WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER
March 13, 2015
William Riegel, Chief Investment Officer, TIAA Investments
European and broad-market international equities generally fared better, at least in local currency terms. For U.S. investors, however, the continued precipitous slide in the value of the euro magnified small losses, eroded gains, or turned positive returns negative when translated into dollars. The MSCI Euro Index, for example, returned 0.82% in euros for the week through March 12 but -1.45% in dollars. Oil prices, which tumbled about 9% for the week and slipped below $45 per barrel, were also hit by the dollar’s strength, along with growing worry over excess supplies.
U.S. Treasuries recovered from the previous week’s selloff, when the bellwether 10-year yield spiked to 2.24% on the heels of the monthly U.S. payrolls report (yields and prices move in opposite directions). Economic releases since then have been rather muted, and the 10-year yield was trading at 2.10% on March 13. In addition, Treasuries benefited from the launch of quantitative easing (QE) in Europe, which drove European yields lower and fueled demand for the higher yields available in the U.S.
Performance varied among non-Treasury categories, including high yield, where new issuance had to be absorbed. Mortgage-backed securities underperformed Treasuries and the broader Barclays U.S. Aggregate Index on concerns about prepayment risk, while emerging-markets debt saw yield spreads widen as the dollar strengthened.
Negative inflation numbers have been driven primarily by the steep fall in oil prices over the past year. We think inflation is likely to stabilize and resume its upward trend, perhaps as early as this fall.
In fixed-income markets, we believe that bond spreads currently represent reasonable but not exceptional value compared to equities. We find investment-grade corporate bonds particularly attractive, as their buyer base is largely institutional and stands to benefit directly or indirectly from European QE. While absolute yields in high-yield bonds and loans are attractive, trading in these assets tends to be more volatile, as buyers include higher concentrations of hedge funds and retail investors.
A key from here will be the Fed’s meeting on March 17 and 18, at which the word “patient” is likely to be dropped from the language about the timetable for raising short-term interest rates. In addition, the new “dot plots” of Fed rate forecasts should provide further clarity about both the likely rate increase and the subsequent pace of tightening. Both of those variables have been lowered but remain above what equity markets are pricing in. We expect equity markets to remain volatile around March’s meeting and between then and the June meeting—still the most likely timing for the first rate hike.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc. is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA). Past performance is no guarantee of future results.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
Please note that equity and fixed income investing involve risk.
© 2015 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017