Entries by halyard

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.

Halyard’s Weekly Wrap – 10/27/23

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As expected, the robust retail sales recorded over the last three months solidly contributed to the outsized Q3 GDP that came in at 4.9%, exceeding the 4.5% consensus expectation. The personal consumption component rose 4.0%, outpacing the 0.8% gain in the previous quarter. Digging into the details, the number isn’t as outrageous as at first glance. Firstly, the government measures the activity versus the previous quarter which, in itself, makes no sense. Every quarter has unique characteristics that impact spending patterns. Vacations in the third quarter, gift giving in the fourth. To adjust for that, the Bureau of Economic Analysis smooths the measure with a seasonal adjustment factor. We prefer, instead, to compare activity on a year-over-year basis and remove the smoothing. On a year-over-year basis, Q3 GDP expanded 2.9%, still an excellent outcome. Another consideration is that government spending represented about 25% of the gain for the quarter. At this stage of the expansion, we’d prefer to see that contribution closer to zero.

Halyard’s Weekly Wrap – 10/20/23

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The retail sales measure for September that was released on Tuesday influenced trading for the entire week. The expectation was that sales would rise 0.3% over the August tally. The actual result was a 0.7% month-over-month gain, with the August measure revised to 0.8% from 0.6%. The three-month period has been a blockbuster for retailers. The irony is that the narrative has changed since Amazon had their supersale in July. The sales event exceeded expectations, leading to forecasts that it cannibalized sales that would have occurred in August and September. That explanation has been recast that the Amazon sale actually reenergized consumers on-line shopping. Our take on it is that despite the sharp rise in interest rates over the last 18 months, the economy has yet to cool significantly.

Halyard’s Weekly Wrap – 10/13/23

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The minutes of the September 19-20 FOMC were truly goldilocks-like. Comments included “Bank credit conditions appeared to tighten somewhat…but credit to businesses and households remained generally accessible,” “The imbalance between labor supply and demand appeared to be easing,” and of course “the U.S. banking system is sound and resilient.” The text echoed the answers delivered by Chairman Powell at the post-meeting press conference. There is a chance of one more rate hike this year and that rates will be held at a high level for an extended period. In short it read as though the committee was taking a victory lap for their engineering of a soft landing. Bond investors were delighted by the verbiage as witnessed in the collapse of the yield curve. The yield on the 10-year note fell to 4.63% from last Friday’s 4.80% close.

September 2023 – Monthly Commentary

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The minutes of the September 19-20 FOMC seemed to reflect the committee members’ belief that they’re in the process of achieving the first ever economic “soft-landing.” Comments from the minutes included “Bank credit conditions appeared to tighten somewhat…but credit to businesses and households remained generally accessible,” and “The imbalance between labor supply and demand appeared to be easing.” As expected, the text echoed the answers delivered by Chairman Powell at the post-meeting press conference. There is a chance of one more rate hike this year and that rates will be held at an elevated level for an extended period. In short it read as though the committee was taking a victory lap for their engineering of a soft landing. Bond investors were delighted by the verbiage as witnessed in the collapse of the yield curve. The yield on the 10-year note fell to 4.55% on the day.

Halyard’s Weekly Wrap – 10/6/23

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Way back in July we wrote that the BLS non-farm payroll report told a far different story than the private ADP employment report, with the former quadrupling the latter. That situation has risen again, only in reverse. The ADP report showed tepid job growth of 89,000 in September while the BLS reported 336,000 for the period, double the number expected. Moreover, the revision of the prior two months added another 119,000 jobs to the economy. While excellent news for the economy it’s likely to put another Fed rate hike back into play at the November 1st meeting. That may not be necessary as Former Fed Governor Kevin Warsh wrote in a Wall Street Journal opinion article this week. He points out that while the Fed Funds rate is 0.5% higher since mid-May, the 10-year note yield, which is the benchmark for mortgage rates and corporate borrowing is 1.4% higher, and that is going to cause a significant bite to the economy. We whole-heartedly agree that both are going to slow the economy. Warsh correctly states that the 10-year is the benchmark for housing, but the short-term rate is the benchmark for bank debt, which typically is lower rated and carries a floating rate; to put it plainly, rising short rates are hurting lower-rated credits.

Halyard’s Weekly Wrap – 9/29/23

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Bonds were under intense selling pressure for most of this week in what could only be described as a delayed reaction to the “higher for longer” message delivered by Chairman Powell last week. The old 2-year note (August 2025 maturity) traded as high as 5.19% before closing the week at 5.11%. The 2-year/30-year yield spread continues to dis-invert, closing the week at -35 basis points.

With the rise in rates, the average mortgage rate hit a 23-year high of 7.31%, up from last week’s high of 7.19%. The rise in the cost of financing a home will offer no solace to the beleaguered housing market.