San Diego, CA – This is the biggest wealth advisory conference of the year. Over 3,000 participants, 3 ½ days of the biggest names in the investment world, and numerous presentations dealing with everything from small office compliance to regime changes and helicopter money. It is a chance to hear about advisors’ concerns, in addition to what they are excited about heading into 2017. In general, the mood was positive and there was a lot of interest in the fixed income presentations. Advisors are not clear on what they should be doing with their fixed income allocation. There was also a good deal of focus on the use of social media to work with clients; how it can hurt/help you, and on cyber security. Below, I have highlighted some items I thought would be of interest to our investors.
Popular view of the direction of interest rates:
- Ceiling of 2% on the 10-year Treasury. With roughly 70% of the sovereign debt market at rates below 0%, it is hard to see US rates going up significantly. That being said, foreign investors should avoid purchasing US debt without hedging currency risk first.
- Inflation will be encouraged by the Fed and therefore should increase.
- The total return trade in the fixed income market is over, and it is now it’s a yield game. The best investments are those with high income and low price duration.
- Fed hikes rates 25 bps in December, then two hikes in 2017.
- Demographics are slowly moving to a need for more fixed income investments as populations of the developed world continue to age. This will keep demand strong for fixed income products, and help keep rates low.
The influence of the central banks on markets around the world is over. They have done all they can to try to stimulate growth. The next step to try and generate growth is fiscal policy. It is up to the governing bodies of the EU, Japan, China and the USA to start funding new policies that will bring economic growth. The impact of this spending will impact markets and investment returns. How? We don’t know until we see what programs are chosen. More specifically in the USA, look for the following fiscal policy changes:
- Increase in funds for infrastructure projects.
- Increase in individual income taxes and/or corporate tax reform.
- Entitlement reform? – Not yet, as these costs continue to grow.
The top advised fixed income sectors to invest in among conference participates are:
- TIPS – inflation adjusted Treasury bonds. Why?
- Valuations at this time do not take into account an increase in inflation.
- Fed is looking to encourage inflation to run higher.
- They offer a great hedge for a traditional fixed income portfolio
- Munis! – Yes that’s right. Why?
- They have some of the lowest correlations amongst asset classes.
- It’s likely that tax rates will be going up in the future. This just makes the value of munis better as they are now cheap with current tax rates.
- High yield muni funds and revenue bonds are the choice amongst advisors. The low default rates on munis encourages credit risk, and concerns with the negative credit trend on General Obligation bonds encourages revenue bonds.
- Do your own credit research. The quality of the rating agencies is only getting worse and there is value to be had.
This material has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation to buy or sell. The information herein was obtained from sources which Mainline West Municipal Securities LLC, a member of FINRA and SIPC, and its suppliers believe reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any securities. Any prior investment results presented herein are provided for illustrative purposes only and have not been verified by a third party. Furthermore, any hypothetical or simulated performance results contained herein have inherent limitation and do not represent an actual performance record. Actual factual performance will likely vary and may vary sharply from such hypothetical or simulated performance results. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal bond securities before investing. More information about municipal bond securities is available in the issuer’s official statement or can be found at http://emma.msrb.org.