Configuring the Barbell Strategy: The What and Why by Nick Burwell

October 17, 2018

Thank you to all who attended our fixed-income session at the conference this year. Unfortunately, we didn’t have quite the level of interest we had at last year’s session. I suppose next year I will have to come up with a more exciting title! If anyone has any ideas, please let me know. For those of you who are curious, I will review some of the main talking points here.

We began the session discussing our fixed-income portfolio construction process. Successful bond management starts with two very critical components, forecasting the future direction of interest rates and the future pricing of corporate credit risk. It all begins with our macro‑economic outlook which then helps us to formulate our forecasts. As the diagram below demonstrates, there are several steps in our thought process that ultimately lead us to individual security selection.

After we wrapped up our discussion around process, we reviewed the rising interest rate environment over the past twelve months. The chart below shows the rather dramatic rise in yields across a wide range of different U.S. Treasury Bond maturities. We also pointed out how closely the short‑term bonds move with the Federal Funds rate, which is set by the voting members of the Federal Open Market Committee at the U.S. Central Bank (Federal Reserve).

Chart Source: Bloomberg

We finished the session reviewing several key indicators concerning the current state of the economy and discussing our outlook over the next year or so. We covered the employment picture, inflation, the budget deficit, consumer and small‑business confidence, monetary policy, yield curve flattening as well as growing debt levels for households, governments and corporations. I encourage anyone who may be interested in this to call the office for a full copy of my presentation from the conference. Thanks again for all who attended, and I look forward to seeing you again next year.