- We think there may be a shorter than expected timetable for Fed rate hikes and that it may be prudent to keep a portfolio of shorter maturity bonds and floating rate securities. This strategy also applies to money market funds with shorter weighted average maturities (WAMs).
- We believe yield levels may rise causing the yield curve to steepen even with the Fed on hold. Yield opportunities in 2010 may be more attractive than in 2009 as the year wears on.
- Elevated concerns over the solidarity of the European Union may increase market volatility and systemic risk. We believe limiting credit exposure to the highest-rated sovereign entities and staying liquid in portfolios is well advised.
- Lower private debt issuance and strong demand should keep credit investments attractive in 2010. We will look to add debt from economically sensitive sectors as the economy strengthens further.
What a Difference A Year Makes
During this time last year, as Treasury securities offered negative yields and credit risk was in full throttle, we cautioned cash investors to beware of the “bear trap” of higher Treasury yields and be patient before moving into financial credits. As the year wore on, we saw improved capital market conditions, stronger bank capitalization and a positive turn in the economy. We subsequently shifted our investment strategies to include industrial credits and a select group of systemically important financial institutions and prime money market funds.
At the start of the “teens” decade, we are now faced with a new investment landscape, much of which is the result of globally coordinated efforts to bring economies and markets back from the abyss. As credit investors, we are constantly on the lookout for hotspots that may present risk to the prudent cash investor. Here, we discuss four emerging investment themes and share our thoughts on how to manage them.
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