Calvert News & Commentary

Memos from Bondland:

Political instability overseas translated into a firmer U.S. bond market last week.

3/3/2014

Untitled Document

By Steve Van Order, Fixed-Income Strategist

Hyrvnia Arrhythmia

Steve Van Order, Fixed-Income Strategist Steve Van Order,
Fixed-Income
Strategist

There are many geopolitical cauldrons under heat in the world at the moment. From the perspective of the financial markets some are closer to a simmer, such as Argentina, and some such as Venezuela and Thailand, are closer to the boil. One very important kettle that has boiled over is Ukraine. Recently, political opposition forced the pro-Russia party out of power and President Yanukovych fled to Russia. Last week, pro-Russian forces took over critical government buildings and airports on the strategically important Crimean peninsula.

If we regard the currency charts of a country as a measure of its health, then the Ukraine hyrvnia (UAH), in effect, appears to have suffered a sort of arrhythmia. The UAH is pegged to a basket of dollars, euros and rubles, depreciating about 25% since it broke free of its long-term anchor of around eight UAH to the U.S. dollar. The Ukraine was not in good economic or financial condition before heading into this political crisis. Its currency was shaky, and the rhythm of life for its citizens, and the entire region has been shocked into a sort of economic arrhythmia.

As a result, U.S. Treasuries benefited from a flight-to-quality as did the government bonds of the usual geopolitical safe havens of the euro-core, Japan and the U.K. Haven currencies such as the Swiss franc also strengthened. The impact of this crisis for markets could be fleeting if things quickly settle down, although that seems unlikely given the regions' political and military history. Hopefully, the parties involved will keep the conflict from turning too hot and into a clear proxy war between Russia and the West. Such a situation, and the chronic and increasing tension between former enemies in the Pacific, should not be underestimated in terms of their potential to generate volatility in global financial markets.

In addition to geopolitical influences on the U.S bond market, last week we witnessed a repeat of the challenging winter weather that has been plaguing the east coast of the United States for much of 2014. The tone of the remaining U.S. economic data released for January was weak, early indications are that the February data will not escape the weather's influences, and March is coming in as a lion for much of the country.1 Taken together, this means that getting a read on the underlying economic trend will be tough until we are into April or May. Fed chief Yellen noted that the central bank was expending a lot of effort in trying to measure the specific effect of the weather. She reiterated that quantitative easing (QE) tapering was not on a preset course and could be adjusted if the weakness was actually more than just weather-related. The wonderful irony, of course, is that her original time slot had to be delayed due to winter weather in D.C.

This commentary represents the opinions of the author as of March 4, 2014 and may change based on market and other conditions. These opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information. Calvert may have acted upon this research prior to or immediately following publication. In addition, accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed.

1. We do not mean to exclude reference to the protracted and exceptional drought in the western continental U.S. that has broadly impacted farm production.



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