Entries by halyard

December 2023 – Monthly Commentary

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As the new year kicks off, the bond and stock markets seem to be expecting different outcomes this year. The bond market closed 2023 with a torrid rally that took the yield on the five-year note to 3.8%, down significantly from the mid-October high of nearly 5%. Similarly, stocks, as measured by the S&P 500 closed the year less than 1% away from an all-time high. Seemingly, bond investors view the economy as being on the precipice of, if not already in, a recession; while equity investors seem to be anticipating that profitability is about to reaccelerate. The obvious culprit for the divergence in views is the Federal Reserve’s about-face on interest rates. Prior to the December FOMC meeting, the Fed’s monetary policy had been communicated as “higher for longer” indicating that they were in no hurry to cut interest rates as inflation drifted back to their stated target of 2%.

Halyard’s Weekly Wrap – 12/15/23

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This was a week when investors would have done well ignoring the economic calendar and instead focused on the summary of economic projections, more widely known as the “dot plot.” Released along with the minutes of the open market committee meeting on Wednesday, the dot plot showed a change in thinking from the committee. Investors had been speculating that the Fed had reached the peak of their tightening cycle and the FOMC release confirmed that. The dot plot released in September showed more than half of the committee expected an additional rate hike this year. The December chart indicated that no members anticipate any additional hikes this year. Moreover, the median view is that there will be 75 basis points of rate cuts in 2024. With that decidedly dovish statement, stock and bond markets continued their bullish run. The five-year Treasury note is trading below 4%, closing the week out at 3.92%, while the S&P 500 continues its parabolic rise, rallying more than 15% since the last week of October.

Halyard’s Weekly Wrap – 12/8/23

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This morning’s employment report delivered a curveball to market participants who had been looking for continued economic moderation. That was not to be the case. The economy added 199,000 new jobs in November, up from the previous month and 14,000 more than the consensus had been expected. Average hourly earnings rose 4.0% year-over-year, as it did the prior month. But what really grabbed the investor’s attention was the downtick in the unemployment rate, which came in at 3.7%, 0.2% below the previous month. The large change in household employment, 747,000 new jobs reported, and the change in the size of the workforce, 532,000 new entrants, was responsible for the decline.

Halyard’s Weekly Wrap – 12/1/23

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There were two news stories this week that made us double check the calendar to ensure that we hadn’t transported back sixteen years to pre-crisis 2007. The first had to do with the Federal Housing Finance Agency (FHFA) and the second was the proliferation of private credit.

Halyard’s Weekly Wrap – 11/24/23

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The upward trajectory of stock prices continued this week despite what some observers called hawkish Fed minutes. We’re hesitant to side with that view simply because there was no deviation from the comments that Chairman Powell communicated at the post-meeting press conference. The committee remains vigilante against any signs that economic growth or inflation is reaccelerating and will raise the Fed Funds rate again if needed.

Halyard’s Weekly Wrap – 11/17/23

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The October Consumer Price Index, at the headline level, was a welcome panacea for investors’ perception of inflation. Coming in at 3.2% year-over-year, CPI was universally greeted as good news and interest rates plunged across the curve. Looking beyond the headlines at some of the subcomponents raised suspicions that some of the data had been “fudged.” Specifically, the price of health insurance. For many, November is healthcare renewal season and it’s never cheaper to renew than it was the previous year. And certainly not 33.98% cheaper as measured by the BLS report due to a change in calculation methodology. That was one of the subcomponents that stuck out in Tuesday’s report. Nonetheless, the bigger picture is that inflation is falling, and the Fed can take solace in that fact. Moreover, that inflation report pretty much takes a rate hike at the December meeting off of the table as reflected in the Fed Futures market. Futures are now implying no further hikes and a rate cut of 25 basis points by next summer.

November 2023 – Monthly Commentary

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As we close out the year, investors seem to have concluded that the Federal Reserve has mostly accomplished their mission of containing inflation while simultaneously achieving an economic soft landing. We agree with the consensus. Year-over-year, the consumer price index was 3.1% in November, and we think that getting back to the Fed’s target of 2.0% will prove elusive for a few reasons. Principally, the changing workforce. The workforce is shrinking as the baby-boomers age out, and as it shrinks workers are finding they hold wage bargaining power, as evident by recent union gains and the rising minimum wages. To maintain profit margins, companies are forced to raise prices which creates the dreaded wage-price spiral. The Fed had hoped to avoid the occurrence by slowing the economy, but structural forces have prevented any slowing to date. Instead, the Fed is likely to need to raise their inflation speed limit to 3%.

Halyard’s Weekly Wrap – 11/10/23

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In last week’s Weekly Wrap we mentioned, mid-page and in passing, that the Treasury Borrowing Advisory Committee (TBAC) had advised the Treasury to skew borrowing needs away from long maturities to the T-bill sector. Since then, we’ve been discussing whether the TBAC understated their concern. They certainly did as yesterday’s disastrous 30-year bond auction showed. The auction cleared at 4.769%, 5.3 basis points above the 4.716% level at which it was trading at auction time. That represents approximately a 1% fall in price and a meaningful hit to those that bought the bond just minutes before. The bid-to-cover ratio, a measure of demand was 2.236%, the lowest since 2021, foreign demand fell, and the dealer community bought 24.7% of the issue, the largest take down since 2021. In a sense, the large dealer takedown is a blessing for longs. Paradoxically, when the dealers are holding a big position, they tend to defend it by not selling. It’s known in the industry as having strong hands.

Halyard’s Weekly Wrap – 11/3/23

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We had anticipated a volatile week given the barrage of economic releases and the Open Market Committee meeting but were surprised by the magnitude of the volatility. When we closed out last week the 2-year note, and 30-year bond were both trading above 5% and sentiment was decidedly bearish. The selloff continued into Tuesday with the 30-year touching 5.09%. But reversed on Wednesday with the ADP employment tally coming in at 113,000 newly created jobs, below the 150,000 expected. That started the short covering that dominated the balance of the week. For his part, Chairman Powell’s comments at the post-FOMC press conference were about as dovish as they’ve been since they started the hiking cycle although he didn’t rule out the possibility of one more rate hike. Despite that, the market interpreted his words as no more rate hikes.

October 2023 – Monthly Commentary

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The short maturity fixed income market is the most attractive that it’s been in years, though there are skeptics warning that rates could go higher still. We’ll craft the following paragraphs to argue why it’s an attractive time to take advantage of the current interest rate environment.

One argument against fixed income is that the intermediate fixed income index is at risk for its third consecutive year of losses. To be clear, we are not talking about intermediate fixed income. At Halyard Asset Management, we manage a short maturity fixed income product called Taxable Reserve Cash Management (RCM) that has a maximum maturity of 2 years for fixed rate securities and a targeted average maturity of approximately 13 months for the portfolio. Securities held include a mix of Treasury notes, Treasury bills, and corporate bonds, and a weighted average yield-to-maturity of 5.85%, as of 10/31/23. Since the 2010 inception of Halyard, the RCM has not had a one year in which the performance was negative! In the 157 months it’s been managed, only 26 months had a negative sign next to the result. That’s an 83%-win rate. Of course, past performance cannot guarantee future success. With that in mind let’s tackle some of the other arguments why one should avoid fixed income.