05 Jun May, 2017 Update and Outlook
Update from Rick:
I want to personally thank so many of you for the kind words and cards during the recovery from my recent unexpected surgery. I am happy to report that all has gone well, although the healing process took longer than I would have liked, and I hope to start back to the office later this week for partial days and full-time next week. I can’t wait to get back to normal again although Chris and Sam did an excellent job of seeing to the day-to-day office operations and proved I am no longer indispensable! I appreciate their dedication and abilities that keep F.I.G. running smoothly.
The major U.S. stock indices managed to produce gains in May, with the Dow up .33% for the month and through 5 months is now up 6.31% so far in 2017. The Standard & Poor’s 500 stock index rose another 1.16% in May, bringing the year-to-date gain to 7.73%. (MarketWatch)
Bond Yields Remain Low
The Federal Reserve has hiked the fed funds rate three times since it first raised its key lending rate over a year ago. And a closely watched gauge from the CME Group that measures rate-hike sentiment puts odds of a June increase at 95% as of the last day of May.
Long-term bond yields have actually dipped from recent highs, with the yield for the 10 year U.S. Treasury closing out May at 2.21% compared with 2.45% at the beginning of this year. (U.S. Treasury) Mortgage rates have also come off their 2017 highs, with the average 30 year fixed rate at 3.76% compared with just over 4.15% back in March. The 15-year fixed rate mortgage is right at the 3% level as of this date. (Bankrate.com)
We felt yields had topped out back in late March/early April, and positioned our mutual fund holdings into fixed income/bond funds in order to try and take advantage of falling rates. This has helped keep our portfolios with a lower risk profile overall as well as benefitting from the lower rates we have seen since that time. (When interest rates fall, bond prices rise)
There are several reasons why yields haven’t risen much, and we can look at both domestic as well as global markets.
Let’s start with the major central banks:
The Federal Reserve has lifted rates but remains very cautious and continues to promote a gradual rate-hike trajectory. But it isn’t just the Fed. While the U.S. central bank has begun to tighten, major banks such as the European Central Bank and the Bank of Japan continue hold their key rates at or below zero for short-term loans. Further, neither bank signaled it may soon shift policy.
As the month ended, the 10-year German bond yielded just 0.30%, and the yield on Japan’s 10-year bond came in at a scant 0.05% (Bloomberg).
With the U.S. 10-year Treasury above 2%, investors overseas looking for a safe place to park cash can easily boost their yield by buying U.S. bonds, which helps keep a lid on U.S. yields.
Long-term bondholders are wary of any sign of inflation. If the rate of price hikes were to jump, they could easily be stuck in a low-yielding bond whose annual payout doesn’t keep pace with inflation. But inflation, as measured by the Consumer Price Index remains very low.
U.S. Economic Expansion:
Not only is weak economic growth a headwind to higher inflation, it acts like a magnet for U.S. Treasuries.
If growth were much faster, we’d likely see funds flow out of Treasuries and into more productive investments. A flight of capital away from U.S. Treasury bonds would drive yields higher. Remember, the price of bonds and the yield move in the opposite direction.
Currently, nominal Gross Domestic Product might suggest the 10-year yield should rise. But remember, yields around the globe are low, central banks outside the U.S. are in no mood to raise interest rates, and the Fed continues to signal any rate hikes are expected to be gradual. Bottom line—there are technical factors that also influence the daily inflows and outflows out of bonds. While volatility in rates can’t be ruled out, the major influences on today’s low-rate environment have yet to abate. We will keep you advised.
If you have any questions or if we can be of further service in any way, please let us know. We appreciate the privilege to be of service and look forward to working with you in the years to come.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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