Take What the Market Offers

The fixed income team at Boyd Watterson continuously evaluates economic conditions and develops investment strategy based on our macro view of the economy.  Recently, we have been making a number of minor adjustments to our fixed income strategies.  First, we have increased exposure to floating rate securities.  We have done so because we believe the fed will continue to raise interest rates in 2018 and 2019, and we want to increase exposure to assets that reprice frequently, taking advantage of a rising interest rate environment.  Floating rate securities typically price off of 3-month LIBOR (London Interbank Offered Rate) and we have seen a material increase in the rate over the last 12 months.  One year ago, 3-month LIBOR was only 1.20%.  Today 3-month LIBOR is 2.32%, a much more attractive level from one year ago and slightly above the inflation rate.   

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 A second strategy we are employing is increasing exposure primarily in our institutional managed portfolios to asset-backed securities (ABS) at the expense of intermediate term corporate securities.  The strategy allows us to increase credit quality while reducing our exposure to the intermediate portion of the yield curve, while also in most cases maintaining the same yield.  Over the last few years, the demand for short and intermediate term corporates has been high as foreign buyers and domestic corporations have been large buyers.  This has led to elevated prices for these securities relative to other asset classes like asset backed securities.  Because our macro view of the economy is positive; we expect growth to center around 2.7% in 2018, and our belief that consumers remain healthy, we are comfortable at this time buying securities that are backed mainly by consumer loans.

 

Mike Vandenbossche, CFA

Executive Vice President, Deputy Chief Investment Officer, Fixed Income

 

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.