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Looking Back When Interest Rates Rose

High Yield Bonds See Yields Continue to Rise

Stocks and Fed Fears

A safer bet?

Low Volatility: Success or Failure?

Looking Back When Interest Rates Rose

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Source:  St. Louis Federal Reserve Bank and S&P Dow Jones Indices.  Daily data as of June 13, 2013 covering the period from December 31, 1992 to June 30, 1995.  Past Performance is not a guarantee of future results. It is not possible to invest directly in an index.
Source: St. Louis Federal Reserve Bank and S&P Dow Jones Indices. Daily data as of June 13, 2013 covering the period from December 31, 1992 to June 30, 1995. Past Performance is not a guarantee of future results. It is not possible to invest directly in an index.

With all the discussion about what might happen were interest rates to rise, it is worth looking at what has happened before. In 1994 the Fed tightened policy and interest rates rose faster and higher than investors expected.  The chart shows the yield on ten year treasury notes — the same instrument everyone is talking about today at a yield of about 2.2% — and the S&P 500.  As seen there, the market didn’t respond very much to the rise that began in late 1993 and early 1994; it did react when rates turned down late in 1994.  Of course there is no assurance that this time might be like the last time.

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

High Yield Bonds See Yields Continue to Rise

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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High yield corporate bonds as tracked by the S&P U.S. Issued High Yield Corporate Bond Index have seen yields rise about 56bps since month end May driving a negative total return of 1.38% so far for June 2013. High yield municipal bond yields have risen by 30bps in the same time period as the S&P Municipal Bond High Yield Index is down 1.76% so far in June.  Duration is playing a key role as municipals are down more than corporates due to their longer duration.  The duration of the S&P Municipal Bond High Yield Index is 7.58 vs a 4.98 duration of the S&P U.S. Issued High Yield Corporate Bond Index.  The longer the duration, the more the prices will move given a change in the yield.High Yield Muni & Corporate Bond Index Yields June 12, 2013

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Stocks and Fed Fears

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Only a month ago the market was in love with the Fed and Ben Bernanke was a hero for helping the market move from 1350 in November to about 1670 in May.  Now the central bank is a villain as the yield on 10 year treasuries tops 2%.

Interest rates have risen in the last couple of weeks, but it is too soon to tell if this is the beginning of the long expected return to higher yields or if it’s random noise and over-reaction.  The fear is that a real change is upon us.  Why would interest rates rise? Four possibilities: inflation, stronger economic growth, a shift in Fed policy or just random noise in markets.  We can set inflation aside – it hasn’t changed in many months except for gasoline prices which appear to be slightly lower.  There is little evidence that people are worried about inflation – no news or comments, no buying in advance, and no excitement about gold.

Second: stronger economic growth.  For every five people worried about inflation, maybe there is one who expects stronger economic growth.  A pickup in the economy would push interest rates higher, but it would also boost profits and the market.  The evidence for a stronger economy is mixed – housing looks better, confidence is up but the job market is still worrisome.  Were interest rates being pushed up by the economy we would be seeing something in the economic numbers.

Next reason: the Fed.  In the last couple of weeks the Fed has said little and done nothing to even hint at a change in policy. Bernanke’s last speech was at the Princeton University commencement on June 2nd – and he said it was not about interest rates. The Beige Book, the FOMC’s report on the economy, didn’t see much change and the fed funds rate hasn’t moved.

Noise and worries:  Markets move on rumors, worries, hopes and fears and little else all the time.  Lately, complaints that the European Central Bank didn’t lower rates at its last meeting, worries that Japan won’t really try to restructure of its economy while the yen rebounds,  and stories about the 1994 bonds collapse. For those who don’t remember, in 1994 the Fed did tighten, interest rates rose, investors in mortgage backed securities lost  money. The following year the stock market started one of the best five year runs in history.

Wait until next week when the Fed’s policy unit, the FOMC, meets on June 18th and 19th.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

A safer bet?

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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http://www.pensionsage.com/pa/a-safer-bet.php

Read the article in PensionsAge by Peter Carvill, looking at the shifting commodities landscape.

In recent decades, investment by pension funds into commodities has been seen as something approaching what may be described as a way to counter-balance the risks from traditional stocks and bonds. As The Role of Commodities in an Institutional Portfolio states: “The case for commodities is based largely on their historical tendency to offer returns that exhibit a low correlation with those of stock and bond market indices. Although commodities may be volatile, their low correlation with traditional investments can result in a significant diversification benefit.” …

… “The real benefit of commodities, says S&P Dow Jones Indices head of commodities indices Jodie Gunzberg, is that…” A safer bet?

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Low Volatility: Success or Failure?

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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One of the consequences of May’s shift in leadership of the U.S. equity market from defensive to cyclical sectors has been the underperformance of most (if not all) low volatility strategies. Does this mean, as some commentators have suggested (e.g. see http://www.indexuniverse.com/hot-topics/18860-when-low-volatilitty-bites-back.html?showall=&fullart=1&start=4), that low volatility strategies “failed?”

Making a judgment of success or failure, about low vol or any other investment strategy, requires us to identify the goal against which the strategy is to be evaluated. Otherwise said, she who would design strategy indices must decide, before she starts, how she’ll know she’s finished.

Click the following link to learn more:
http://us.spindices.com/documents/research/research-the-limits-of-history.pdf

In the case of low volatility indices, the objective is to deliver a pattern of returns similar to that of the parent index, attenuating both increases and decreases. Like this:
Low Vol and S&P 500

Over long periods of time, most low vol indices have outperformed their parents, as the graph above illustrates for the S&P 500. But their goal is not outperformance per se — their goal is, well, lower volatility. As long as they deliver against that objective, low volatility indices will be doing what they were designed to do.

The posts on this blog are opinions, not advice. Please read our Disclaimers.