range during the first half of 2017. Increased equity volatility is also on the horizon, with some profit to be had in risk assets, and a slowdown in the pace of improving economic data supportive of core fixed income returns. While rate hikes combined with upside growth and inflation potential will continue to apply upward pressure to rates, we expect this to materialize later in the year. As in 2016, we expect upside opportunities in the first half and the second half to be more about risk mitigation.

Look to international diversification within equity allocations

We believe developed international markets will benefit from the global reflationary trend, weaker currencies, and still favorable monetary policies relative to the US. In addition, international markets, particularly Europe, are attractive from a valuation perspective. Given how much optimism is already priced into US markets, and the level of pessimism toward international markets, we see greater upside overseas in the next few quarters.

Take advantage of relative value opportunities

Two markets we believe had run too far into year-end were rates and the dollar. To this end, we have pursued relative value opportunities by adding duration and Gold to our strategies in order to benefit from the rollover in both rates and the dollar. While it may be tempting to focus on the domestic front for the first half of 2017, discounting the macro picture will do you no favors. With stability for fixed income, optimism for international equities and an emphasis on relative value investing, 2017 provides ample opportunities for those who invest wisely.

For more insight, please visit our Asset Allocation and Fixed Income Perspectives or reach out to the team at 512-895-4130.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Trump’s Impact on Fixed Income Markets

Posted on January 13, 2017February 2, 2017 by Sage Advisory

While the country prepares for the first hundred days of a new Commander-in-Chief, contrasting market dynamics warrant a closer look for investors of all types. Whether you’re following the Treasury market or your Twitter feed, here are a few factors to keep in mind when it comes to making investment decisions over the next few months.

Trump-onomics call and response

What exactly underlies so-called “Trump-onomics”? It is the aggregate effect of potential tax cuts, fiscal stimulus and de-regulation, which are presumed to be cornerstones of Trump’s economic agenda.

Unexpected though it may have been, Trump’s election has spurred optimism and firmer consumer and business data globally, raising growth expectations. The end result? A dramatic repricing of yields that has pushed equities and the Dollar higher.

While the bullish tone of risk markets makes sense, our advice would be to avoid overzealousness. A lot of optimism is now priced into markets, and the follow-through in policy and growth fundamentals will evolve slowly, leaving markets vulnerable to disappoint with periodic reality checks in 2017.

Policy follow-through is key

While Trump may be dominating the headlines and hearts of investors, the investment environment remains dominated by global policy concerns.

The macro backdrop is heavily dependent on global monetary and fiscal policy follow-through. Combined with the volatile political landscape, risk markets will be apt to wide swings around fair value.

The big picture is that the Fed has been cautious normalizing the interest rate environment, only raising rates twice in two years. And, looking forward, the December Fed meeting provided a projected path that is only slightly more aggressive than previous Fed forecasts. With these expectations now priced in, rates are fully valued and likely to drift down at the first sign of data or policy disappointment.

Factoring in the future

Taking these dynamics into account, we remain generally bullish, with data and sentiment supporting credit spreads into the first quarter.

Flexibility in fixed income will also be key throughout the year, as there are pockets of opportunity to tactically allocate across fixed income sectors. With the recent rise in short-term Treasury yields, suddenly the risk/reward characteristics for short-term fixed income investors looks very attractive.

Given the uncertainty around implementing the new administration’s policies, the market may have overshot the potential for substantially higher-rates. As the first half of 2017 progresses, look for fixed income performance to stabilize.

For more insight, please visit our Fixed Income Perspectives or reach out to the team at 512-895-4130.

Brexit Video Commentary June 2016

September 2, 2016 — In light of the recent Brexit referendum and the reaction of the markets on a worldwide basis, Sage shares their thoughts on the future and their portfolio strategies moving forward.

Build America Bonds, The Fiscal Cliff & Insurer Portfolios

September 1, 2016 — With about two weeks to go until the stated deadline for Congress to address the automatic spending cuts set to be imposed on most federal agencies, one component that may have slipped under the radar for many insurance companies is the impact that the “Fiscal Cliff” (as these mandatory cuts are being called) would have on Build America Bonds (BABs).

Brexit Vote Commentary

June 23, 2016 — The UK’s shocking and close decision to leave the European Union (EU), the second largest trading block in the world, after 23 years will create significant political consequences and economic challenges for the 5th largest global economy. In simple terms, this was a form of divorce from the EU and like most of them it will likely be messy, take years to finalize and involve long legal negotiations regarding trade and tariffs as well as many other things.

Bonds are Better! The Right Tactical Choice for 2009

November 1, 2008 — Investing during the last several weeks within an environment of rapidly declining asset values and record volatility has been more about damage control than implementing a pro-active strategy. Given the extent of recent market losses, most asset allocations have seen sweeping, dramatic changes and as a result investors are now faced with difficult portfolio rebalancing and tactical investment positioning decisions. While we support the investment notion of employing a periodic rebalancing policy for strategic allocations, we would caution against an aggressive move back into equities at this time. Even given the magnitude of the sell-off across the global equity markets, when one weighs the macro environment, relative asset valuations and the probable upside and downside market scenarios, we believe a stronger case can be made for significantly enlarging allocations to the fixed income sector, especially high-grade credit, for better returns versus equities over the next six to twelve months.

Municipal Market Monitor

December 31, 2007 — The municipal market just experienced one of the most volatile quarters in recent history. With the repricing of risk that occurred in August due to issues within the mortgage and credit markets, municipals were inadvertently hammered down with the rest of the market. Leveraged players that utilized municipal securities were forced to unwind many of their deals due to the divergence in yield movements between the underlying securities and the hedging vehicle. In addition, liquidity concerns contributed to the lack of interest for municipal securities, which can be a common occurrence for Muni’s during economic turmoil. However, for the astute investor, these events have created great opportunities to invest in the municipal market at tax adjusted yield levels not seen since 2003.

Going Beyond Core Equity

March 1, 2007 — Adding alternative asset classes to a core equity portfolio as a risk diversifier and potential return enhancer is not a new concept, but it has become easier and more cost efficient to do so with the growth of index-based products. Specifically, Exchange-Traded Funds (ETFs) provide a liquid, transparent and cost effective way to gain exposure to many alternative asset classes. Further, ETFs allow investors to go beyond a static exposure by offering a vehicle that can be used to tactically manage that exposure.

Municipal Bond Portfolios: The Case for Active Management

October 1, 2006 — Why should investors employ active management for their municipal bond portfolio? This is a question posed by many individuals who want tax free income. Despite the perceived safety and stability of municipal bonds, active management can add incremental value.

Sage Advice Special Report — Tobacco Obligation Bonds

June 1, 2006 — Over the past 24 months, municipal bonds have had a stellar run relative to other asset classes on an after-tax and risk adjusted basis. In addition to the municipal market’s overall return, the tobacco obligation bond sector has experienced double digit returns, while other sectors have realized comparatively lower returns. This extraordinary performance, driven primarily by event risk, had a significant impact on the Lehman Municipal Long Bond Maturity Index’s return. In this short report, we examine the recent historical effects of tobacco obligation bonds on the Lehman Broad Municipal Index