AQS Performance and Perspective - January, 2018
AQS| Asset Management for Insurers
Maybe This Time?
Since July 25, 2012, there has been much prognostication
as to when yields would rise a-la 1980s style bear market. As this
chart shows, they were right - for a while. Rates worked
their way up to 3% only to make a new low July 8, 2016. But
2017, the Fed agreed to begin in October, 2017 what we've
termed UN-reinvestment essentially increasing supply. That
supply began at $6 billion monthly, increasing to $12b, $18b, $24b
and $30b in each subsequent quarter - a total of about $250 billion
in additional supply.
In December, 2017, the tax plan passed. This is
currently projected to increase the deficit to approximately $1.3
trillion (that's with a 't') - double the current supply.
Then the pace began to pick up.
On January 9, the Bank of
Japan surprised markets with a cut in purchases of long-dated Japanese
On January 10, a report
surfaced that China viewed treasuries as 'less
attractive'. The Chinese later claimed that was 'fake
news'. Markets responded
Earlier this morning, Mario Draghi, President of the ECB
indicated 'very few
chances of rate hike this year'.
'Amazing Effect' on Negotiations
While some (mostly those that sell TO the U.S.) bemoan the
action as 'unfair', at least one executive, Dow Chemical
CEO, Andrew Liveris, sees an 'amazing effect' on negotiations
In what he calls a 'paradigm shift', nations now are
concerned that if they don't give an American corporation "a shot,"
their companies could be denied opportunities in the U.S.
"It's had an unintended consequence, which is actually
amazing," Liveris said. "And maybe that, at the end of
the day, is President Trump's strategy."
We at AQS have been looking for an infrastructure spending
policy since the beginning of the Trump administration. It is one
of the few things on which Republicans and Democrats agree.
While it's premature to suggest as policy, the
document, passed along (planted?) in a chat room provides a look at
the principles of funding and principles for infrastructure improvements.
Item I, the Infrastructure Incentives Initiative, encourages
state, local and private investment in core infrastructure by providing
incentives in the form of grants and conditioned
on achieving milestones within an identified timeframe. Yay!
End of the Raging Bull?
Maybe not so fast but it is a REALLY
long-term trend. AND Bill Gross declared (for like the 10th
time in as many years) that the bull market in bonds is over. It
does give some background as to why the 'whammy' described above may have
some traction. NOTES:
1. 'Technicals' are good for
timing but should be confirmed with fundamentals. The graph below
2. 'Technicals' are good for
identifying reversals in trend.
3. Fundamentals currently support the idea that a
breakout (to the upside in yield) might be upon us. But how high is
4. Another fundamental, the equity market, will almost
certainly reverse in a confirmed rising rate environment. This puts
money back into bonds.
5. While this chart suggests an upper boundary in
yield is upon us, it doesn't indicate that a breakout won't wander along
in the 3% ballpark for the rest of our career.
Client results shown are calculated using SIA standard
investment formulae for portfolios AQS has managed in
excess of one year. Each portfolio complies with governing
investment statues, regulatory testing standards and metrics.
Results vary based on the client's specified investment policy,
risk tolerance, profit objective and product mix. AQS works with
each client to develop a global understanding of objectives for income
and surplus growth as well as product opportunities that represent synergies
in terms of growth and diversification.