Ken Volpert, a portfolio manager and head of Vanguard’s Taxable Bond Group, says that investors shouldn’t hold their breath when it comes to tapering, which is not the end of the world. His postive thinking stems from the convergence of employment, population and bond data.
First, Volpert points out, the percentage of employed adults has been largely flat during the recent recovery, and the reason for the flatness, he says, is “the boomer-rang.”
“If you divide all adults into those age 25 to 55 and those age 55-plus, you will find that 25–55 is historically a much larger cohort,” says the portfolio manager in a recent blog. “Because of our baby boomer friends (those born between 1946 and 1964), me included, the 55-plus cohort has been getting bigger relative to the 25–55 cohort. It’s still much smaller, but it’s gaining on the younger group.”
When it comes to the job market, the growing size of the 55-plus crowd is pulling down the overall job participation rate of the total U.S. population.
Furthermore, though the unemployment rate is dropping, the economy still is not generating “more jobs relative to the number of adults, which is what drives the economy forward,” Volpert notes.
Without this robust job growth, corporations and consumers are increasing their savings and reducing both borrowing and consumption, “thereby reducing upward pressure on interest rates and prices,” the expert says. “For the Fed to raise interest rates, this dynamic needs to reverse, which I don’t see happening any time soon because of structural issues in the job market.”
As some “hardy souls” move out the yield curve, from short-term to intermediate-term bonds, this dynamic may be good news, according to Volpert.
“The feared penalty from rising rates, in my opinion, is not imminent. And the reward is approaching a historical high, relative to short-term investments," he notes.
(This dynamic is shown in the second chart. Yields on short- and intermediate-term corporate bonds and expected inflation are found on the left scale; the gold line is the difference, shown on the right scale.)
Though yields remain depressed thanks to Fed policy, the gap between short- and intermediate-term is “near the widest point of the last decade,” Volpert says.
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Check out PIMCO’s Gross: Fed Playing a ‘Dangerous Game’ on ThinkAdvisor.
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