Greater Liquidity, Lower Volatility, and an Insatiable Reach for Yield
- The fourth quarter capped a banner year thanks to continued dovishness and stimulus from the Federal Reserve. Risk assets and haven assets all performed well, which was quite unusual. Complacency has replaced risk aversion.
- We continue to favor Treasuries. In the corporate sector, spreads per unit of leverage are at an all-time tight right now. From that perspective, we are concerned that investors are not being paid for the risk that they’re assuming, hence we remain very underweight the sector.
- In the tax-exempt market, some investors are not being adequately compensated for credit risks we are seeing in the market. Case in point: the general obligation (GO) bonds of Illinois and New Jersey, which each returned more than 11%.
- We are still bullish on the municipal asset class. If supply decreases and demand is strong, ratios can get much stronger.
We’ve already seen signs of such strength at the beginning of this year as investors poured new money into a market with limited supply.
The commentary is the opinion of the subadviser. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
Past performance is not indicative of future results.