- What's our outlook for the 10-year? In an era of zero interest rate policy (ZIRP), only the outlook for the 10-year mattered. But that era is rapidly coming to an end—we forecast by the end of this year the Fed will signal its shift away from zero interest rates—and along with it a fixed income strategy that depends only on the outlook for 10-year (or longer maturity) interest rates. As that historic shift away from ZIRP occurs, investors need to rethink their fixed income strategies beyond simply how much duration they hold to where they hold that duration.
- Dude, Where's My Duration? That outlook leads to this month's lowbrow pop-culture title reference. Interest rate exposure by maturity matters more to performance in an environment of "normalization" of interest rates. And not all fixed income asset classes are created equal—or have equal interest rate sensitivity along the curve. Seeking safety in the front end of the yield curve? You may have just jumped out of the frying pan and into the fire.
- What is normal? In its simplest terms, "normal" monetary policy starts with a positive "real" interest rate. That means investors can save in the "riskless" asset of government bonds without the loss of purchasing power to inflation. The Fed calls its current policy "highly" accommodative. If it stays true to its policy of "data dependence" (noting the data show a strengthening economy), simply moving from "highly" to "merely" accommodative implies a 2% fed funds rate.