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A Sound of Thunder

Share current LOB: CommercialCorporateInstitutional

Ray Bradbury’s 1952 short story, A Sound of Thunder, explored the implications of time travel and the impact one small decision could have on the future of the world. The concept is one that many have considered over the years with the same question in mind: could we change history? The challenge of this mindset is that it is impossible to know what the true outcome would be with even the most insignificant of changes. As Edward Lorenz noted in his research on chaos theory, even a small butterfly flapping its wings over Brazil could seemingly cause a tornado in the state of Texas.

The Federal Reserve and central bankers around the world are convinced that taking a different approach to fighting a deep recession will affect a better outcome and restore stability to the markets and the global economy. In his famous “Helicopter Drop” speech in November 2002 to the National Economists Club (http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm), Federal Reserve Chairman Ben Bernanke noted that had central bankers in the Great Depression in the 1930s and in Japan in the 1990s utilized every monetary policy tool available to them, they could have mitigated the ensuing financial distress. Chairman Bernanke felt that “the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation…to ensure financial stability in the economy.

“Fixed income should be considered more risky today than it has been at almost any other time in the past 30 years.

Thus, the Federal Reserve and central bankers around the world are availing themselves of these monetary tools in an effort to right the economic ship and effectively “change history”. According to ISI Research:

  • There have been over 293 easing programs instituted by central banks around the world in the past 4 years; and
  • Our Federal Reserve has paralleled these efforts with three substantive quantitative easing programs (QE1, QE2, and QE3) in that same time period.

The visible implications of these policy decisions are dramatic:

  • The US Treasury ten year bond has fallen from a yield of over 4% in 2008 to approximately 1.7% today.

The US treasury bond has fallen in the last 5 years

  • US Thirty year fixed conforming mortgage rates are at 3.5% from over 6.5% during the 2008 crisis;
  • Spreads in domestic high yield bonds are now at multi year lows;

Spreads in domestic high yield bonds are now at multi year lows

  • Investor sentiment has continued to support the demand for income despite negative real Treasury yields; and
  • The ECB has managed to put a ceiling on spread widening with commentary on their support of all peripheral Eurozone countries.

10-Year Sovereign Benchmark Yields

These facts lead us to one assessment: fixed income should be considered more risky today than it has been at almost any other time in the past 30 years. Thus, we have maintained a neutral or underweight to fixed income assets across portfolios. Our position is ironically informed by uncertainty. The unknowns of when rates will rise or when the global economy will be able to stand on firm footing without intervention pose too great a threat to treat the fixed income markets as though they will behave according to historical norms.

The single known is that, when rates do rise, it will be a sharp reversal that will come when investors least expect it. Nevertheless, institutional investors continue to search for less volatility in their portfolios and yield to cover spending needs, but the fixed income market fails to deliver the security and consistency it once offered. It is our goal to help clients minimize the impact of this reversal and, in the meantime, leverage large cap domestic stocks to generate greater income through above average dividend yields and alternative strategies to manage volatility. We have also chosen to pursue greater diversification within the fixed income space.

SunTrust Bank and its affiliates and the directors, officers, employees and agents of SunTrust Bank and its affiliates (collectively, “SunTrust”) are not permitted to give legal or tax advice.  While SunTrust can assist clients in the areas of estate and financial planning, only an attorney can draft legal documents, provide legal services and give legal advice.  Clients of SunTrust should consult with their legal and tax advisors prior to entering into any financial transaction or estate plan.  Because it cannot provide legal services or give legal advice, SunTrust’s services or advice relating to “estate planning” or “wealth transfer planning” are limited to (i) financial planning, multi-generational wealth planning, investment strategy, (ii) management of trust assets, investment management and trust administration, and (iii) working with the client’s legal and tax advisors in the implementation of an estate plan.

These materials are educational in nature.  The implications and risks of a transaction may be different from individual to individual based upon past estate, gift and income tax strategies employed and each individual’s unique financial and familial circumstances and risk tolerances.  

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

©2013 SunTrust Banks, Inc. SunTrust and SunTrust Foundations and Endowments Specialty Practice are federally registered service marks of SunTrust Banks, Inc. SunTrust PortfolioView, and SunTrust eGrants are service marks of SunTrust Banks, Inc.

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