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The Fed Would Love To Raise rates This Year. If Only The U.S. Economy Would Cooperate
Searching for Clarity Among the Dots Fixed Income Outlook April 2015 From Osterweis Strategic Investment OSTVX
In Seurat’s painting, his dots produce a clear image. We can’t say the same for the FOMC’s dots. The ever-changing plots, torturous language and a nebulous dependency on data have led to increased investor uncertainty. Also, it seems each time a Fed official gives a speech, his or her views conflict with those of other Fed officials who are also on the speaking circuit. At a minimum, this may indicate that there is a healthy debate within the Fed about when to raise rates. From where we sit, real world inflation is brewing, asset bubbles are growing and global QE has pushed investors into uncomfortably risky positions. Global central banks are in uncharted waters and the unwinding of QE followed by the normalization of interest rates could cause significant market volatility. In contrast, the British QE program was much smaller, so it cannot be used as a test case for the effects of unwinding. While we do know that central bankers are keenly aware of the risks caused by the bursting of asset bubbles, if history is a guide, they will likely remain blind to them until after the dams burst. While we do not know when or how the Fed is going to normalize interest rate policy, we do expect that it may involve significant dislocations, at least initially. At current levels in many asset classes, investors don’t seem to be getting compensated for moving out on the risk curve. Until that changes, we remain steadfast in our view that seeking to control risk while working to obtain moderate yields in shorter duration high yield and convertible securities is the most attractive alternative at this point. We continue to keep cash as dry powder for when we do get bouts of volatility and can layer in longer dated assets at attractive yields http://www.osterweis.com/files/Fixed Income Outlook_1Q15_Final_unlocked.pdf
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Fixed Income Outlook
April 2015
From Osterweis Strategic Investment OSTVX
In Seurat’s painting, his dots produce a clear image. We can’t say the same for the FOMC’s
dots. The ever-changing plots, torturous language and a nebulous dependency on data have led to increased investor uncertainty. Also, it seems each time a Fed official gives a speech, his or her views conflict with those of other Fed officials who are also on the speaking circuit. At a minimum, this may indicate that there is a healthy debate within the Fed about when to raise rates. From where we sit, real world inflation is brewing, asset bubbles are growing and global QE has pushed investors into uncomfortably risky positions. Global central banks are in uncharted waters and the unwinding
of QE followed by the normalization of interest rates could cause significant market volatility. In contrast, the British QE program was much smaller, so it cannot be used as a test case for the effects of unwinding. While we do know that central bankers are keenly aware of the risks caused by the bursting of asset bubbles, if history is a guide, they will likely remain blind to them until after the dams burst. While we do not know when or how the Fed is going to normalize interest rate policy, we do expect that it may involve significant dislocations, at least initially. At current levels in many asset
classes, investors don’t seem to be getting compensated for moving out on the risk curve. Until that changes, we remain steadfast in our view that seeking to control risk while working to obtain moderate yields in shorter duration high yield and convertible securities is the most attractive alternative at this point. We continue to keep cash as dry powder for when we do get bouts of volatility and can layer in longer dated assets at attractive yields
http://www.osterweis.com/files/Fixed Income Outlook_1Q15_Final_unlocked.pdf