With the debate over a potential Fed rate hike, we’re closely watching the bond market and global yield activity. One of our fixed income portfolio managers is Christine Horoyski of 1832 Asset Management, who manages a portion of our fixed income mandate in both of our model portfolios. Christine has held some of the portfolios’ fixed income allocation for some time, given her active management approach which is consistent with our overall portfolio mandates. Unlike many fixed income managers Christine regularly trades her debt holdings given her flexibility to select securities in a number of economic sectors, geographical areas and various government jurisdictions. Her tactical approach has yielded over 5% annualized during the last 5 years, and over 6% annualized over the last 3 years. Christine has typed some comments for us this week, and I have included them below.
“We would place the odds for a September rate hike as a low probability, given both the modest payroll number (released September 2), and the recent disappointing data. Both ISM and Retail sales were weak last month, and inflation remains modest. The increasingly hawkish rhetoric we are hearing from Fed officials is less about messaging a September rate hike, and more about increasing the Fed’s “optionality” around the event. There was a very low probability of a September hike priced in the bond market post payroll, and the Fed jawboning over the last few days is an attempt to increase those odds, in our opinion.
While market commenters prognosticate on the likelihood of a September versus December rate hike by the Fed, and following the bouncing media comments between hawkish and dovish Fed officials is much like watching a tennis match, the real action in the bond market has been at the longer end of the curve. Yields in the long end of the Japanese bond market have risen 50bps over the summer, UK and German bond yields are following suit, and North American bond yields look ready to break out to the upside. The selloff at the long end of the bond market is less about increasing odds of a September rate hike, and more influenced by the lack of further QE or stimulus measures announced by Central banks. This is having the effect of steepening the yield curve.
We have moved to a defensive duration position, and are positioned for a steeper curve. We have increased the exposure to shorter dated bonds (10 years and under) and eliminated longer duration bonds as a tactical move. We have a modest US dollar position, having unhedged our positions following the US dollar selloff post payroll, so we will have a modest cushion against higher yields should the US dollar perform. We have an upper range in long term bonds that we are watching, and have powder dry to add exposures should they hit our target.”
Daniel Popescu CFP, CIM, FMA, FCSI
President & CEO
MNP Tower, 3100-1021 West Hastings St.
Vancouver, BC V6E 0C3
T: 604-558-6830/1(877) 588-6822
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