• We expect moderate increases in rates in 2017
  • Our taxable positioning protected the downside
  • Municipals suffered due to possible tax reforms
  • We are focused on more attractive yields levels

Yields rose sharply following the election, exacerbating a gradual increase that began in July after economic data began to firm. The Fed acted in December with its first quarter-point rate hike in a year. We expect two more quarter-point increases in 2017, with the change of a third. While this will push short-term rates higher, we also expect a flattening of the yield curve as long-term rates remain relatively stable. The Fed may move more aggressively with improved productivity and higher labor force participation and wage growth. The Fed is also keeping an eye on the dollar's strength, with Treasury bonds already quite attractive versus other developed sovereign bonds such as German Bunds. Easy Japanese and European monetary policies may keep yields contained despite domestic stimulus proposals.


Our taxable portfolios benefited in the fourth quarter from our short-duration positioning and heavy overweight to corporate credit versus government bonds. Our allocation to Treasury Inflation Protected Securities (TIPS) also helped protect portfolios against the modest rebound in inflation expectations. Our allocation to financials performed well, thanks to a steeper yield curve and the possible rollback of the Dodd-Frank legislation. Municipal bonds were an unusual underperformer, primarily due to the treat of tax reform which would, if enacted, reduce the value of municipals' tax exemption. We expect tax reforms, but believe the total elimination of the municipal tax exemption is unlikely.


Higher rates in the absence of high inflation are good for bond investors, in our view, in spite of short-term declines in bond market values. Cash flows and maturities can be reinvested at higher rates, thus increasing the yield on a portfolio over time. Inflation is the true enemy of fixed income, but we do not believe the recent uptick in inflation expectations is necessarily a harbinger of things to come.

We currently find intermediate bonds attractive for income investors. However, signals from the Trump administration tapering of bond buying by the European Central Bank, and stabilization of the Chinese economy suggest that rate volatility risk has increased. We are thus targeting short to neutral durations relative to our strategic objectives and are continuing to overweight exposure to credit where spreads still offer 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 of 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.

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. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

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.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Non-deposit investment products: are not FDIC-insured, are not Bank guaranteed and may lose value.

Index Definitions

The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.
The Real Monetary, Fiscal & Exchange Rate Policy Index is Real M2 Money Supply year-to-year change, plus Real Federal Expenditures (12-month total) year-to-year change, less Real Federal Receipts (12-month total) year-to-year change, less Real Broad Index of the foreign exchange value of the Dollar year-to-year change.

The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expectations of the economy to improve, expectations of real sales to move higher, current inventory, current job openings, expected credit conditions, whether now a good time to expand, and earnings trend.

The Citi Economic Surprise Index is a data series that measures how data releases have generally compared to economists’ prior expectations. When data is coming in weaker than expected, it declines; when data is coming in stronger than expected, it rises. This doesn’t necessarily mean that it declines when the economy is weakening, just when the data is surprising on the downside. The Index is a weighted historical standard deviation of data surprises.

The U.S. Treasury 10-year note is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The BofA Merrill Lynch Fixed Income Indices track the performance of the global investment grade, high-yield and emerging debt markets.

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

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