Impacts and Positioning in the Current Interest Rate Environment


This piece brings together all the Private Wealth Management research teams on a topic of common interest and current importance. The following report stems from a roundtable discussion held earlier this month on the topic of Interest Rates. First, the Fixed Income team talks about the ins and outs of the global interest rate situation. Then three other teams go into detail on how the interest rate environment is impacting the position of their products.

Fixed Income

Bond yields have fallen dramatically since the beginning of the year, despite predictions that they would rise. Yield curves have flattened out, only rising for bonds with terms of three-months or shorter that saw the benefit of the 25 basis point rise in the Federal Funds rate at the end of 2015. The Federal Open Market Committee (FOMC) had suggested it would make as many as four more 25-bp rate hikes in 2016, and so far this year there hasn’t been one.

On the longer end of the interest rate curve, rates have been driven to low levels because of an expectation of a “low and slow” trajectory of short-term yields driven by the monetary policy of the Fed and other countries’ central banks, low inflation expectations, and low growth expectations.

This chart shows how far current yields (teal) have come down since the beginning of the year (tan). (Source: Bloomberg)

Negative interest rates have spread across several countries’ sovereign debt, with Japan, Germany, France and Italy being the leaders in negative yields. The total amount sunk into negative yields is $10 trillion (down recently from $11 trillion, since central banks seem to have indicated they are reaching the end of their appetite for quantitative easing measures).

Foreign money flowing into the 10-year Treasury yield has helped to push yields down to 1.56%, which is 73 basis points below where the 10-year started 2016. Sustained low yields in U.S. government bonds have contributed to normally risk-averse investors entering the equity market. Some dividend-paying stocks, especially in the Utilities, Telecom, and REIT sectors, are seen as “bond-equivalents” because of the income they provide. The result is that investors are paying less attention to fundamentals, and taking on more risk than they were previously comfortable with in an attempt to maintain income levels they once expected from the fixed income market.