Fixed Income Themes Heading into 2015
TOM BUTCHER: Hello and welcome to Van Eck Outlook. I'm your host, Tom Butcher. I have with me today Fran Rodilosso, Portfolio Manager for Market Vectors' fixed income ETFs and a veteran of fixed income investing. Our focus is fixed income themes going into 2015. Looking back over 2014, what have been the biggest surprises in the fixed income market?
RODILOSSO: First and foremost, U.S. interest rates. I think few investors had been long duration as their top call for 2014. We’ve certainly seen 10-year yields come in at this point in the year by about 65 basis points from December 31, 2013. That happened despite the fact that U.S. growth has been a better story, at least versus expectations, than growth in the rest of the world. Those are some of the other surprises: the level of stagnation in Europe and Japan, the further compression of rates in those countries, and the movement into negative territory at the front end in Germany. Even disappointing growth in emerging markets has been a surprise in 2014, as have been lower commodity prices, lower growth, and lower inflation. Consequently, global yield curves have moved inward from where expectations pushed them at the beginning of the year. What is probably not a surprise is that the Fed has found a way to stay easy in terms of its monetary policy, despite some improving statistics on growth and employment. While that's not surprising, some of the ways the Fed has come to rationalize its position might be surprising.
BUTCHER: What themes should investors be most aware of going into 2015?
RODILOSSO: Some of the same issues that are present today, e.g., questions on rates, but also questions that have arisen in the second half of 2014 about matters such as liquidity and credit quality amid slowing growth or stagnation in some parts of the world. These will be important issues for next year. Regarding short-term rates, market expectations of where the Fed funds rate is going in the U.S. are lower than where Fed estimates apparently are, based on the information that the FOMC releases. At some point during next year, that difference will need to be reconciled. In a way, we all hope the Fed is right, and there's a need to allow short rates to move higher because growth is improving. On the other hand, if the market is right and we are seeing global stagnation and lower commodity prices, etc., credit quality should become more of an issue for people. Growth is really the best "credit fundamental" there is, particularly in certain sectors such as commodity-related sectors. Liquidity, which I also mentioned, is a reflection of how the market is functioning. The market actually has functioned fairly well in 2014 in many areas that people were concerned about heading into the year, however, I know liquidity will be on investors' minds next year as well.
BUTCHER: Fran, thank you very much. With those fixed income themes in mind, we come to the end of this edition of Van Eck Outlook.
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