Strategic Income Opportunities Fund Monthly Insight

It’s all about the data

Dec 28, 2018

This is what we love to do: find the best value in the world, build a balanced portfolio, seek consistent returns.

– Rick Rieder, CIO and Co-Head of Global Fixed Income

Where rates go from here depends
on incoming economic data

The Federal Reserve raised the federal funds rate another 0.25% in December given strong realized and expected labor market conditions and a stable and desirable pace of inflation. The unemployment rate has remained low and monthly reports of jobs added have been strong on average. Inflation rates, both including and excluding food and energy prices, have remained near the Fed’s 2% target rate.

With these employment and inflation objectives largely being met, we believe the Fed will likely pause its rate-hiking cycle in the first half of 2019 should evidence that the economy is slowing continue to mount. The Fed has acknowledged the recent moderation in business fixed investment and tangible signs of slowing conditions in the more rate-sensitive segments of the economy, such as housing. Notably, November’s new home sales were down 12%, and pending home sales dropped nearly 5%, year-over year. The National Association of Home Builders housing market index hit its lowest level since May 2015, and its lowest of this rate-hiking cycle.

The Fed has signaled that they retain a tightening bias, but that this bias is dependent on economic data. Chairman Powell reiterated that the Committee will be highly focused on incoming data reports, and at each and every meeting the data will determine whether or not the Committee proceeds with a policy adjustment (i.e., a rate hike). We believe this approach is appropriate in the current environment and that it will likely preclude moving rates much higher from here, particularly if the rate of growth slows in 2019 as we expect. The downside of continuing to hike rates could be quite significant, as recent market movements have reflected. Given the utmost importance that monetary policy not become a headwind to economic growth, we think the Fed will proceed very cautiously.

In the Strategic Income Opportunities Fund, we hold the majority of duration in the 0- to 5-year part of the yield curve, although we recently rotated some exposure into longer-dated Treasuries to hedge riskier allocations. We slightly reduced the fund’s inflation protection positions (in breakeven form) on the front end of the curve given our view that inflation will continue to moderate in the near term. We’ve been sourcing yield from high-quality, liquid sectors such as agency mortgages, investment grade credit and municipals. Click here for more.

Diversified sources of return

Diversified sources of return keep volatility low

Data is since strategy inception (3/31/10) through 11/30/18. Subject to change. Diversification does not ensure a profit or protect against a loss.

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted.

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