REGULATORY CHANGES, DEMOGRAPHIC TRENDS, AND INSTITUTIONAL BIAS

There are many important factors external to the economic system that may critically affect a bond portfolio’s performance. To varying extents, these factors are difficult to anticipate. Forces such as demographics, mutual fund growth, and global economic prosperity are trending factors whose dynamics and influence may be discerned. However, sudden, meaningful changes such as tax policy, pension plan allocation rules, guidelines, benefit payout rules, supply of bonds issued, types of bonds issued, central bank policy, and the implementation of credit controls, capital controls, trade treaties, IMF policies, and trade wars, among other issues, are more problematic to contemplate and incorporate.
Other more abrupt aspects of life such as the outbreak of unanticipated wars or the formation of important economic cartels are impossible to predict. All of these factors could induce dramatic changes in the following: (1) direction of interest rates, (2) intermarket yield spreads, (3) shape of the yield curve, (4) volatility of the market and the pricing of expected volatility, (5) exchange rate values, and (6) intracountry yield spread as well as other important financial valuations in addition to an understanding of the investment policies of the reserve-rich central banks and those that are quickly accumulating reserves.

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