Insights

Higher for Longer Strategy When we look back on 2022, we cannot overestimate the damage the fixed-income markets inflicted on investors.  Investment grade corporate bonds fell 16%.  Long-term treasuries had a total return of -29%.  High yield bonds fell 11%.  Even very short-term treasuries declined 3%.  It was the worst year for fixed-income investors in roughly 40 years.  Equity markets also declined sharply.  The S&P 500 fell 18% and th..

Waiting for a Pivot Strategy The Fed has been very clear that it intends to raise rates aggressively until there are clear signs of falling inflation.  There have been 300 basis points of rate increases in the last five FOMC meetings with another 125 basis points expected before the end of the year.  The result of this has been a significant decline in the stock market, rising interest rates, and an expectation of a recession in 2023.  Monetar..

When Will Inflation Peak? Strategy As threats from the pandemic subside, the focus has moved to the Fed and how aggressively it will fight inflation. Having raised rates three times already, with many more hikes this year expected, it seems to us the Fed is willing to risk a recession to tame inflation.  This is usually very negative for the market returns.  Both equity and fixed income markets have already seen some of the worst performance ev..

Interest Rates Spike Higher Strategy This article typically begins with a few comments about the pandemic, but cases have fallen sharply, and many more restrictions are being lifted.  We are learning to live with it on some level.  The big story from the 1 st quarter of 2022 is the sharp rise in rates.  The 2-year maturity Treasury yield increased 160 basis points.  The five-year maturity yield rose 120 basis points and the 30-year Treasury w..

Tighter Monetary Policy is Here Strategy While Covid remains the number one health threat and number one economic threat, the variants keep changing.  We were negatively impacted by the Delta variant last quarter and now we have Omicron.  While this variant is much more contagious, it seems to cause fewer serious symptoms. Some medical experts say this is how a pandemic ends; millions get infected by a much less serious variant, and we have her..

Strategy The COVID Delta variant had a significant impact on 3 rd quarter economic activity.  GDP is expected to have increased 2% - 3% in the quarter which is well below the 6.7% we saw in the 2 nd quarter.  Daily cases in the U.S. increased from 25,000 to 160,000.  Airline travel decreased, borders closed, and it seemed as though we were headed back to renewed pandemic restrictions.  August nonfarm payrolls were expected to increase 700,000..

Strategy Unlike the first quarter when we saw interest rates rise in anticipation of stronger growth, the realization of a stronger economy has resulted in rates falling.  The 10-year Treasury yield fell by 27 basis points and long bond yields have declined by 30 basis points.  Despite commodity prices moving higher, homes selling for more than list, a waiting list to buy most major appliances, and labor costs rising, the Fed has assured us the..

“An End in Sight” Strategy The first doses of the vaccine were administered in late December.  Since there will be at least two companies with approved vaccines, and likely more than three, the most vulnerable should be protected by the end of the first quarter.  This should result in fewer fatalities and falling positivity rates.  Economic activity will increase rapidly as 12 months of isolation begins to wind down.  Scho..

Recommendations It seems a bit trivial to discuss economics and investment strategy in the middle of a pandemic.  What’s really important anyway?  Where interest rates are headed or how to remain healthy while this invisible killer terrorizes the globe?  One thing we can do is explain what we see happening in the financial markets and how can we capitalize on these disruptions.  Having lived through the 2008-2009 recession, ..

As we monitor economic activity and the impact on credit spreads, we have seen and will continue to see data that is much worse than any of us have seen before. Equity markets expect this which is why they are rallying today despite a jobless claims report that indicate an unemployment rate of 13% (the peak in ’08 – ’09 was 10%). It will probably go higher in the coming months. Fortunately, the stimulus from both th..

I want to share something important that is happening in the investment grade corporate credit market. I track the option adjusted spread (OAS) which is essentially the additional yield the investor receives versus a risk-free Treasury security. Prior to the COVID outbreak, the OAS for the investment grade corporate bond index was 102 basis points. A month later, the OAS had increased to 401 bps. It currently stands at 305 bps..

Financial Institutions Insights 1st Quarter 2020 Strategy “A Short-Term Rebound Followed by Economic Softening”   Recommendations Interest rates declined 90 basis points in 2019.  While current levels seem low (5-year Treasury note yield at 1.60%), remember in 2012 the same Treasury had a yield 0.50%.  Unless the duration of your bond portfolio is less than 3.0 years, it’s not the time to extend duration.  2020 will be a..