Key Questions On Fed & Economy Going Forward

December 21, 2016

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Deepika Sharma, managing director of investments and portfolio manager at Astor Investment Management.

Navigating the low-return environment has been one of the top concerns for fixed-income investors throughout 2016. Consider the fact that 35% of the global sovereign bond market (as of this writing) is trading at negative nominal yields, which begs the question: Why are interest rates so low?

The common assumption is that the Federal Reserve and other central banks are keeping rates low, or that the cause is the 2008 financial crisis. In our view, however, this thinking is not entirely accurate. In fact, low interest rates are not a recent phenomenon. Real 10-year yields in the U.S. have been declining since the 1980s. Nominal 10-year yields were low in the 1960s, peaked at 15% in 1981 and have been falling ever since.

 

What's Next For The Fed and Economy

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After the Fed announcement of an interest rate hike of 0.25% at the Dec. 13-14 FOMC meeting, we have to ask: What is the upper limit of the Fed’s potential to raise rates, given the long-term trend? How effective is Fed policy likely to be in the future? These are important questions.

Low long-term rates could very well mean equities and other “risky” assets will remain overvalued, while fixed-income investors struggle to meet target returns.

 

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