The first quarter of 2013 turned out pretty much as expected: a low volatility environment with the level of bond yields and credit spreads relatively stable. At some point, we have to be happy with earning a yield on our fixed income investments. The last several years have been a major bond bull market, particularly 2012, but with yields at low levels, there is not much room left for bond price appreciation and we should be comfortable with earning our yield and carry.

Central banks around the world have worked hard to keep volatility low and to encourage portfolio rebalancing. Their mission has been a success so far, as we have seen asset prices rise, which has allowed collateral values to increase and enabled deleveraging the easy way—through the assets side of the balance sheet rising rather than the painful, deflationary cutting of liabilities.

Now, it would be great to see the real economy begin to drive growth, along with continued improvement on the asset side of the balance sheet. In other words, the real factors of economic production—land, labor and capital—become engines of growth driving rising profits and incomes. The old growth model of borrowing and spending is impaired, so we need more profits, jobs and incomes to move the economic expansion forward.

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© Loomis Sayles

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