Tim Buckley: I want to move in what we call the rate of things, where we think interest rates are moving, looking forward. If we think about the policy of the central bank, I do not know how to describe it. I mean, the adjectives you hear people throw around. You hear “unprecedented”, you hear it all the time. You can say “significant,” “memorable.” You can use them together.
What we’ve seen from the Fed is, well, pretty incredible. From what we’ve seen in terms of financial stimulus, well, you can say the same thing. What does this mean for the rate to move forward? What does this mean for inflation? How do you feel about your fixed income team?
John Holly: Yes, we are thinking a lot about the rates you have created and these important monetary policy points, which are happening in the United States and around the world. And to accomplish this we would say, “For a short time.” Rates have the potential to maintain a low level for an extended period of time, and we are building our strategies around it.
If we look at things like inflation, the markets are currently looking at a big drop in oil prices and a big fall in demand and economic activity and taking a view that inflation will come down. Markets have been pricing at about 1% of inflation for more than 10 years and are actually projecting projections around one or two years. Removal
While working with our economics team and trying to keep a long-term outlook, we think those estimates are probably less understood where inflation is likely to stop. Near the term, there are plenty of hurdles, but in the long run, the fiscal and monetary policy stimulus you’re talking about is probably going to sow the seeds for inflation to return to the Fed’s 2% target or higher. So looking at that, we are gradually creating a position to come in contact with inflation-indexed bonds that we think, in the long run, have a chance to improve.
Team: Now, John, it’s different from what people use. So, most of our clients are accustomed to listening, expect good, loose monetary policy and lots of financial spending, inflation. But there are too many problems in the economy for this to happen. You don’t see it happening year after year. And so you say, what can you get in the tips [Treasury Inflation Protected Securities] The market? These are great business for you now.
John: Yes, we think there is some value in that. And again, with our diversified approach, we’re investing in tips on our public funding strategies. But we are also looking at other areas where there may be exceptional performance mort, for example, in mortgage-backed securities. We see that a large drop in rates could give homeowners the opportunity to refinance their mortgages. This is a problem for mortgage-backed securities. But what we are finding is some part of the mortgage market where homeowners prepayment prices are wrong and this is creating some opportunities that we think can give our clients a positive extra return than expected. So this is an area where we are again trying to diversify our strategies.
All investments are at risk, including the potential loss of the original investment.
There is no guarantee that any specific asset allocation or combination of funds will meet your investment objectives or give you a certain income level.
Bond funds are subject to the risk that an issuer will fail to pay on time and the price of the bond will fall because of an increase in interest rates or a negative perception of the issuer’s ability to pay.
U.S. government support for treasury or agency securities only applies to underlying securities and does not prevent stock-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills ensure the timely payment of capital and interest.
Diversity does not guarantee gain or protect from loss.
2020 The Vanguard Group, Inc. All rights reserved.