2011 Review and Outlook for 2012 December 28, 2011, Managing Director and Portfolio Manager
The last twelve months have been quite remarkable in terms of volatility and absolute levels of interest rates. The bond market was whipsawed by events in Europe and Washington. Greece was the poster child for the debt crisis in Europe but it was merely the first country to feel the wrath of the capital markets. Portugal, Ireland, Spain, and ultimately Italy experienced difficulty accessing the cash markets to roll over debt. You can view the spreads on various European sovereign debt (European contagion charts) on our website at www.cumber.com. As the European debt crisis worsened, investors flocked to the U.S. In the U.S., markets were roiled by our illustrious leaders in Washington who were unable to agree on a long-term plan to reduce deficits and grow the economy. Additionally, in August Standard and Poor’s downgraded the credit rating of the federal government from its AAA status. In spite of this upheaval, treasury yields declined to record lows.
Ten year yields began the year near their highs as the economy appeared to be gaining strength. However, rising energy and food prices in the first four months of the year restrained consumer spending, causing the economy to slow. Job growth remained weak to moderate, and the housing sector continued to flounder. The range on the ten-year treasury was more than two full percentage points (3.74% high in February and 1.72% low in September). The range was similar for thirty-year treasuries. We end 2011 with ten year yields around 2 % and thirty year yields at 3%. The yield curve has flattened by approximately one full percentage point as the Federal Reserve is actively shifting out of short-term securities into long-term bonds (Operation Twist).
Cumberland’s taxable bond portfolios came through this volatility in great shape, outperforming our benchmarks. Portfolios had been positioned for a decline in interest rates as we believed the deleveraging story would continue to keep a lid on rates or force them lower. In addition, we were fortunate to have a significant overweight in Build America Bonds (BABs) and taxable municipal bonds. This sector outperformed investment-grade corporate debt and mortgage-backed securities.
As we approach 2012 great uncertainty remains. Europe’s debt situation and potential fracturing is still driving market flows. The US economy appears to be on firmer, albeit unsteady, footing. Durable goods orders remain strong as businesses continue to favor equipment over employment to meet demand. Jobless claims and the unemployment rate have declined but with the caveat that workers are dropping out of the work force because of the lack of opportunities. We still see deleveraging occurring in our economy as household debt-to-income levels remain at near record highs. In the banking system, commercial and industrial loans have turned down again after a few months of increases.
Food and energy prices remain problematic for consumers in an economy where job growth and income growth are less than spectacular. We have started to add short maturity Treasury Inflation Protected Securities (TIPS) as the front-end anchor to our barbell structure. The monthly inflation adjustment in principal or face value should offset some or all of any decline in the price of the bond. We remain committed to taxable municipal bonds as their yields remain substantially higher than for corporate bonds. Over time we would anticipate moving to a more neutral position in the bond market as the economy continues its long healing process.
Cumberland Advisors® is registered with the SEC under the Investment Advisors Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in states and/or international jurisdictions where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services.
Please feel free to forward our commentaries (with proper attribution) to others who may be interested.
For a list of all equity recommendations for the past year, please contact Therese Pantalione at 856-692-6690,ext. 315. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.
Read Full Article »