City National Rochdale remains positive on fixed income assets based upon our economic outlook, current credit valuations, a modestly higher interest rate outlook, and the steepness of the yield curve. We look to position suitable portfolios to be over-weight credit, barbell portfolio maturities, while staying short to neutral duration relative to respective benchmarks. We expect fixed income total returns in the year ahead to broadly track portfolio yield. 

City National Rochdale expects U.S. GDP to expand 2.5% to 3% for 2015. A strengthening labor market, accommodative financial conditions, and cheaper oil all support a more dynamic path for the rest of the year. Low government bond yields in advanced economies continue to be supportive of U.S. Treasury prices. We expect interest rates to rise over the coming year, but do not expect runaway domestic inflation or a dramatic rise in U.S. rates.

Fixed income markets expect the Fed to begin raising short-term rates later this year (see chart), but at a slower pace than previously forecasted. At City National Rochdale, we are positioning portfolios to take advantage of this reinvestment opportunity, while also benefiting from the relative steepness of the Treasury, municipal, and credit yield curves. 

Liquidity Concerns: Recent media reports have focused on liquidity risks within fixed income markets, noting that tighter bank regulations have forced market makers to reduce inventory available for trading. These articles cite concerns that if fixed income investors sell en masse, reduced inventories will result in heightened volatility. If this does occur, we would view it more as an opportunity than a long-term risk.

Supply and Demand Dynamics: The investment grade corporate bond market may see nearly $1.4 trillion of gross issuance in 2015, surpassing last year’s total of $1 trillion. Corporations are continually looking to lock in relatively inexpensive financing before rates rise. Strong demand and the abundance of supply have kept credit spreads relatively stable. Looking forward, we expect credit spreads to tighten and the pace of new supply to slow as interest rates creep up.

Corporate Credit: Corporate credit quality has improved in recent years. Corporations have refinanced higher coupon debt for new, low-cost financing, while keeping more cash on hand. We believe this position of current credit strength is also one of the largest sources of risk. With the domestic economic picture looking relatively positive and the expectation for below-average default rates, we expect to see additional debt-financed mergers and acquisition (M&A) deals, stock buybacks, and rising stock dividends. Due to M&A risks and the current bias of shareholder rewards over bondholders’ protections, we favor the financial sector over the industrial sector.

Municipals: Municipals are largely following the direction of the taxable fixed income markets, but have been in a weak technical period due to heavy new issue supply. As a result, we have seen muted volatility and some decent buying opportunities. Shorter maturities are seeing the most demand, with the best value found in 5% coupons in the 15- to 20-year part of the curve. Other focal points include Puerto Rico, Chicago, the California drought, and the disparate pension circumstances across the nation. We are targeting duration slightly short versus our benchmarks while shifting back to a higher-quality bias. We are also increasing liquidity in portfolios, at the margin, to take advantage of potential volatility as we near Fed lift-off .

Opportunities: With rising rates on the horizon and easy access to capital beginning to diminish, credit markets have started to differentiate risks on a more granular level. Since the financial crisis, passive fixed income strategies have benefited from a broad market rally. Going forward, we expect active duration management, security selection, and quality credit research to outperform passive strategies.

City National Rochdale, LLC is a Registered Investment Advisor and wholly owned subsidiary of City National Bank.

Investment and Insurance Products: 
• Are Not insured by the FDIC or any other federal government agency 
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate 
• May Lose Value


Important Disclosures 

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.

Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Index Definitions

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Core Personal Consumption Expenditures Price Index (core PCE) is the personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.

Shanghai Composite Index (SHCOMP): A capitalization-weighted index. Th e index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.

Shenzhen Composite Index (SZCOMP): An actual market-cap weighted index (no free float factor) that tracks the stock performance of all the A-share and B-share lists on Shenzhen Stock Exchange.

MSCI China Index (MXCN): A free-float weighted equity index. It captures large and mid-cap representation across China H shares, B shares, Red chips and P chips.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.