Here we go again. A new year is upon us and most economists feel that 2014 will be a transition year for the bond market as the Fed slows down the $85 billion per month bond purchases under its historic quantitative easing program. The timing and pace of the Fed’s exit plan will certainly be one of the most important financial events of the year globally for both stocks and bonds.
Can the exit be orderly? More than $16 trillion in wealth has been restored since the 2008–2009 mortgage meltdown. The economy has been in snail mode but has managed to grow just over 2 percent per year on an annualized basis.
Unemployment remains high, especially from the Fed’s point of view, but has been declining slowly as hiring confidence returns. Consequently, 2014 should be an interesting year for the markets.
Alpha is usually defined as the performance advantage investors seek in terms of return over an industry benchmark. In other words, for us as bankers it answers the question of how your bond portfolio is performing versus peers. In the past, we have used the UMB Peer Group as the benchmark as it is large ($36 billion) and also representative of community bank bond portfolios since there are more than 500 community banks in the group.
Because we appear to be at an inflection point for the bond market and are starting a new year, I think this is an excellent time to review your bond portfolio’s security mix, average maturity/duration, total return and overall performance. If you need help calculating any of the performance metrics in the attached chart, feel free to contact me at the email address above.
Best wishes for a healthy and prosperous 2014.
Jeff Goble is executive vice president and managing director, investment banking, at UMB Bank, n.a., Kansas City. His email address is Jeffrey.Goble(at)umb.com.
Copyright (c) January 2013 by BankNews Media