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Kent Thune

Fixed Income 2013: The New Uncertainty

By October 31, 2012

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One of the biggest challenges for the investor after the presidential election and into the next year, will be where to invest fixed income in 2013. Why is this you ask? 

One of the greatest enemies of the investor is uncertainty and once the presidential election of 2012 disappears next week, uncertainty will be removed and all will be well, right?  Not exactly.  The new and bigger uncertainty will be the fiscal cliff of 2013.  The Bush-era tax cuts, which were extended for two years in 2010, are set to expire at the end of 2012.  The result will have the same effect as a tax increase and can have significant and negative impact on the economy.

The first concern will not be the negative impact if Congress fails to extend all or parts of the tax laws set to expire but what the uncertainty will do as the New Year approaches.  If hurdles, such as the current and looming uncertainties of European solvency and the fiscal cliff, can be overcome or resolved to a "worst is over now" scenario, world economies could resume their modest growth.

What's wrong with that?  The challenge lies in interest rates and how to manage fixed income.  The federal reserve will have finished its "QE 3" by mid-2013 and the markets are anticipating a rise in interest rates to follow by late 2013 or early 2014.  This may seem far off but capital markets are forward-looking mechanisms.  Bond prices can begin falling (they move in opposite direction of interest rates).  However, current bond yields are so extremely low, investors may be willing to hold on to bond mutual funds longer or some may begin considering a bond laddering strategy or even a CD laddering strategy.  Others may be willing to take extra risk for yield and buy junk bonds or dividend paying ETFs or mutual funds.

For a primer on all the above, be sure to check my article, Where to Invest 2013 - Fixed Income.

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