HOME     RESEARCH    The Minutes: August 15, 2019

The Minutes: August 15, 2019

Aug 20, 2019 / The Minutes, United States, Fixed-Income, Asset Class Research

In the interest of giving advisors an ear at our regular internal research meetings, we will start sharing meeting minutes condensed into readable talking points. (We will focus on the topics discussed that are most relevant to advisors.) These meetings are generally freewheeling affairs with agendas that range from a formal schedule of topics to an open forum. For those advisors who subscribe to our research views and implement our thinking, we hope you find these notes helpful in communicating our fundamentals-based approach to clients.

Eric Russell Figueroa, CFP®
Associate Content Manager

In Attendance

Jeremy DeGroot

Rajat Jain

Jack Chee

Jason Steuerwalt

Kiko Vallarta

Peter Sousa

Jeremy DeGroot, CFA
CIO, Principal

Rajat Jain, CFA
Sr. Research Analyst, Principal

Jack Chee
Sr. Research Analyst, Principal

Jason Steuerwalt, CFA
Sr. Research Analyst, Principal

Kiko Vallarta, CFA
Research Analyst

Peter Sousa, CIMA®
Director of Portfolio Strategies, Principal


Recession Headlines
  • One of our advisors mentioned that clients and family members who normally would never discuss the markets have been talking about recession and “inversion.” News headlines are likely to blame.
  • The 10-year Treasury rate recently fell below the 2-year, leading to mentions in the press that clients may be reading.
  • But where has the fear been the last few months? Perhaps the 10-2 curve is more widely followed, but the generally more predictive 10-3 month curve has been inverted for months. [Yield curve inversions are reliable recession signals but can have quite long lead times before a recession. An inversion, in and of itself, would not lead us to make a portfolio change. See discussion below on our recent trades.]
Interest Rates and the Recent Portfolio Changes
  • Jeremy wants to be clear that the recent trade was not LG’s “call on rates.” It should not be presented as such. The team saw the risk of recession rise in the data and developing events and wanted to upgrade the portfolios for risk management purposes.
  • We are not going to try to market time a recession or bear market. It’s about putting clients in the right allocation to begin with so they can weather a bear market.
  • Clients must be prepared for their equity holdings to take a hit if or when stocks go down 20%-plus.
  • Some models now have Treasury exposure. Jack says they are not historically cheap, but rather they are attractive relative to other global yields.
  • Same as he was thinking about when to add duration when rates were rising, Jack is now thinking about what could fake everybody out and send rates rising again in today’s context: definitely a growth or inflation surprise.

See this client communication we shared with our clients > It centers around the trades we made, but also addresses recent market volatility. Feel free to adjust it for your clients and redistribute it with the proper footnote.

Thought Experiment from Camp Kotok

Kiko shared one of the main themes discussed at the most recent Camp Kotok economics retreat: “a future where global rates remain permanently near zero.” Most people still think low/negative rates are “crazy” or “not normal,” yet Japan has shown us they can last for decades. Europe is also there now. How do you structure an investment portfolio if you believe high-grade sovereign nominal yields will average 1% or lower for many years?

We don’t have a formalized scenario, but we do have one where rates go down 100 bps. That would be pretty close to zero from here. The team is definitely thinking about the possibility of negative rates coming to the U.S. and what that would mean.

What would work in this scenario? Potentially growth stocks and bonds. But where do you go with little inflation? Take on credit risk? Gold? [Gold is known as an inflation hedge, but it is said that it also responds to real interest rates given it has no yield—see its performance this year.]

Equity Market Volatility
  • Jack mentioned that he calls out to his credit managers during big drops in stocks to see if conditions in credit markets are confirming. Is this the big one?
  • Unlike in December, when issuance froze and liquidity dried up, credit managers are not seeing the same stress.
  • Jeremy pointed out, though, that those credit managers did see signs of stress in December and it wasn’t the big one!
  • Jason also shared a counterpoint from Ares Investments’ teams: they are getting defensive right now based on deteriorating fundamentals in certain sectors; whereas in December they felt it was just a mark-to-market loss.
  • For context, U.S. stocks were just 6% or so off their all-time high.


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