Interest Rate Strategies
Last week the Dow Jones Industrial Average oscillated within a 2,500-point range. In a typical correction, market sell-offs can take weeks or months to unfold. But in today’s environment, corrections can be completed in a matter of hours. What caused the sell-off, and what does it mean for potential returns going forward?
For those readers who are not aware of Nostradamus, he is viewed as being one of history’s better prognosticators. Granted, he never had the difficult assignment of trying to forecast the direction of the U.S. Treasury 10-Year yield, but given the track record of projections over the last decade, it becomes readily apparent that Nostradamus would have had little to fear from a reputational standpoint.
As we’ve seen during the most recent earnings season, high-yield debt still presents a mix of opportunity and risk. While a reduction in taxes should benefit all profitable companies, other provisions could lead to tough choices for some less-credit-worthy borrowers.
In 2013, WisdomTree created a suite of strategies that we believed could improve on traditional approaches for managing interest rate risk in bond portfolios. In our view, a potentially more intuitive alternative to senior loan strategies was to own a broad-based portfolio of high-yield bonds but then hedge out nominal interest rate risk.
The U.S. interest rate backdrop continues to remain challenging for investors looking for income. The rise in U.S. Treasury yields following last November’s Election Day, and a bit more recently around the Federal Reserve’s first rate hike in 2017, allowed investors to possibly believe that rates may finally be making a more permanent move higher. Or, at the very least, that yield levels had finally bottomed and a new and elevated trading range had been established.
Jeremy J Siegel
Senior Investment Strategy Advisor
CEO of WisdomTree
Jeremy Schwartz, CFA
Executive Vice President, Global Head of Research
Christopher Gannatti, CFA
Head of Research, Europe
Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he will be based out of WisdomTree’s London office and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.
Head of Fixed Income Strategy
Tripp Zimmerman, CFA
Head of Fixed Income & Currency
Associate Director, Asset Allocation and Modern Alpha
Head of Capital Markets
Associate Director of Capital Markets
Head of Europe
Joseph Tenaglia, CFA
Associate Director, Asset Allocation
Kara Marciscano, CFA
Jianing Wu joined WisdomTree as a Research Analyst in October 2018. She is responsible for analyzing market trends and helping support WisdomTree’s research efforts. Previously, Jianing completed internships and projects at Geode Capital, Starwint Capital, and Invesco Great Wall Fund Management with a focus in quantitative research. Jianing received her M.S in Finance from the Massachusetts Institute of Technology. She graduated with honors from Boston College with degrees in Mathematics and Philosophy.
Jeff Weniger, CFA
Director, Asset Allocation
Alejandro Saltiel, CFA
Associate Director of Modern Alpha
Alejandro Saltiel joined WisdomTree as a Quantitative Research Analyst in May 2017. He is responsible for quantitative research on WisdomTree’s products and global equity markets. Prior to joining WisdomTree, Alejandro worked at HSBC Asset Management’s Mexico City office as Portfolio Manager for multi-asset mutual funds. He started his career working at a boutique hedge fund that specialized on trading options on sector-levered ETFs. Alejandro received his Master’s in Financial Engineering degree from Columbia University in 2017 and a Bachelor’s in Engineering degree from the Instituto Tecnológico Autónomo de México (ITAM) in 2010. He is a holder of the Chartered Financial Analyst designation.
Matt Wagner, CFA
Modern Alpha Analyst
Matt Wagner joined WisdomTree in May 2017 as a member of the Research team. He is responsible for research on WisdomTree’s products and communicating the firm’s views on the markets. Matt started his career at Morgan Stanley, working as an analyst in Treasury Capital Markets from 2015 to 2017 where he focused on unsecured funding planning, execution and risk management. Matt graduated from Boston College in 2015 with a B.A. in International Studies with a concentration in Economics. Matt is a holder of the Chartered Financial Analyst designation.
On Wednesday afternoon the Federal Reserve raised rates by 25 basis points, effectively raising its target band for the Federal Funds Rate to 25−50 bps. A widely anticipated move, it is an important and positive development for risk markets such as equities in that it removes a level of uncertainty.
After nearly two and a half years of debate, the Federal Reserve finally lifted the Federal Funds Rate target by 25 basis points on December 16, 2015. While investors continue to grapple with what impact this might have for markets and the economy, we thought it could be instructive to understand what impact a tightening cycle has historically had on the cost of credit for investment-grade corporations.
Last week, Professor Siegel and I chat with Marc Chandler, Head of Global Markets Strategy at Brown Brothers Harriman, about his views on divergent central bank policy actions, implications for the U.S. dollar, euro and yen, as well as his thoughts regarding emerging markets.
With December 16 marking the last opportunity for the Federal Reserve (Fed) to raise interest rates in 2015, market participants now put the odds of a Fed rate hike in December at nearly 80%—up from the 32% probability given to a rate hike just three months ago in September.
Over the last couple of months, volatility across asset classes has ticked up markedly. Interestingly, although interest rates have declined from their highs of the year, rates haven’t fallen that much compared to the downdraft in global equity prices. Brad Krom explains why this has resulted in the returns of the Barclays U.S. Aggregate Index (Agg) remaining approximately unchanged year-to-date.