Asset Allocation Chart of the Month
Interest Rates: Diverging
- Since the Fed began cutting its Funds rate in September, long-term rates have moved in the opposite direction. While the Fed has lowered its target rate by 100 basis points, the yield on the 10-year Treasury bond has risen nearly the same amount.
- The spread between the 10-year yield and the Fed funds rate has widened by nearly 200 basis points. The speed and magnitude of this spread widening mirrors patterns seen at the onset of the 2001 and 2008 recessions.
- However, few expect a recession, making this situation more unique. In bond parlance, we are experiencing a “bear steepening” of the yield curve. It’s called a “bear” steepening because it negatively impacts most participants: short-rate holders lose income, while long-term debt holders face price declines.
- Several factors may explain this bear steepening:
- Economic resilience: Strong labor market data and other indicators suggest reduced recession risks. Unlike 2001 and 2008, the Fed isn’t reacting to an economic downturn.
- Inflation concerns: Policy proposals from the incoming Trump administration have raised the possibility of inflationary pressures.
- Government debt worries: Growing budget deficits have sparked concerns about public debt levels, and the incoming administration doesn’t appear to want to address them.
- Productivity gains: If sustained, rising labor productivity could support higher economic growth (and higher interest rates).
- Regardless of the cause, the rising yield on 10-year Treasuries is significant because it influences rates on many other long-term securities, such as mortgages. While these higher rates may reflect a stronger economic outlook, if sustained, they could eventually undermine growth.
- We are currently underweight in duration, for now. However, as long-term rates continue to rise, we are increasingly drawn to their return potential and less concerned about the risk of further rate increases.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA - Vice President and Senior Fixed Income Strategist, and Brian Cheyne, CFA, CIMA - Senior Investment Strategy Specialist, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800-638-8194 for more information.
A Word About Risk
Investing in fixed-income securities which can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities which may be downgraded by a Nationally Recognized Statistical Rating Organization (NRSRO) to below investment grade status. U.S. government agency securities which are neither issued nor guaranteed by the U.S. Treasury and are not guaranteed against price movements due to changing interest rates. Mortgage-backed securities and asset-backed securities are subject to the risks of prepayment, defaults, changing interest rates and at times, the financial condition of the issuer. Foreign securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. Emerging markets securities which are more likely to experience turmoil or rapid changes in market or economic conditions than developed countries.
Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data given. For performance information current to the most recent month-end, visit TouchstoneInvestments.com/mutual-funds.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.
Touchstone is a member of Western & Southern Financial Group
Not FDIC Insured | No Bank Guarantee | May Lose Value
