A play on the famous catchphrase offered by the fictional James Bond in the movie Goldfinger begins to describe, I believe, the state of the financial markets as August came to a close.
Yes, the world’s markets have been shaken these past two weeks with declines in asset values that The New York Times1 suggested erased more than $1 trillion of the value in the stock markets. Like the aftershocks of an earthquake, the volatility that followed continues to create unease. It is curious that even in the face of precipitous declines in the equity indexes, fixed income markets have hovered in a relatively narrow range, neither rising nor falling with the same drama as equities. The rise and fall of the 10-year U.S. Treasury during August was in the two and a half point range. However, total return was a positive 0.04% in August, according to the Barclays U.S. Treasury Index. Furthermore, the Barclays Municipal Bond Index rose 0.20%.
What is curious about these results is that the fixed income markets were only slightly stirred by the convulsions of the equity markets. Under different economic conditions, fixed income would have been expected to soar under a “flight to quality” scenario. As we all know, however, the Federal Reserve (Fed) seems to be holding us hostage to its interpretation of economic conditions by continuing to keep rates at or near zero as it has for the past six years, seeking a proper moment to end this “stimulus.” Since that moment is anticipated to arrive sooner than later, few dare to commit to an “all in” strategy with fixed income. Still, even the smallest incremental return for fixed income stands in contrast to the negativity that currently permeates other markets. There is some evidence that municipals have continued to deliver what is desired of them during times of uncertainty: modest appreciation and a steady stream of tax-advantaged income. I anticipate that this theme will persist through the remainder of the year.
1The New York Times, Business Section, September 1, 2015