11.03.2011
By Terry Flanagan

Chasing Yield

Fixed income investors don’t need to look too far ahead on the yield curve for opportunities, noted asset manager.

Atypical monetary policies are ahead for the fixed income markets, noted Jim Barnes, senior fixed-income manager at National Penn Investors Trust Company.

“If the Federal Reserve pursues additional non-traditional monetary policies, as we expect, this could prompt increased inflation expectations — and ultimately drive up long term yields and create a steeper yield curve,” he said.

Market participants who felt the first two rounds of quantitative easing were a bust can rest assured a third round will not resurface for now, noted Barnes. Yet, while he is not entirely keen on a newer Federal Reserve policy, Operation Twist, an effort to keep low long-term interest rates, he commented it may not harm the economy as much as artificially pumping dollars into the system, as in the case of Quantitative Easing.

“It will be interesting to see how Operation Twist pans out; I don’t think it will have too much of an impact on increasing asset prices out there,” said Barnes, “It’s important to understand the distinction between Operation Twist and QE 1 and 2; the latter puts on increasing inflationary pressures and enhances asset bubbles.”

Regardless of the policy, Barnes expects “the Fed will come up with creative ways to communicate to the public that they want to instill low interest rates, for a long time” to aid in their mandate to maintain price stability, and employment rates up. Moreover, Barnes foresees the Federal Reserve will implement “more flexible policies.”

Such policies will undoubtedly create financial market volatility. Barnes told Markets Media that diversification and risk management will be key in combating the rippling volatility.

“Large financial institutions that have well-diversified product lines are apt to be better positioned to withstand financial market volatility,” Barnes said, highlighting the importance of using diversification to manage risk.

Yet, opportunities for the little yield that exists in the marketplace are not lost.

“It’s a low interest rate environment, but we’re seeing people go for corporate bonds,” he said. “The five to year part of the yield curve appears to be the best place to seek opportunities today,” still emphasizing the importance of performing due diligence.

“In this low interest rate environment, chasing yield by extending out on the yield curve may be a fool’s game.”

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