NEAM Insights

The UK’s Brexit referendum was held two years ago on June 23, 2016. The UK gave formal notice of its decision to leave the European Union (EU) on March 29, 2017 and following the two year notice period required by EU law, the UK will legally leave the EU on March 29, 2019. Since the referendum result was close (52% of voters in favour of leaving) and the precise terms of exit were not a feature of the referendum, it’s been a tortuous journey to date and there’s likely to be more uncertainty before Brexit takes its final shape. Read More

Recently, we explored how tax changes have influenced the attractiveness of tax-preferenced investments and the impact of accounting regimes and taxes on rating agency and regulatory solvency assessments.1 This Perspectives addresses the impact of these tax changes on risk tolerances and asset allocation when taxes are explicitly considered in the decision process. Read More

The long-run rate of inflation in the U.S. is roughly 3%, yet we haven’t had sustained inflation readings in that range since the mid-1990s. There are many causes for this, not the least of which is the most significant economic downturn in several decades and perhaps since the Great Depression. Still, after nine years of exceptional and stunningly accommodative monetary policy, it’s a bit surprising that central banks are still working toward achieving a 2% inflation rate. Read More

Investors are becoming increasingly concerned about prospects for higher levels of both inflation and interest rates, resulting in the recent spate of volatility and a correction in equity prices (a 10% decline from its 52 week high). Major central banks, led by the Federal Reserve in the United States, have begun to take their collective foot off the gas with regard to the use of their balance sheets to support prices of securities in the capital markets. Investors are asking: how will the reduced buying by major central banks impact the demand for fixed income securities, interest rate levels and the shape of yield curves? Read More

Municipal Bonds First and foremost, muni bond income remains tax-free at the Federal level for individual investors, as it has been since the Federal personal income tax was established in 1913. Personal income tax rates though were adjusted modestly by the tax act, including a reduction in the highest marginal rate from 39.6% to 37%. From a technical perspective, this should have minimal effect on demand from individual investors who own almost two-thirds of the market. The corporate tax rate reduction (from 35% to 21%), however, increases the attractiveness of taxable bonds relative to tax-advantaged securities for most corporations. This includes banks, credit unions and P&C companies which combined, comprise one-quarter of the market. Conversely, proration rules for life insurance companies were modified, thus increasing the attractiveness of tax-exempts relative to taxables for this historically small segment of the muni market. Read More

Background The first year of the Trump presidency turned out to be a surprise in several ways, but perhaps the most notable was the complacency and lack of volatility that characterized both interest rates and risk asset prices in general. For one fleeting moment after the 2016 election, markets convulsed, but after that moment they haven’t looked back. During the year, NEAM focused on the potential impact on interest rates of four distinct priorities for the new administration: Read More

In late July the head of the U.K.'s Financial Conduct Authority (FCA) noted in a speech that, although there has been substantial improvement in the governance of LIBOR since the bid rigging scandal during the financial crisis of 2008–2009, the market for the underlying loans that are used in the construction of LIBOR is no longer sufficiently active. Hence, he proposed that LIBOR itself should be phased out. Market participants had already been working on a replacement for LIBOR, but this announcement was abrupt, leading investors to consider the ramifications for all asset classes that reference LIBOR as a benchmark. Read More

Background: As the financial crisis caused by the Lehman bankruptcy spread around the globe, its form mutated, depending on local or regional factors. In Europe the financial crisis laid bare structural weaknesses in the Eurozone monetary policy - interest rates and a currency - were shared between countries but there was no pooling of solvency risk. Read More

Background 2016 was marked by surprise populist votes in both the UK, with Britain’s vote to exit the EU, and the US, with the election of Donald Trump as US President. These political events have had important effects on financial markets. In 2017, Europe faces some key political events. Read More

As our regular readers know, NEAM utilizes its proprietary return projection methodology to establish an annual forecast for fixed income returns within the U.S. P&C insurance industry. As part of this process, we also create a distribution of possible outcomes which is used to estimate the probability of a negative total return. While 2016 exhibited roller coaster-like characteristics, our estimates proved reasonably accurate. Read More