Why the Fed won't raise rates this year

Why the Fed won't raise rates this year
Regardless of what Friday's April jobs report suggests, DoubleLine Capital thinks the economy is just not strong enough to support higher rates.
MAY 09, 2015
The Federal Reserve is not going to raise rates in 2015. A bold statement perhaps, but that's the view of DoubleLine Capital, which manages $73 billion in fixed income funds. Investor eyes are keenly focused on the April monthly employment report, due out this Friday, in the latest attempt to gain clarity when the data-dependent Federal Reserve will move to raise the Fed Funds rate. However, Bonnie Baha, head of global developed credit for DoubleLine and a member of the firm's Fixed Income Asset Allocation committee, told S&P Capital IQ Wednesday that DoubleLine thinks the U.S. economy is not strong enough to support higher rates. (More: Jeffrey Gundlach's history lesson on the Fed and bonds) Ms. Baha is co-manager of DoubleLine Floating Rate Fund (DLFRX) and DoubleLine Low Duration Bond Fund (DLSNX). She is also part of the team that supports the recently launched and actively managed SPDR DoubleLine Total Return ETF (TOTL). All three of these funds have an average duration below that of the Barclays Aggregate Index, but sport relatively high yields compared to peers, aided by taking on some credit risk. Supporting the view on rates, she highlighted the fractional first quarter 2015 0.2% gross domestic product, the still low-inflation rate that remains below the Fed's target and is likely to be negatively impacted by rebounding energy prices, and employment as a percentage of the U.S. population that remains at 1997 level, but with a lower quality. While the U.S. economy should improve somewhat in the remainder of 2015, Ms. Baha thinks investors are preparing too early for Fed action. She believes the 30 basis point increase in the 10-year Treasury yield in the past two weeks to 2.20% stems from technical trading reasons as fundamentally nothing has changed. (More: Gundlach says 'blockhead' Fed should postpone raising rates) DoubleLine's view on the timing of Fed action is different than many, including Standard and Poor's Global Economics, which expects the initial Fed funds hike will occur in September. Indeed, DoubleLine believes that based on expected GDP growth, the 10-year yield should be closer to 1.75%. Such a decrease in bond yields and simultaneous increase in bond prices, if it were to materialize, would also be positive for shareholders of high dividend yielding stocks in the consumer staples and utilities sectors. S&P Capital IQ believes these sectors have underperformed the broader S&P 500 Index this year as investors have rotated out of these stable "bond proxies" in anticipation of higher bond yields. Consumer staples and utilities stocks in the S&P 500 Index sport an average dividend yield of 2.7% and 3.7%, respectively. Todd Rosenbluth is director of ETF & Mutual Fund Research at S&P Capital IQ Global Markets Intelligence. Follow him @ToddSPCAPIQ

Latest News

NASAA moves to let state RIAs use client testimonials, aligning with SEC rule
NASAA moves to let state RIAs use client testimonials, aligning with SEC rule

A new proposal could end the ban on promoting client reviews in states like California and Connecticut, giving state-registered advisors a level playing field with their SEC-registered peers.

Could 401(k) plan participants gain from guided personalization?
Could 401(k) plan participants gain from guided personalization?

Morningstar research data show improved retirement trajectories for self-directors and allocators placed in managed accounts.

UBS sees a net loss of 111 financial advisors in the Americas during the second quarter
UBS sees a net loss of 111 financial advisors in the Americas during the second quarter

Some in the industry say that more UBS financial advisors this year will be heading for the exits.

JPMorgan reopens fight with fintechs, crypto over fees for customer data
JPMorgan reopens fight with fintechs, crypto over fees for customer data

The Wall Street giant has blasted data middlemen as digital freeloaders, but tech firms and consumer advocates are pushing back.

The average retiree is facing $173K in health care costs, Fidelity says
The average retiree is facing $173K in health care costs, Fidelity says

Research reveals a 4% year-on-year increase in expenses that one in five Americans, including one-quarter of Gen Xers, say they have not planned for.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.