Federal Reserve Tapering-Cutting Through the Fog

There have been numerous articles and much discussion around the market volatility caused by the uncertainty around the Federal Reserve tapering their $85 billion asset purchase program and the possibility of rising interest rates.  Investors are especially nervous as the general opinion is that rates will rise quickly once they start.  This is due in part to the long duration of the Fed easing program and the historic fact that interest rates can rise quickly.  Given the inverse effect on bond pricing the decrease in the value of fixed income instruments value can be large and swift.

High yield bonds, intermediate bonds, emerging markets bonds, large value equities and real estate all dropped in value.

While the Fed could completely remove the stimulus we do not think this will be the case.  The primary reason is employment figures, they are not where the Fed wants them and an increase in interest rates and inflation is seen to be bad for job creation.  We think rates will be fairly range bound.

Harbor is maintaining shorter durations on fixed income and has a quality bias.  While we do not expect returns to be high for fixed income, we are expecting a return over cash of approximately 2.75%.  In all we continue to think the economic recovery coupled with on the whole better earnings will continue to buoy market prices albeit with continued volatility.