U.S. economic growth expanded at a moderate pace during the third quarter. The average consensus GDP forecast is for an annualized growth rate of 2.0% for the quarter, driven largely by consumer spending. Yet despite the steady pace of domestic growth, concerns about an economic downturn continue to intensify as China trade rhetoric and BREXIT concerns combined with the traditionally illiquid, end of summer period. Citing slowing global growth and uncertainties around trade, the Federal Reserve Bank (Fed) lowered the federal funds rate by 0.25% at each of their July and September Federal Open Market Committee (FOMC) meetings, leaving the current target range at 1.75%-2.00%. This was a dramatic shift from their forecast in December of three rate hikes, ending at 3.25% in 2019.
Treasury yields continued to move lower during the quarter, tracking closely with European yields. The 10-year Treasury note which began the quarter at 2.00%, traded as low as 1.46% in early September before closing the month at 1.67%. Similarly, the 2-year Treasury note began the quarter at 1.76%, traded as low as 1.43% in early September and closed the quarter at 1.50%. Lower yields translated into positive returns for bond holders in the quarter. The Bloomberg/Barclays Aggregate Bond Index generated a 2.27% return for the quarter, while the Bloomberg/Barclays Intermediate Government/Credit A+ Index posted a 1.25% result for the period. Overall, fixed income returns remain strong across asset classes for both the year-to-date and trailing 12-month period.
As the Fed initiated “insurance” rate cuts seeking to insulate the current economic expansion against growing headwinds, debate raged over the source of slowing growth and how much monetary policy can help. Indeed, Fed Chairman Powell characterized the cuts as a mid-cycle adjustment. However, it is important to note that the decision to cut rates and the magnitude of the adjustment was not unanimous amongst the voting Fed members, with two voters opposing any additional cuts and one voter favoring a larger cut. The division over the appropriate policy level of rates is driven by disagreement about how far along we are in this economic cycle as well as uncertainty about the root cause of the sub-par growth. We believe that interest rates, particularly following two additional 0.25% cuts, are now quite accommodative. Yet investor expectations reflected in forward markets are anticipating several more cuts to come.
In our view the dislocation and uncertainty resulting from the trade impasse remains the biggest threat to global growth. Global and domestic manufacturing and agriculture sectors are showing strain as indicators like the JPM Global Purchasing Managers Index (PMI) and the U.S. ISM Manufacturing Index fall into “contractionary” territory. While a declining percentage of the U.S. economy, manufacturing remains large enough to have a significant impact on growth and business sentiment. Should we see some resolution to the trade issues (China and BREXIT) we would expect some snap back in investor and CEO confidence, which world manifest itself in better equity performance and higher yields globally.
For insurance companies the flat yield curve and compressed spread environment means we must continue to balance the needs for income with the increased risk taken to get that income, be that credit, structure, liquidity or duration risk
“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC, and Madison Investment Advisors, LLC, which also includes the Madison Scottsdale office. Madison Funds are distributed by MFD Distributor, LLC. Madison is registered as an investment adviser with the U.S. Securities and Exchange Commission. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.
Any performance data shown represents past performance. Past performance is no guarantee of future results.
Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
The Bloomberg Barclays Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage backed securities, asset-backed securities and corporate securities, with maturities greater than one year.
The Bloomberg Barclays U.S. Intermediate Government Credit A+ Bond Index measures the performance of U.S. dollar denominated U.S. Treasuries, government related and investment grade U.S. corporate securities with quality ratings of A3/A or better and maturities between one and 10 years.
Bonds are subject to certain risks including interest-rate risk, credit risk and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds.
Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in the report constitute the authors’ judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Madison Scottsdale is the Insurance Asset Management Division of Madison Investment Advisors, LLC ©October 18, 2019
“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC, and Madison Investment Advisors, LLC, which also includes the Madison Scottsdale office. Madison Funds are distributed by MFD Distributor, LLC. Madison is registered as an investment adviser with the U.S. Securities and Exchange Commission. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority.
Madison Investments shares all personnel and resources at their Madison, Wisconsin location. Statistical data is for the consolidated Madison organization. The Madison organization consists of its holding company, Madison Investment Holdings, Inc. and its affiliates: Madison Asset Management, LLC; Madison Investment Advisors, LLC; and Hansberger Growth Investors, LP. Asset information presented includes non-discretionary assets. Refer to each entity’s Disclosure Brochure for more information.