The Federal Reserve (Fed) chose to keep rates unchanged at last week's meeting; however, the decision was far from unanimous. Three Federal Open Market Committee (FOMC) members dissented from the decision. The Fed indicated they expect to raise rates by year end if the economy continues on its current path. The reaction from the markets on a continued dovish Fed was for stocks to rally and the yield curve to flatten. I continue to remain cautious on both bond and stock prices over the next several months due to valuations.
One concerning and potentially negative signal for Treasury bond prices is that foreign central banks have reduced their holdings for the third consecutive quarter according to Federal Reserve custodial data (Bloomberg source). Central banks have been a consistent and important buyer of Treasury bonds as U.S. deficits have risen. Even during the most recent issues with Saudi Arabia around 9/11 legislation, the prospect of the kingdom selling Treasury holds has been tossed around. Given that deficits most likely will rise in the coming years no matter who wins the upcoming elections, the supply/demand balance of the Treasury market will be an important factor for prices.
In this environment, I remain more and more cautious on longer-maturity Treasury securities.
This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.