On the topic of interest rates, the commonly held view is that we have nowhere to go but up. That line of thinking leads many people to believe that bonds will only lose money in the future and that they have no place in a diversified portfolio anymore. However, if the last several years have taught us anything, it’s that interest rates can indeed go lower from here. Just two years ago we would have scoffed at the idea of negative interest rates, yet nearly 30% of worldwide government bonds now offer interest rates below 0%. Certainly we’ve now reached the bottom, right?
This recommended reading article comes from the blog of Professor Tim Duy, of the University of Oregon, a prominent follower of the Federal Reserve and global monetary policy. Dr. Duy’s most recent post, “Janet Yellen’s Inflation Problem,” analyzes the conundrum facing the Federal Reserve today given that inflation expectations continue to head lower. Without rising inflation, Duy argues, the Fed has no reason to raise interest rates anytime soon. In fact, they may need to consider lowering rates if this continues.
While we won’t attempt to make any predictions on the direction of interest rates, we do think it’s important to understand that there is both a bull case and a bear case for fixed income. As always, markets tend to incorporate both arguments in determining the fair market price. At Carlson Capital Management we believe that fixed income continues to play an important role in a well-diversified portfolio.