Last week’s steep bond market selloff seems to have marked a sea change in the market, one which investors are still trying to fully fathom. With a bond manager’s keen insight into the value of securities the impact of monetary and fiscal policy, James Camp, managing director of fixed income at Eagle Asset Management, spoke with AdvisorOne to size up the state of the stock and bond markets and the direction of Fed policy.
The first measure of today’s bond market — across the fixed-income board, according to Camp (left) — is a trading range 30 basis points higher than the historic lows the market has recently experienced; 10-year Treasuries are now trading in the 2.1%-2.4% range. He said the reasons for the upward shift in yields were the positive results of the Fed’s bank stress tests last week and the apparent resolution to the Greek debt crisis.
Camp still views balance sheets at the consumer, financial institution and sovereign levels to be problematic, and therefore sees this “good news” as temporary. From a monetary policy standpoint, “the hurdle for another round of quantitative easing has just been raised,” Camp says. “Ultimately, I expect to get something from the Fed. I just don’t expect it imminently.” Camp says the easy-money gift the Fed keeps giving cannot occur when the inflation gauge the Fed looks at is at 2.6%. Only when inflation is at the 2% level will the Fed have the political cover to pursue further easing, he says.
Camp is sure the Fed would like to send rates down again when it is expedient to do so, citing 30-year mortgage rates, which this week climbed above 4% for the first time in more than three months. The First Eagle manager was critical of this approach. “The Fed cannot manufacture a mortgage market," he said. "We have a very broken model."
Camp expects further losses in the battered housing sector. “The problem is not prices, demand or interest rates,” he says. “It’s availability of credit.”
While Camp expects policy rates to remain low for the next 3 to 5 years, he sees signs of fatigue in the bond market. With money market rates at zero, he expects funds to flow more into stocks in the near term. The portfolio manager disputes the view of some bond market bears that there is no value in bonds, however.
“We’re closer to end of the run than the beginning,” he says, but “there’s always a reason to own non-corrrelated assets to equities,” citing opportunities for managers who know how to “trade the range.” Right now, Eagle Asset Management fixed-income portfolios are concentrated in higher quality bonds, and Camp says 4 to 5 years is “the sweet spot” where investors can get some return on their capital. He expects intermediate bonds to return 3.5% to 4% this year.
Going forward, while the economic headlines and investor sentiment have been favorable, the U.S. still has a way to go to return to a lasting economic recovery, Camp says. The key problems, he says, are the remaining overhang of bad debt at every level. “Kicking the can down the road doesn’t work forever,” he said. “The losses haven’t gone away.”
He says the Fed may have reached the limits of its ability to address problems and that the executive branch and lawmakers must tackle the issues obstructing economic growth. Our fiscal policy has been “less than stellar,” he says. “I’d like to see a rational, broader, simplified tax base; genuine reform to entitlements and Medicare spending. We have to act on some of these — and sooner rather than later.”