How many of us will be proven wrong by year end? How many right? In a business where we are often judged—fairly or not—on an annual or even quarterly basis, the act of making predictions can be risky. Put your thoughts in print and 12 months later you may be issuing a mea culpa, and professional investors are never keen on that sort of thing.

Executive Summary

At a time when yields for corporates and munis are almost equivalent, and when liquidity concerns may outweigh any desire to reach for yield, P/C insurers can seize an opportunity to sell fully priced fixed-income holdings. But sitting on the cash erodes economic capital, and now is not the time to stockpile long-duration assets. While all choices seem suboptimal, real-time data may offer the best window into short-term investment opportunities, argues Sage Advisory's Josh Magden.

Still, as third-party money managers we are paid to take a position, both to earn a fair return on an insurer’s capital and even more importantly to protect the downside volatility of their capital position. The start of the year saw many of us in the investment management industry certain that the Fed would begin to increase benchmark interest rates toward the end of 2014 or possibly in the first quarter of 2015. As a result, many bond managers shortened the duration of client portfolios and there was much ado about rising rates.

Thus far in 2014, challenges to insurer capital from such a policy environment have not materialized. It seems we are at any uneasy truce. Détente is the watchword for the moment. Since Yellen’s ascendency as Fed chair, her dovish statements on future interest-rate increases—notwithstanding recent comments that the U.S. economy is nearing the Fed’s “inflation objective”—are tempered by an economy where headline unemployment numbers are improving but wages are not. Indeed many market observers feel that unemployment is misleading of late. The “slack” in the labor market that Chairwoman Yellen seems to monitor closely—i.e., the underemployed versus the unemployed—remains a nettling problem.

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