Entries by halyard

Halyard’s Weekly Wrap – 05/26/22

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Bond prices continued to rebound this week with the front end out performing. The yield to maturity on the 2 year US Treasury Note declined another 10bps to 2.49% while the yield on the 30 year Bond remained the same at 2.99%. The steepening of the yield curve is the result of participant’s expectation of slower growth and lower inflation going forward. The chart below shows that participants removed future expected rate hikes over the course of the next year – effectively recalibrating the terminal fed funds rate lower. The mid-month equity swoon and the string of earnings misses added to the bullish sentiment in the front end.

Halyard’s Weekly Wrap – 05/20/22

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Through April, the capital markets took the Fed’s hawkish tone as a welcome antidote to stubbornly high inflation. But as we move further into the year, that mindset has reversed. Driving the change is the barrage of weak earnings reports we’ve seen over the past two weeks, and specifically retail earnings. Amazon, Walmart and Target were the worst of the category, all having their stock price fall by more than 20%. The overriding culprit has been rising costs of goods sold cutting into their bottom line. That was more than enough to undercut the fledgling return of investors confidence we saw as we closed out last week. For this week the S&P 500 is down more than 4% and trading at its lowest level since March 2021.

Halyard’s Weekly Wrap – 05/06/22

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Chairman Powel left the first in-person FOMC press conference in two years as a G.O.A.T. (greatest of all time), according to the investment media and suffered the fate of a spring lamb the very next day. For those unfamiliar with the term “spring lamb,” myself included, it’s a lamb slaughtered before it reaches its first birthday. Apologies for the grim analogy. On Wednesday investors were delighted that Powell had driven home the point that a 75 basis point rate hike was not forthcoming and cheered by his general tone of confidence. However, by the next morning the relief had been replaced by anxiety that stagflation is on its way, stock prices are too high and the yield curve too flat. From the Wednesday’s high to the Friday low, the S&P 500 tumbled more than 5.5%. Equally vicious was the selloff in the 30-year. On Thursday, the long bond fell nearly 3 ½ points before retracing about half of that by the close. To put that price action into perspective, the current long bond (2 ¼% 2/2052) is trading at a price less than 82, down from its issue price of 100 in February. The yield-to-maturity calculates to 3.20%, offering a real return of about -5.00%. Moreover, with the latest selloff, the 2-year/30-year yield curve has steepened 51 basis points since April 1st. Typically, the yield curve steepens when market participants believe the Fed is losing the inflation battle.

April 2022 – Monthly Commentary

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Last week investors were delighted that the Fed only raised interest rates 50 basis points and Fed Chairman Powell drove home the point that a 75 basis point hike was not forthcoming. However, by the next morning, the relief had been replaced by anxiety that stagflation is on its way, stock prices are too high and the yield curve too flat. Since the announcement, the S&P 500 has tumbled sharply, joining bonds in the year-to-date bear market. The current long bond (2 ¼ % 2/15/2052) is trading at a price of about 82, down from its issue price of 100 in February. At a dollar price of 82, the yield-to-maturity calculates to 3.20%, offering a real interest rate (Treasury rate – inflation rate) of about -5.00%. Moreover, with the latest selloff, the 2-year/30-year yield curve has steepened approximately 45 basis points since April 1st. Typically, the yield curve steepens when market participants believe the Fed is losing the inflation battle.

Halyard’s Weekly Wrap – 04/29/22

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Last week we flagged the advance report of Q1 GDP as the economic report to watch this week, and we were spot on. Investors were shocked to learn that economic activity contracted 1.5% in the first quarter, driven primarily by trade and government spending. On the bright side, the consumer continued to spend, with the personal consumption measure rising 4.7% over Q1 2021. But a big expansion in imports and reduced government handouts were more than enough to offset the gain in consumption.

Halyard’s Weekly Wrap – 04/22/22

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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.

Halyard’s Weekly Wrap – 04/07/22

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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.

March 2022 – Monthly Commentary

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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.

Halyard’s Weekly Wrap – 04/01/22

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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.

Halyard’s Weekly Wrap – 3/25/22

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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%.