Crit Thomas:
Okay, I’m Crit Thomas, and I’m here with Art DeGaetano. And, Art, interest rates, at least on the long end of the curve, have been starting to move up. And as I talk to advisors, I’m starting to hear concerns about inflation starting to run away from us, and what are the risks there? And I would like to talk to someone like you, who’s really in the middle of these things, and see what your perspective is in terms of the risk that is presented by higher interest rates.
Art Degaetano:
You know, the last two months, I would say, the rate market and the Treasury curve has been steepening out. You’ve seen that just on the equity side with the performance in the bank stocks like J.P. Morgan and Wells Fargo and Bank America. Post the Georgia elections, now with a Democratic Congress, as well as the Biden administration, there’s much bigger bias to issuance of Treasuries to finance different sort of spending programs, and the market -- that is the theme in the market. So, you’re seeing rates move gradually higher.
You’re also seeing inflation breakevens up to 10-year point around 2.05, which anticipates an opening of the economy as maybe the vaccines get rolled out and things start to soften. I would say our humble view is we’re more biased towards rates bottoming out here -- or topping out here and not really moving higher. And if you think about a Biden administration, at least what they’ve said, you might have tax increases with those rate -- with the Treasury issuance, so that might put a little bit of a dampening on the economy.
Also if interest rates go up, there’s a fair amount of analysis that goes into valuations of the equity market, so valuations might be stretched. And again, you might have a muted equity market. And finally, I would also say it’s not clear that they will get the 1.9 trillion spending package done, as well as in two or three months, there’s going to be an infrastructure package which will be significant. So, if they have lower numbers that end up getting approved, you’re going to have less issuance. The last thing I’d say, as well, is if you look at the hedge fund community, the top, say, 20 strategists on the street, and even a fair amount of the mutual fund community, everyone’s position-biased for higher rates. So, if interest rates were to top out here in the next month and come lower -- move lower, you’re going to see a significant shift in where people have to reallocate.
So, we’re a little more not worried about rising rates. And inflation-wise, I’ll just mention that. We kind of look at it the way a household. If you told me that I had lost my job, and I was having to cut back in a recession, I definitely would want to be in a household that has no debt versus a lot of debt. So, when you think about the U.S. economy, just on a basic premise, significant amount of debt servicing -- at the corporate level, significant amount of debt servicing, so if there’s any sort of slow down, I think that could be deflationary. It’s not really in people’s models right now, but we’ll see. So, we’re more a little balanced than I’d say the street, and maybe most of positioning out there, but again, we’re running only a 3.5 duration, so -- in the portfolio, so we’re not going to be effected if we’re not correct, and interest rates move higher. And we do have a fair amount of floating rate exposure, which would benefit in a rising rate environment, although it’s not our base case.
Crit Thomas:
Okay, that was great. I appreciate it, Art.
Art Degaetano:
Sure.
Crit Thomas:
Thank you.
As of December 31, 2020, BANK OF AMERICA CORP 6.00%, 11/16/2169 made up 0.38%, BANK OF AMERICA CORP 6.00%, 01/25/2169, made up 0.71%, BANK OF AMERICA CORP 6.20%, 10/29/2169, made up 0.18%, JPMORGAN CHASE & CO 6.15%, 12/01/2169, made up 0.06%, JPMORGAN CHASE & CO 6.10%, 12/01/2169, made up 0.02%, WELLS FARGO & CO 4.75%, 12/15/2169, made up 0.24%, WELLS FARGO & CO 5.70%, 12/15/2169, made up 0.20%, and WELLS FARGO INCOME OPPORTUNITIES FUND made up 0.26% of the Flexible Income Fund. Current and future portfolio holdings are subject to change.
The Touchstone Flexible Income Fund invests in fixed-income securities which can 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. The Fund invests in preferred stocks which are relegated below bonds for payment should the issuer be liquidated. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing their price to decline. The Fund invests in non-investment grade debt securities which are considered speculative with respect to the issuers’ ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. The Fund invests in asset-backed securities which are subject to the risks of prepayment, defaults, changing interest rates and at times, the financial condition of the issuer. The Fund invests in corporate loans which are considered speculative with respect to the issuers’ ability to make timely payments of interest and principal, may lack liquidity and have more frequent and larger price changes than other debt securities. There is a high risk that the Fund could suffer losses from investments in non-investment grade debt securities caused by the default of an issuer.
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