In light of the market volatility in recent months, we thought it might be a good time to check the gauges in our car and provide a periodic review—a summarized highlight of various asset classes we operate in.
We might have been considered geniuses if we’d decided that an already-low Treasury yield of 3.0% or so wasn’t already low enough and was poised to hit 1.8%. That was not, in fact, the case. The probabilities were just not stacked in that direction of lower rates, for a number of reasons, and we were not alone in this view at the time. The S&P downgrade of the U.S. government counter intuitively caused a flood of cash away from risk assets into Treasuries, causing them to become even more expensive/lower-yielding. Over the last several years, investments in agency mortgage-backed securities have offered better coupons and valuations, so that is the direction we took—which worked when intermediate-term bonds did well. Read more