Taxable Total Return 3rd Quarter Review

Author: Daniel Himelberger, Post Date: October 1, 2018
image_pdfimage_print

Treasury yields went up across the curve throughout the third quarter of 2018. Once again the rate move was led by the front end of the yield curve, with Treasury bills and notes out to three years experiencing the largest increase in yield.

Cumberland Advisors Market Commentary

The longer-dated Treasuries were not far behind, with the 10-year Treasury holding above 3% and the 30-year Treasury above 3.2%. The table below shows the increase in Treasury yields over the third quarter of 2018.

A yield greater than 3% on the 10-year Treasury has been viewed as a key psychological level for market participants. The belief is that a 10-year Treasury holding above 3% could trigger an upward trajectory in longer rates moving forward. There are a few obstacles that could stand in the way of that happening, however. One of most substantial would be other major government bond markets’ (such as Germany and Japan) having 10-year yields much closer to zero than to 3%. A yield topping 3% makes the US – the largest bond market in the world – an attractive alternative for international investors. In a world starved for yield, the current yield on the 10-year and 30-year Treasuries appears to be the best game around for government bond investors. Increased demand for these securities at current levels could potentially keep yields where they are or even push them lower, leading to continued flattening of the yield curve. This dynamic is something we are continuing to monitor, and it is why we are maintaining a small weighting on the long end of the yield curve. Below is a graph that shows a comparison of 10-year US, German, and Japanese government bonds over the last year.

 

At the September 26th FOMC meeting the Fed raised the fed funds target rate 25 basis points to a target range of 2.00–2.25%. This marks the eighth hike in the cycle and puts the fed funds rate at its highest level since October 2008. The statement accompanying the meeting remained mostly in line with forecasts from the previous meeting. The one major exclusion was the statement regarding monetary policy’s remaining “accommodative,” and its omission could lead people to believe that further hikes would potentially restrict growth moving forward. Other than the elimination of the “accommodative” statement, there were no changes to how the Fed described the current economic environment; and the median forecast for future rate hikes remained unchanged.

As for Cumberland’s Taxable Total Return portfolios, we continue to combat the current rising-interest-rate environment by focusing on an increased weighting in defensive assets on the front end of the barbell strategy while still maintaining a small weighting in longer securities as attractive yields become available. The defensive assets are still anchored by Treasury floating-rate securities and Agency multi-step securities, which have benefited portfolios since the start of the Fed’s hiking cycle at the end of 2015. While we continue to navigate a rising-interest-rate environment, the story remains the same. Our goal is to remain defensive in our approach to investing while making our investment decisions conservatively and extending durations to pick up additional yield as opportunities in the market present themselves.

Daniel Himelberger
Portfolio Manager & Fixed Income Analyst
Email | Bio

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

cumber map
Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.
Loading...