The consensus forecast for 2014 was that improving economic conditions and a shift in Fed policy would depress the price of bonds, but long-term bonds ended up being the best-performing asset class of 2014. This chart shows one reason why. The deflationary pressure brought by the drop in the price of oil and other commodities was actually priced in by the bond market, leaving yields to languish at lower levels and causing the yield curve to flatten.
Unless oil and commodity prices recover, bond yields will likely remain low and the FOMC will have less of a case to increase rates dramatically with the specter of inflation shrinking back from the near term horizon. Expect to see increased market volatility, as markets try to measure the impact of such a steep drop in the price of oil on different companies and industries.
Key takeaway: Despite increasing odds of a Federal Reserve interest rate hike during 2015, prospects for global economic growth and commodity prices will continue to impact the direction of long term interest rates in the United States.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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