Slow Growth: An Opportunity for Bond Investors

Slow Growth: An Opportunity for Bond Investors

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Corporate credit markets will be safe from the economic uncertainty surrounding the fiscal cliff, according to experts at Standish Mellon, a Boston-based asset management company.

Their new report predicted the fiscal cliff would be averted and the economy would narrowly avoid tumbling into another recession. The slow economic growth coming out of the negotiations will present opportunities for bond investors. “Both U.S. investment grade and high-yield bonds over the last 20 years have posted positive excess returns when U.S. economic growth ranged between one percent and two percent,” the report said.

If Congress and the Obama administration fail to avoid the fiscal cliff, tax hikes and spending cuts amounting to 4.8 percent of U.S. gross domestic product (GDP) will go into effect at the beginning of next year. However, if a compromise deficit reduction package is reached, which Standish Mellon anticipates, it could reduce this drag sharply – enough to avoid recession.

"Under our base case scenario, the U.S. economy will suffer a fiscal drag of roughly 1.4 percent of GDP next year and U.S. real GDP growth will decelerate from 2.1 percent in 2012 to 1.4 percent in 2013," said Thomas Higgins, global macro strategist for Standish.  -  Read more at The Sacramento Bee

CEOS IN EMPTY SUITS PUSH HIGHER TAXES  Top business leaders urged Congress to reduce the deficit by raising taxes. Their letter released Thursday prompted Marketwatch’s Washington bureau chief, Steve Goldstein, to criticize the corporate chieftains for not “putting their money where their mouth is.”

“Does anyone seriously think GE’s army of lobbyists, or those for any of the signatories, will not push back against any reduction or elimination of the tax code they employ to their advantage?” Goldstein said. “There’s also no pledge on campaign donations, say, to refuse to contribute to candidates who don’t take action to avoid the fiscal cliff and aren’t willing to consider the full combination of revenue hikes, spending cuts and entitlement reform. So these companies will continue to fund candidates who fight against the very premise of the letter. In short, the CEO group won’t put their money where their mouth is. In this town, it won’t get you far,” he said.  -  Read more at Marketwatch

NYT BLAMES FISCAL CLIFF FOR DIP IN EARNINGS   The New York Times reported that its Q3 earnings were down by 20 percent from weak advertising that the company’s Chief Financial Officer James Follo blamed on “weakened business confidence associated with uncertainty around elections and the pending fiscal cliff.”  
Read more at Business Insider

WAPO: OBAMA IS BETTER PREPARED TO AVOID THE CLIFF The Washington Post’s editorial board endorsed President Obama on Thursday by calling the president better positioned to navigate the country away from the fiscal cliff than Mitt Romney. “We come to that judgment with eyes open to the disappointments of Mr. Obama’s first term. He did not end, as he promised he would, “our chronic avoidance of tough decisions” on fiscal matters. But Mr. Obama is committed to the only approach that can succeed: a balance of entitlement reform and revenue increases.

Romney, by contrast, has embraced his party’s reality-defying ideology that taxes can always go down but may never go up, the paper said. Along that road lies a future in which interest payments crowd out everything else a government should do, from defending the nation to caring for its poor and sick to investing in its children.  Read more at The Washington Post

GOLDMAN SACHS DISAGREES: ROMNEY WILL AVOID THE CLIFF Goldman Sachs political economist Alec Phillips said Thursday that the country has a better chance of avoiding the fiscal cliff if Mitt Romney is elected president. “A Romney win seems more likely to lead to a short-term extension of the 2001/2003 tax cuts and some aspects of the fiscal cliff,” said Phillips. “A status quo political outcome raises the risk of a game of fiscal ‘chicken’ at year end, in which policy goes ‘off the cliff’ unless one party reverses their long-held position on the upper income portion of the tax cut.”  -  Read more at CNBC

For more news on the approaching fiscal cliff, follow us on Twitter@Fiscalcliffnote

Brianna Ehley is the former Washington Correspondent for The Fiscal Times. She is currently a reporter on Politico's health care team in Washington, D.C.