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Economic Trends · Dec 9th, 2024
What this video’s about:
In this edition of “The Market Share,” Paul Gifford, Chief Investment Officer at 1st Source Bank, and Erik Clapsaddle, Senior Fixed Income Portfolio Manager, focus on fixed income markets and the potential impact of a Federal Reserve rate cut. This is episode 2 of our 2025 Investment Outlook series: view the first episode here.
Labor Market and Economic Conditions
The labor market has stabilized, softening after incredibly tight levels early in the year. The unemployment rate is holding steady at 4.1%, and job openings slightly exceed the number of unemployed people. This is notable because there are typically more unemployed people than job openings. Another key indicator is the Job Quits Rate, which measures the percentage of people voluntarily leaving their jobs. It’s at its lowest level since mid-2015. This suggests that workers are less confident about finding new jobs, indicating some caution in the labor market.
Fixed Income Investment Strategy
Erik explains their fixed income investment process, which centers around credit analysis and investment-grade credit, including corporate and municipal bonds. The strategy also incorporates government agency mortgage-backed securities and treasuries. For higher returns, they include assets like high-yield bonds and bank loans, which are less correlated with the overall bond market. The approach is similar to equity investing: long-term, diversified portfolios with thorough credit analysis.
2025 Strategy Adjustments
Looking ahead to 2025, Erik notes that they have restructured their bond portfolios to align with current economic conditions and Federal Reserve policies. They have increased the duration and maturity of their portfolios and maintained exposure to credit. Additionally, they have slightly increased allocations to government mortgage-backed securities.
Current Interest Rates and Outlook
There have been significant changes in interest rates over the past few years. The ten-year Treasury hit an all-time low of 0.31%, and there were $18 trillion of negative-yielding bonds globally. In 2022, the total bond market lost over 13%. However, the current starting point for fixed income yields is much more attractive, around 5 to 5.5%.
For the 12-month period ending October 31st, bonds returned over double digits for their clients. This positive outlook means that clients can achieve solid returns without taking excessive risks. Many clients have even reallocated from equities to bonds, taking advantage of the higher yields.
Conclusion
Today’s video provides a detailed analysis of the fixed income market in 2025. With the potential for a Federal Reserve rate cut, the current attractive yields in fixed income present a compelling opportunity for investors. A diversified and strategically adjusted portfolio can help you traverse the shifting economic terrain with confidence.
This article is the second in a three-part series on our 2025 investment outlook. Stay tuned for the next installment, where we will look into how AI is impacting investing. Don’t miss it!
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