SOURCE: Global-FMI

Global-FMI

August 03, 2015 16:38 ET

The Nature of Interest Rate Forecasting

Interview With William Chin, President at the Canadian Society of Technical Analysts

NEW YORK, NY--(Marketwired - August 03, 2015) - In the past few years, the low levels of interest rates have had a major impact on insurance asset portfolios, resulting in low yields across a variety of assets and products. As a result, insurers have been searching for new investment strategies to diversify their portfolios to ensure they maximize their yields and can bring further profit to the business. However, the prospect of an imminent interest rate rise and the associated risk means investors need to find a balance between risk, liquidity and yield, to gain the most profits but not take on excessive risk.

Mr. Chin, President at the Canadian Society of Technical Analysts recently spoke with GFMI about key topics to be discussed at their Insurance Asset Optimization Conference, September 28-30, 2015 in New York, NY.

Why is maximizing yield such a key issue for insurers at this time?

WC: In a low interest rate environment, the risk and implications per every basis point change in interest rates is magnified. Insurers armed with higher returns on their assets will enjoy a heightened advantage over their peers in pricing their products.

At the same time, since short-term interest rates are at, or near zero, the yield curves for a significant number of currencies are very steep. Picking the right points on the yield curve can generate very different results.

How does macro research aid insurance investments?

WC: Macro research can identify the range within which interest rates in the respective currency can fluctuate. Given a set of economic data and monetary policy, the "natural boundaries" of interest rates can be established. Since economic data and monetary policy do not change drastically, this set of "natural boundaries" are very helpful in determining where current interest rates are at, and formulating strategies accordingly. As economic data and monetary policies make meaningful changes, the "natural boundaries" can be updated.

Once the "natural boundaries" have been determined, technical analysis can be applied to identify directional changes in interest rates within the "natural boundaries".

I will address these points in greater details in my presentation, "The Secret Life of Interest Rates".

How will the US yield curve behave as the Fed marches towards a neutral policy stance? How can yield curve forecasting help increase yield from investments?

WC: The short and intermediate parts of the US yield curve have been distorted by ZIRP; the removal of that could have significant impact on the parts of the curve from 10-year and in, where most corporate financing is done and assets for insurance companies are purchased.

ZIRP, and the removal of, has never happened before, making this conference so important to attend.
The 'normalization' of the Fed funds rate will give an upward bias to the short and intermediate parts of the yield curve.

If the US economy is seen as too weak to withstand the 'normalization' process, the yield curve could flatten; long-term interest rates could fall as the Fed tightens.

However, if the US economy strengthens and inflation picks up, the yield curve will steepen, regardless of the Fed's actions.

Therefore, there are plenty of risks and opportunities built within the US yield curve.

What is the role played by Technical Analysis in Interest Rate Forecasting?

WC: Technical analysis can be used to confirm or refute macro analysis, especially in light of the "natural boundaries of interest rates".

Technical analysis can also offer the timing and pricing in execution. In a low interest rate environment, every basis point counts.

What do you think attendees will gain from attending this event?

WC: The performance of fixed income benchmarks will likely suffer as the Fed embarks on 'normalization' of monetary policy.

It is therefore important to get a new perspective on absolute performance based on active management. Attendees will be able to add to their tool boxes non-traditional methods to fixed income management and asset optimization.

Investors are no longer paying 'Alpha fees' for 'Beta performance' because you can buy beta by buying an ETF.

Insurers are heavy into wealth management products. They are investment managers as well. Therefore, active management to generate Alpha is an extremely important trait to have if you want to be competitive. In my presentation, "The Secret Life of Interest Rates" I will demonstrate how macroeconomic research and technical analysis can be combined to help generate Alpha.

How has interconnectivity among asset classes changed the nature of interest rate forecasting?

WC: Interconnectivity among asset classes has never been stronger, partly a result of active involvement by central banks and the abundance of liquidity seeking yields. This phenomenon leads to volatility being transmitted quickly from one asset class to another. It is therefore extremely important for interest rate forecasters to follow other asset classes closely. I will address 'Multi-market Analysis' in my presentation "The Secret Life of Interest Rates" as well.

A recent example is the similar behaviors between crude oil and the 10-year US Treasury yield. (Correlation does not always mean causation, but here they are definitely related)

A 2-year chart between the 10-year yield (candlesticks) and crude oil (black line)

William Chin has 35 years of experience in trading and forecasting in global capital markets. He has developed a method in interest rate forecasting using 'macroeconomic research' combined with 'technical analysis'. This method enabled him to successfully predict the Credit Crisis of 2008, the Taper Tantrum of 2013, and the recent rise in interest rates. Accurate forecasts invariably lead to effective strategies and enhanced returns. He will be using these examples in his presentation to illustrate his method.

William has an MBA in economics. He is the President of the Canadian Society of Technical Analysts and the Vice President of the Americas for the International Federation of Technical Analysts. He is currently Chief Technical Analyst and Portfolio Manager for an investment firm.

The GFMI meeting provides insurers with new investment strategies to diversify their portfolios. Our expert speaker roster of CIO's and Investment Heads will deliver case studies targeted towards managing insurance assets in the current interest rate environment.

For more information, please click here to download the conference agenda or contact Tyler Kelch, Assistant Marketing Manager, GFMI at 312-894-6310 or tylerke@global-fmi.com

About Global Financial Markets Intelligence
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