Three Themes in 2015

Abstract

The three new trends we watch out for in 2015 include the start of an interest rate tightening cycle, consequences of worsening supply shortage, and resurging geopolitical uncertainties. We recommend moderate portfolio duration and a laddered portfolio structure. Other suitable tools may include callable securities, floating rate notes and bonds with putable and callable features. Remain steady and cautious through the transitional year, especially with credits exposed to geopolitical uncertainties and the oil economy. Consider alternative credit investments including supra and sovereign agency names and senior tranche asset backed securities.

Introduction

‘Tis the season for gifts, resolutions and market outlooks. At the beginning of each year, we are obliged to join the crowd and provide our best outlook on prevailing market trends that could affect the corporate cash investment landscape.
If December gives a hint for the New Year, “volatility” is the first word that comes to mind. Going into the last month of the year, few market participants had expected the spectacular declines in crude oil prices and the Russian Ruble. The Fed performed another wordsmith trick, replacing “considerable period” with “patience” in describing the continuum between the end of quantitative easing and the first interest rate hike. As a result, stock, bond, and commodity markets were treated to a big year-end rollercoaster ride.
For 2014, our picks for the three trends impacting cash investors were the aftermath of financial regulations, anticipation of a steeper yield curve, and proliferation of innovative products. By now, the formulation of new regulations is mostly in the rear view mirror, while implementation tasks continue. The yield curve has steepened significantly and may continue on the front end, although long-term bond yields may be more stable. As for new financial products, the trend should remain in place as regulations continue to drive innovation.
Here are the three new trends we will watch out for in 2015: the start of an interest rate tightening cycle, consequences of worsening supply shortage, and resurging geopolitical uncertainties.
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