"Kee" Points with Jim Kee, Ph.D.

  • Quick Overview
  • Rising Rates and Fixed Income Opportunities


Quick Overview

Stocks sold off a bit last week after reaching all-time highs as 10-year Treasury yields moved above 3.2%. I talked about interest rates and stock market valuations last week, so I won’t go into that here except to say that I don’t know any economists who are comfortable with sub-3% interest rates. And frankly, for a mid-term election year, it feels like stocks have gotten a little ahead of themselves. US economic news has been good for sure, with strong GDP growth, jobs numbers, Purchasing Managers Surveys (PMIs), and corporate profits (earnings). I just thought a lot of that had been priced in (nobody has a market valuation model good enough to really know). Rising US rates and a stronger dollar are also putting pressure on emerging markets (down -13% this year), many of whom have borrowed in dollars. A stronger dollar means that it requires more units of their currency to exchange for dollars to service their debt. I would reiterate though that wealth is created by production and exchange, and most emerging economies need to focus on monetary policies that facilitate production and exchange, which means policies that are stable and transparent. That does not describe most emerging markets, which is the real reason why many of these economies have been “emerging” or struggling for a century or more, not US monetary policy or global exchange rates movements.

Rising Rates and Fixed Income Opportunities

Speaking of interest rates, Josh Hudson, CFA, our Director of Fixed Income, is ecstatic about the recent upward movement in interest rates. That is because we build laddered portfolios of individual bonds, and we have been positioned for rising rates. A ladder means we buy bonds of varying maturities, so we have bonds constantly maturing (being paid off), the proceeds of which can be reinvested at higher rates. And because we hold bonds to maturity, we don’t have to worry about bond price declines because our clients will be paid back the par or initial issue value of their bonds, not the current (lower) market prices. Bond discussions are a good example of things that need to be “Barney’d up,” to quote a recent academic (who borrowed the phrase from the Marines). It means that if a big purple dinosaur can’t understand it, you’re probably not explaining it right! With respect to rising rates, Josh put it like this:

“To put current yield levels into perspective, the 2-year Treasury yield is now where the 30-year Treasury yield was three months ago. Let that sink in for a moment. You can now earn the yield in the 2-year part of the yield curve that you had to extend out another 28 years to get back in July. There is nothing to say that bond yields may not get more attractive from here, but when we hit multi-year high yield levels, and especially in such a short window, we can’t ignore the opportunity to invest.”