What to Expect From the Bond Market

Bonds can solve a problem or create one, according to Paul Matlack, senior vice president, senior portfolio manager and fixed income strategist for Delaware Funds Macquarie Investment Management. “The days of making equity-like money out of bonds [are] gone,” Matlack said during a session at the Envestnet Advisor Summit on Thursday. 

We’re still in an expansion phase, he noted, but economic soft data is much better than hard data. 

The issue in the U.S. economy is excess labor, he added. “There’s a lot of labor sitting out this expansion, so that’s why wage rates have not really clicked up dramatically.” 

The big growth driver, consumer spending, has been low as a result. Combined with flat corporate and government spending, the low-growth economy has persisted.

Bank lending is down as well, according to Matlack. “You’d think after eight years of expansion, you’d see loan losses clicking up, but no,” he said. The most recent quarterly reports from big banks have shown they’re releasing reserves back into their earnings, he said. “That tells me they’re not lending with the aggressiveness you would expect.”

Investor focus has shifted from the Fed to Congress and the president, which has made the Fed more comfortable increasing rates. Matlack expects the Fed will raise rates again in June, “and thereafter it’s going to be very data-dependent.”

He doesn’t see growth taking off unless the government can make some aggressive stimulus moves. 

The economy is at an inflection point, Matlack said, “and you need the ability to move around. You need the ability to either get aggressive or get defensive, and it’s hard to say which way we’re going.”

Brian Pytlewski, senior vice president and director of municipal fixed income for RNC Genter Capital Management, had a mixed view of the interest rate environment.

On the plus side, municipal credit quality is very stable, he said. Last year, the S&P had just 1,800 rating actions, compared with 4,000 in 2009.