The invisible hand versus the Fed Chairman wearing the big wooden clogs. That could best describe the comparison of the Volker Fed versus the Powell Fed. Ironically, Chairman Powell, along with uber-dove, ECB Chair Christine Lagarde, spoke at a panel discussion hosted by the Volker Alliance on Thursday. The recently turned hawkish Powell confirmed that the Fed was prepared to raise the overnight Fed Funds rate by 50 basis points…when it meets nearly two weeks from today. Moreover, he strongly suggested that the committee is likely to raise the overnight rate by another 50 basis point when they meet on June 15th.
The minutes of the recently concluded FOMC meeting are rarely of interest since the Fed adopted the post-meeting press conference during Chairman Bernanke’s term. Since then, Fed Chair’s have chosen to communicate the committee’s thinking at the post-meeting press conference. Chairman Powell didn’t follow that pattern at the March 15 meeting as the minutes contained “bombshell” information. Two days ago Fed Governor Brainard rocked the markets with her comments that the Fed was ready to begin to reduce its balance sheet. That was confirmed yesterday when the minutes loosely detailed how balance sheet reduction was to be implemented.
The Halyard Reserve Cash Management (RCM) strategy has encountered an unprecedented sixth consecutive monthly loss. While we are not happy with the string of losses, our conservative positioning has mitigated the downside relative to many of our peers. Since October 1, 2021, the RCM composite has generated a -0.42% loss. Comparatively, PIMCO’s MINT has lost -1.51% and Blackrock’s NEAR has lost 0.82% since October 1st. The loss for the Bloomberg Aggregate Bond Index, the flagship benchmark for the broad fixed income market is down 5.93% for Q1 2022. The loss has accelerated into the second quarter with the Aggregate now down 8.04% YTD thru April 12th.
Losses are unusual for short maturity fixed income portfolios and have been directly influenced by the sharp and steady selloff in the 2-year Treasury note. Since October 1st, the yield-to-maturity of the 2-year note has risen from approximately 0.30% to as high 2.50% earlier this month. The Federal Reserve has been the driver of the sharp rise in short maturity rates. As recently as November, the Fed had assured market participants that the uptick in inflation would prove transitory. Then the Central bank abruptly changed the narrative and communicated that interest rates would need to rise to battle inflation. Since then, the “drumbeat” of forecasted rate rises has gotten louder, and the committee has strongly suggested that there would be a 50 basis point hike at the May 4th FOMC meeting and, likely another 50 basis point at the June 15th meeting, with more to come this year.
The brutal bear market in bonds continued this week, with the two-year note 108 basis points higher than where it stood on March 1st. Following a solid non-farm payroll report, two’s are 9 basis points higher for the first day of April. As a result, the 2-year/30-year yield curve is now marginally inverted, which is likely to provoke recession fears. Historically an inverted yield curve signals a recession ahead. We think the selling is getting overdone, but are reluctant to extend duration until we see some stability in the market.
The vicious bear market in bonds that began last fall continued this week with the 2-year Treasury note touching 2.33% this afternoon. Recall that the 2-year note closed last week just below 2.00%. Fed speakers were again the driver of the selloff, strongly suggesting a 50 basis point hike at the May 4th FOMC meeting and potentially another 50 basis point at the June 15th meeting. Citibank is forecasting four 50 basis point hikes this year, while Goldman Sachs is expecting that the 2-year note will end the year at 2.90%. Those forecasts and retail liquidation of their fixed income holdings is behind the relentless selling. Ironically, equity investors seem to be unfazed by the sharp selloff in fixed income. Since hitting the low for the year in late February, the S&P 500 index has rallied nearly 10%.