Entries by halyard

Halyard’s View on the US Inflation Debate

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The Federal Reserve’s June meeting was viewed as a hawkish shift.  A shift in rhetoric only, as the Fed will maintain its current ultra-easy monetary policy for the near future.  Recall from the previous FOMC meeting on April 28th, Powell reiterated that they believe the uptick in inflation will prove transitory and they were comfortable with the status quo.  When pressed on whether the committee had begun discussions on how taper would be enacted, he responded that they “haven’t even talked about talking about taper.”

May 2021 – Monthly Commentary

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The big news this month was the Fed announcement that the Central Bank intends to reduce their holdings of ETF’s and individual corporate notes.  Selling secondary holdings can technically be defined as tightening, but in this case the size is tiny relative to their buying operations and can be explained away as an administrative adjustment.  In individual corporate names they hold over 1,200 line items and about two dozen ETF’s, both investment grade and High Yield.  We don’t expect the unwind to have any market impact at all.  The bigger issue is that the Street has begun to speculate that at the June 16 FOMC meeting, the Fed will raise the rate paid on Reverse Repo and IOER by 5 basis points.  In doing so, the Fed would effectively reset the T-Bill to about that same level, lifting it off of the 0.00% level at which it has been trading for months.  The one issue potentially keeping the Fed from acting is their continued insistence on avoiding any form of tightening – perceived or real.

April 2021 – Monthly Commentary

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After three consecutive months of rising 10-year interest rates, the benchmark note yield drifted lower in April ending the month at 1.62%.  To put that into perspective, the 10-year rate bottomed last summer at 0.50%.   The move higher has been driven by the easing of COVID-related restrictions, the resultant strong rebound in economic activity, excessively easy monetary policy and the concern that the fiscal stimulus passed by Washington will result in higher inflation.

March 2021 – Monthly Commentary

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The start of the second quarter has been quiet in the fixed income market, with the yield curve unchanged and a dearth of new issuance.

The March inflation measures, which was expected to be elevated, didn’t disappoint.   The Producer Price Index, released Friday morning April 9th after a computer glitch at the BLS held up the report for 25 minutes, registered 4.2% YOY.  Well above last month’s 2.8% reading.  Traders chose to ignore the surprise though, and the bond was little changed on the day.

February 2021 – Monthly Commentary

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The bond market has struggled mightily of late with one unexpected “fire” flaring up after another, and despite demanding attention, the Federal Reserve has failed to act.   Of concern has been the downward trend in Treasury Bill yields over the last few weeks.  No one wants to see the yield for T-Bills go negative, but with the Treasury reducing supply temporarily to stay under the debt cap, the Fed buying in the secondary market and money market funds now effectively all government Bill funds, the yield has nowhere to go but down.

January 2021 – Monthly Commentary

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Risk/Reward valuation of the Bond Market

The Bloomberg U.S. Aggregate Bond index (Formerly the Barclays Aggregate Bond Index), the widely followed benchmark measure for the broad U.S. bond market, generated a total return of 7.51% last year.  That performance was primarily due to the Federal Reserve buying all manner of fixed income instruments.  The Fed has promised that their monetary manipulation will continue into the foreseeable future, but some members have raised the topic of tapering the purchases.

December 2020 – Monthly Commentary

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The Halyard Asset Management Reserve Cash Management (RCM) strategy generated 1.23% after fees and expenses for the year.  That compares favorably to the 0.32% total return of the iMoneyNet Money Fund average.  As of January 1, 2021, the RCM strategy has a duration of less than 5 months and a weighted average yield to maturity of approximately 0.37%.  In comparison, the benchmark has a yield-to-maturity of 0.00% due to the high management fees associated with those funds and the current low interest rate environment.  Aside from Treasury Bills, the top 5 RCM holdings are Toyota Motor Credit, Allstate Corporation, Lowe’s, Ralph Lauren, and Oracle.  The composite is overweight floating-rate notes, a structure that typically performs well when interest rates rise.  While we don’t anticipate an interest rate hike anytime soon, floaters are attractive relative to fixed rate paper.

November 2020 – Monthly Commentary

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It’s a paradox that as we wind down this very difficult year in which the pandemic ravaged so much of our day-to-day lives that the capital markets should close out the year on such a quiet note.  The bond market continues to benefit from the Federal Reserve’s open market buying and we have no expectation that the Fed will reduce their purchases anytime soon.  That’s especially the case given the upward pressure investors have put on 10-year Treasury note yields since early December.  The Fed continues to espouse the no inflation rhetoric citing government measures that show inflation continues to run below 2% in aggregate.  But we don’t subscribe to that view given the upwardly biased pricing we see in everyday goods and services.  Their desire to keep monetary policy excessively loose continues to benefit riskier assets as witnessed in equity prices and credit spreads. 

October 2020 – Monthly Commentary

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Since our last monthly update we have seen the Presidential election mostly come and go, have seen the coronavirus cases spike, and have learned of two successful vaccines.  The country is split in terms of satisfaction with the outcome of the election, but investors are looking past the surge in the virus to the potential endgame the vaccines present.  That optimism is reflected in the performance of the S&P 500 index.  Year-to-date the Index has generated a total return of 13.5% at the time of this writing.  It seems investors are anticipating that the economy will return to the growth it was experiencing this time last year, before anyone was locked down and working from home.  Surely there is pent up demand for travel and leisure activities.  However, there is still an outsized number of people out of work and with the recent uptick in cases we can likely expect that number to climb further. 

September 2020 – Monthly Commentary

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The bond market was little changed in September as investors grappled with continued virus uncertainty and traders with school-aged children tried to figure out the logistics of educating their young.  The latter issue made for uneven liquidity during the month which may have factored into the performance of the stock market.  For the month, the S&P 500 was down -3.91% breaking the string of consecutive positive months that extend back to April.  The performance of the bond market for the month was lackluster with the 10-year Treasury Note falling 1.5 basis points for the month.