2014 will go down as a year that was a “statistical champion” as both stocks (as measured by the S&P 500 and the Dow Industrials) and bonds (the more interest rate sensitive asset classes) had very good years. It was a year of duration over credit. What we mean is that interest rate sensitive sectors (Treasuries, mortgages and investment grade) dominated, while credit (high yield bonds and loans) were beaten down. At the beginning of 2014, we were one of the few firms calling for flat to lower rates, but even we did not see an 80 basis point move down in the 10-year Treasury.

So where does that leave us as we head into 2015? Stocks look extended. They are not cheap by any measure but the party continues until it doesn’t. How about bonds? Wholesale selling of the high yield asset class due to its large exposure to the energy industry has created what we see as attractive entry points into numerous names that have nothing to do with the energy markets. We did not see these types of discounts going into 2014. While we don’t expect interest rates to rise much in 2015, they are unlikely to fall and become a tailwind for longer duration asset classes, such as investment grade bonds. Read more of our piece, “The Year Ahead: High Yield, Energy, and Interest Rates,” click here.