NEAM Insights

Fixed income investors today face a somewhat unusual market backdrop. Absolute yields on investment grade bonds are attractive compared with the low-rate environment that prevailed for much of the past decade, and current yields can meaningfully support return-on-equity (ROE) objectives for insurance companies. At the same time, credit spreads, the incremental yield investors receive over comparable U.S. Treasury securities, remain near the tight end of historical ranges. Recent investment-grade corporate spreads have hovered around 70 to 90 basis points, levels that imply limited compensation for taking additional credit risk compared to long term averages. Read More

Government Debt in the 21st Century One of the defining issues of our time is the debt sustainability of sovereign nations. For much of this century, governments around the developed world have lacked the political will or leadership to pursue fiscal austerity measures that would address large fiscal deficits and would put sovereign debt levels on a sustainable path. Politicians have made the determination that it is better to defer addressing the issue, get elected or re-elected, and leave the difficult decisions that may involve sacrifice for a later date or for someone else. The result of this procrastination approach has been ever rising levels of debt on both an absolute basis and relative to the size of the economy. Read More

The Fed and Inflation In 1979, annual inflation rates were north of 10% and rising when Paul Volcker, then Chairman of the Federal Reserve Board, took action to attack the problem. On the heels of an unscheduled Federal Open Market Committee meeting, Volcker announced a change in Federal Reserve policy designed to rein in inflation. By early 1980, the Fed Funds rate peaked at a record high of 20% and inflation crested at just under 15%. This series of Fed actions confirmed the Fed’s independence, firmly established its inflation fighting credentials and ushered in an era of low and stable inflation rates. Read More

As we enter 2021, there appears to be light at the end of the tunnel. Multiple vaccines have been shown to be highly effective at preventing infection from the COVID-19 virus and various governmental authorities around the world have approved their use and commenced inoculation programs. While the spread of the virus persists at an alarming pace and the death toll from the pandemic continues to rise, there is cause for optimism. Stock markets have rallied strongly on the heels of the vaccine news as investors have begun to anticipate a post pandemic world. At this point, it appears appropriate to consider the “end” and look toward a future with a marginalized COVID-19 virus or at least with the virus in a manageable state. Read More

For over a decade now, we have had significant outside influences acting on our economy and capital markets. The most notable has been the actions of the Federal Reserve. In response to the global financial crisis the Fed used its entire arsenal of conventional and extraordinary policy tools to provide liquidity to markets, support economic growth and contain the spread of financial instability. Read More

While Bob Dylan wrote these lyrics over 50 years ago, they seem to describe well the political climate of today. At a minimum, there is certainly a lot of window shaking and wall rattling going on. As we enter 2017, change is in the air. The new administration has plans to enact significant policy change in a number of areas. The capital markets are in the process of digesting and discounting these changes and we need to consider their impact on our interest rate outlook and fixed income strategy for the year. Read More

At the beginning of this year, we wrote a piece called “The Song Remains the Same.” The basic message of the article was that we should expect the current environment of slow economic growth and low interest rates to persist. Given that developed world economies continue to struggle with structural issues such as large debt burdens and aging populations, we believed, at the time, that global monetary authorities would continue with their extraordinarily accommodative programs and that interest rates would likely stay at (or near) their historically low levels. In short, we did not see a lot to get excited about. Our return expectations for the year were modest and our general view of the risk/reward tradeoff in capital markets was uninspiring. Read More