For instance, the 10-year Treasury is at a yield of 2.78% (as of 3/20/14) versus ending 2013 right around 3.0%. So have markets largely already reacted to the expectation of higher rates? Maybe so. This move in Treasury rates that we have seen since last summer is well ahead of any 2015 actual increase in the fed funds rate, and ultimately if that increase happens in June 2015 versus December 2015 would seem to be irrelevant.
So yes, markets are manic and hypersensitive to Fed-speak in the immediate. But in the longer term, we don’t see the specific timing as something to be laser focused upon.
Investors instead need to analyze and determine how to broadly be positioned in this environment. As we have recently written about, we actually see a number of factors, among them the muddling global economy, demographics, and liability driven investing, that could actually help constrain rates as we go forward (see our piece, “Of Elephants and Rates”), and so far we have seen constrained rates in the first quarter of 2014.
The reality is that we see value in the high yield market and attractive yield to be had for those that can actively pick and choose securities in that market, irrespective of whether rates rise or not.
1 Federal Reserve, 3/19/14 meeting statement and press conference.
2 Acciavatti, Peter, Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “2013 High Yield-Annual Review,” J.P. Morgan North American High Yield Research, December 23, 2013, p. 112, 97.
3 Back up data sourced from JP Morgan and the Federal Reserve. Peritus Asset Management, “Strategies for Investing in a Rising Rate Environment,” http://www.peritusasset.com/wp-content/uploads/2014/01/Strategies-for-Higher-Rates-Final.pdf, p. 4-5 for annual details.
This article was written by Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD).