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Effects of Taper Talk on Treasury Rates


FRAN RODILOSSO: Fixed income markets in 2013 were really two stories.  One, there was a story of taper talk. Would the Fed start slowing down its asset purchases of $85 billion a month?  What happened in December of last year was the Fed actually did begin tapering purchases down to $75 billion a month.  The impact on Treasury bonds was negative as yields rose.  Initially on taper talk, rates hit 3% on 10-year bonds.  When the market became unsure what would happen with the Fed, rates moved back down to about 2.75%.  After the Fed actually did begin, or announced that they'd begin tapering in December, we saw 10-year yields finish the year above 3%, significantly higher than where they began in 2013.


U.S. and European Fixed Income Markets


RODILOSSO: Other parts of the fixed income universe posted mixed performance in 2013.  U.S. credit markets, particularly high-yield, did quite well.  The cushion available in the current yield offered mid-single digits positive return for U.S. high-yield1.  Improving growth in the U.S. helped short-term rates to remain low which helped support credit markets in general.  Default rates in the U.S. also remained below 1%.  For other fixed-income markets, European sovereign debt traded quite well last year, as did European credit, particularly high yield, for many of the same reasons that credit did well in the U.S.  Europe saw slightly better growth numbers, although Europe is still looking a lot less out of the woods than the U.S.


EM Fixed Income Markets


RODILOSSO: Emerging markets debt on the other hand posted negative returns pretty much across the board in 2013.  Local currency sovereign debt2 was the worst performer within the emerging market universe.  However, hard currency sovereign debt3 performed quite poorly as well.  Ironically, corporate debt4, where most people think the liquidity is lower or returns might have been worse last year, was the best performer within the emerging markets debt universe, posting slightly negative returns for the year. This is compared to -8% on local currency sovereign debt and closer to -5% on hard currency sovereign debt.


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IMPORTANT DISCLOSURE


1 U.S. High Yield: BofA Merrill Lynch U.S. High Yield Master II Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicl issued in the U.S. domestic market.


2 Local currency sovereign debt: Market Vectors EM Sovereign Bond Index (Local FX) tracks the performance of emerging markets sovereign bonds denominated in local currency.


3 Hard currency sovereign debt: Market Vectors EM Corporate Bond Index (USD & EUR) tracks the performance of emerging markets corporate bonds denominated in USD or EUR.


4 Corporate debt: BofA Merrill Lynch U.S. High Yield Master II Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market.


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Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. Debt securities carry interest rate and credit risk. Bonds and bond funds will decrease in value as interest rates rise. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. Securities may be subject to call risk, which may result in having to reinvest the proceeds at lower interest rates, resulting in a decline in income.


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