In an environment of low rates and rising inflation, fixed-income investments may best serve as a placeholder for idle and uninvested cash.
- Inflation may be transient, but it creates real volatility in the financial markets. The Fed, convinced inflation is transient, administers ultra-low short-term rates and manages longer-term rates through Quantitative Easing (QE). “You can’t fight the Fed.”
- The Bond market vigilantes, convinced inflation is real, push back forcing bond yields higher. But, as in the past, real investors buy the higher yields and the market establishes a new trading range. “Continuing the case for active management.”
- Since 2016 the Fed has clearly stated its 2% inflation goal, accomplished how? Administer short-term rates to remain ultra-low, and through Quantitative Easing (QE) keep long-term rates artificially low. “But the result – as of January 2021 still no 2% annual inflation.”
- However, things may finally be changing. The majority of Washington’s proposed economic stimulus/spending will be financed by increased U.S. Treasury issuance. To keep the Treasury’s borrowing costs low, the Fed will remain the major buyer. Short-term rates stay ultra-low while longer-term rates slowly trend higher but remain historically low. “Savers continue to earn a few basis points and diversified investors, even with higher rates, still don’t earn a risk appropriate fixed-income return (a measure of yield/duration).”
- Historically, the dual role of fixed-income has been to provide a reasonable rate of return and be a hedge for “risk-off” markets (e.g., falling equity prices). “But with rates so low, traditional fixed-income investments can no longer provide this dual role.”
- Cornerstone Treasury Strategies Fund, LLC (CTSF) seeks to provide the new role of fixed-income. “Through more active management CTSF, a private, high-quality hybrid of a money market/short-term bond fund, seeks an annual return that exceeds inflation and to be a hedge for “risk-off” markets.”