The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or Silicon
Valley Bank, or any of its affiliates.
You worked all day
Watching the quotes flit by on my Bloomberg last Wednesday
regarding the FOMC meeting, I must admit to being quite bored. This was a very
unusual and unsettling feeling as I typically enjoy market events — whether good
or bad. Since high school, I've always known I wanted to work in the investments
field, especially during volatile times.
But these are not volatile times.
Reading the newspapers, there seems to be all kinds of reasons
for people to place wild, outlandish bets - the stuff that creates
Sampling a snapshot of headlines on a major paper's Web site
recently, I saw headlines that imply major events such as:
- Plan for the U.S. to pull out of Afghanistan
- Republicans questioning the President's authority in Libya
- Regulator worries over derivatives that may be linked to
Greece without participants' knowledge
- Potential flooding in North Dakota (a continuation of a
- Al Qaeda members escaping a Yemen prison
- Morgan Keegan, a major regional brokerage, put up for sale
after agreeing to pay a $200 million fine in a mortgage securities case
- Fed lowering outlook for U.S. growth
- Greeks fear their government is "selling" their nation to pay
- Spending cuts to hurt recovery (which the Fed believes will
Uncertainty should create diametrically opposing views. In
markets with a single clearing price, this means there should always be a trade
and the swings of sentiment from one view to the other should lead to volatile
But such is not the case today.
In the bond market, we've seen the 2-year Treasury note fall
from 1.13 percent to today's paltry 0.37 percent over the last 18 months. Though
this is quite a swing in yields, looking forward, it's difficult to imagine many
disparate views. As rates get lower, markets get quieter because everyone knows
they eventually will have to go up.
This forces market participants to just one side of the trade
and today that trade is to hold cash. Some might blame today's inactivity on the
"dog days of summer," but I prefer action more akin to Al Pacino's Dog Day
So what are investors to do?
After being "holed up" waiting for better entry points into the
market, bond investors are feeling frustrated and concerned. The source of the
frustration is somewhat obvious: low yields mean low returns and low returns
mean unhappy constituents. It doesn't really matter whether you are beating your
benchmarks or not. Psychologically, achieving returns well south of 1 percent is
very difficult to get used to.
On the other hand, bond investors are not simply bond
investors. They are stewards of cash with the responsibility to ensure that cash
is available for its planned use.
In today's markets with yield differentials sometimes measuring
just 10 or less basis points, it can be better to remain on the sidelines. If
the market is only offering boring, you have to buy boring.
But for those investors whose cash balances allow them to
invest out to 1 year or more, the positively shaped yield curve does offer an
opportunity to add some yield.
And with the tone and content of last week's Fed meeting
implying the Fed will remain on hold into the future, you are likely to be happy
to add that yield for quite some time.
*- "Volatility" in this context can be defined as simple
price fluctuation. But the reality of how prices occur adds a nuance to this
definition. That is, when the difference between where buyers and sellers value
a security widens, price fluctuations increase. If two participants believe a
security is worth 100 cents and 90 cents respectively, the actual price will be
somewhere in between, but it will fluctuate congruent with how much capital is
being put to work by these participants at different times. When there is great
fluctuation in capital flows, prices can swing drastically.
In today's bond market, with yields so near their absolute
lower bound of zero, it is impossible for this situation to occur. Hence,
realized volatility declines and markets get "boring."
Only large capital flows betting on higher interest
rates can actually push rates higher. While we all know that's the only
direction rates can go, very few are betting it will happen any time soon and
Bernanke did not give anyone reason to change this opinion last week.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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