We strive to provide the highest level of client satisfaction, and handle each request with the utmost importance. We expect to respond to each request we receive within one business day of receipt.
Please note that trades cannot be processed via e-mail for security reasons. If your inquiry requires immediate assistance, please call us at
1-800-821-5129 (8:30 a.m.-6:00 p.m. EST, Mon-Fri).
Thank you for contacting Lord Abbett. A member of our staff will contact you between X:XXpm EST and XX:XXpm EST [today OR XX/XX/XXXX]. A confirmation has been sent to your email address.Close
Use this form to give us your feedback or report any problems you experienced finding information on our Website.
* Indicates Required Fields
Thank you for providing feedback.
Although that rationale may be lacking on a fundamental basis, the current environment of aging baby boomers and slow global economic growth continues to provide fundamental grounds that should keep long-term interest rates near historically low levels. Monetary policy, particularly the Federal Reserve’s pledge to keep the fed funds rate at exceptionally low levels through at least late 2014 and its various quantitative easing initiatives, should also continue to anchor long-term interest rates.
These factors, however, do not mean that Treasury yields will be immune from periods of volatility. While there are a few scenarios that could lead to periods of turbulence in long-term Treasury yields, this may not translate to volatility in securities that are more aligned with corporate credit fundamentals. (See Table 1 for return correlations between Treasuries and corporate debt securities.)
(Data from August 2002 to July 2012)
Source: Zephyr Style Advisor.
One of the common threads throughout the current atmosphere of uncertainty relates to the pervasive inaction among policy makers. In Europe, there has been inaction in terms of enhancing the fiscal cohesion among countries in the European Union. In the United States, the inaction also relates to a fiscal situation that, if unaddressed, could push the country into recession and/or drive the country’s debt levels up to about 70% of gross domestic product by the end of 2012, which would be the highest ratio since just after World War II.6
While no one will mistake the United States for the peripheral countries in Europe, rising debt levels need to be financed, conceivably, with more debt. This indicates that the supply of U.S. Treasuries is set to rise for the foreseeable future.
Another outcome of the U.S. political impasse could be another downgrade of its credit rating, particularly if the previously scheduled sequestration that is part of the looming “fiscal cliff” is delayed, postponed, or ignored. Standard & Poor’s downgrade of the U.S. credit rating in 2011 was a clear impetus for volatility, yet the declines came in equity indexes and Treasury yields as investors sought the safety of U.S. government debt amid the uncertainty.
However, Fitch Ratings and Moody’s Investors Service currently have “negative” outlooks on their triple-A credit ratings of U.S. debt, with both agencies citing lack of plans to reduce the federal deficit and the political atmosphere of inaction as factors that could contribute to their respective downgrades.7 And another downgrade could affect the demand for Treasuries from buyers who are only able to hold triple-A securities as deemed by at least two ratings agencies.
These two issues—the potential need to issue more debt to finance growth deficits and a potential disruption in the buyer base for Treasuries—might create a supply/demand imbalance that could lead to periods of volatility in long-term interest rates. This scenario could become exacerbated if the Fed, which has been the largest recent buyer of Treasury securities, were to also limit its future participation in the market.
Could this potential scenario of volatility also affect corporate credit securities in a similar way? That may be unlikely, given that corporate credit metrics have strengthened in the low-rate environment, while sovereign finances have generally deteriorated. One reflection of this improvement in corporate credit fundamentals is that 67% of the high-yield bonds and floating-rate loans issued during the past three years have involved refinancing transactions,8 which can strengthen corporate credit profiles by reducing interest expenses and/or extending maturities.
If long-term Treasury yields were to increase from their current levels, thus potentially making them more attractive to some investors, demand for corporate debt would likely remain high as well. This takes into consideration that high-yield credit spreads remained above their long-term averages as of July 31, 2012,9 while the expected high-yield default rate is expected to remain at or below 2% for the next two years, compared with the long-term average of slightly more than 4%.10 Thus, riskier parts of the corporate bond market might continue to provide a relatively high level of income in an environment where the risks are expected to remain below their long-term averages.
Of course, there are other scenarios that could fuel volatility in long-term rates as well, including one where the risk of insolvency among the peripheral European countries and their banks is mitigated from an investment standpoint. In addition, if U.S. economic growth gains momentum while the country’s fiscal issues are gradually addressed, this could also lead to some turbulence in long-term interest rates.
One indicator of potential economic growth that could have a broader effect on Treasury securities is the continuing increase in bank loan activity. For example, in its July survey of bank loan officers, the Fed stated that not only did U.S. banks ease their lending standards but they also did so in an environment of improving demand as European banks withdrew from the market.11 This has led to an environment where U.S. banks are lending the most since June 2009.12
The increase in U.S. bank lending as economic growth continues, albeit slowly, might be reflected in an increase in the velocity of the money supply, which could be an inflationary signal. If more banks regard loans as an effective way to deploy capital, this could also mean that they use less of their capital to hold Treasury securities.
Investors seeking to shy away from Treasury or agency debt might believe they are doing so by avoiding strategies that explicitly state that they are purchasing the securities. But investors could still have considerable exposure to the two asset classes if they own a fund that is benchmarked to the Barclays U.S. Aggregate Bond Index, 77% of which consisted of Treasury, agency, and agency mortgage-backed securities as of July 31, 2012.13 Therefore, even if a strategy had an underweight position in those asset classes, it could have significant exposure to Treasury and agency securities.
As investors contemplate the conditions for fixed-income strategies, they will undoubtedly consider how long-term interest rates might respond to certain developments. While these deliberations might include scenarios with periods of volatility, investors might also consider how corporate credit securities might, or might not, be affected during these periods.
Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.
The credit quality of the securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from AAA (highest) to D (lowest). Bonds rated BBB or above are considered investment grade. Credit ratings BB and below are lower rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities. The credit quality distribution breakdown is not an S&P credit rating or an opinion of S&P as to the creditworthiness of the portfolio.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.