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.

As expected, consumer prices rose in August, rising more than consensus expectation. The year-over-year measure of CPI registered 3.7%, up from 3.2% last month, but the core CPI for the same period fell from 4.7% to 4.3%. That’s far from the Fed’s 2% target but the anecdotal slowing in the economy is likely enough to keep the Fed on the sidelines at the September 20th FOMC meeting, but not enough call the current monetary policy the peak.

The June payroll gain was the slowest in 30 months, coming in at 209,000 new jobs versus the 230,000 consensus expectation. That disappointment was offset by a greater than expected jump in average hourly wages. The wage measure came in at a 4.4% annualized rate versus the 4.2% expectation. The unemployment rate ticked down to 3.6%. A loosely interpreted rule of thumb is that the economy will continue to grow when more than 200,000 jobs are added per month. The BLS report was especially disappointing when compared to the private ADP jobs measure released on Thursday that showed a whopping gain of 497,000 new jobs. As we have cautioned in the past, seasonal adjustments applied to the BLS measure cause the two reports to deviate from time to time. Also of note, the revision to the previous two months was 110,000 jobs lower.

With volatility still at a heightened level from the failure of Silicon Valley Bank, Signature Bank, and First Republic, we thought it would be an opportune time to discuss how we’ve positioned our Reserve Cash Management strategy (RCM). As the name implies, the RCM is a separately managed account strategy designed to generate returns in excess of the money market universe with a somewhat similar risk profile.

The short-maturity fixed income landscape is vastly different than last year. Namely, the overnight lending rate corridor is 5.0% to 5.25% and we’re likely at the peak of that rate for this cycle. Moreover, the Fed Funds futures market is anticipating that the Fed will cut the overnight rate later this year and will ultimately take the Fed Funds rate below 3.00%.

With the events of the last few days, February seems like a distant memory. More importantly, it was yet another test of the integrity of the Reserve Cash Management strategy, and it performed as designed. As we have espoused, the emphasis of the RCM is broad diversification and an emphasis on liquidity, and that has served our investors well during the crisis. We’ve emphasized that to keep any more than $250,000 in a bank account is to make an unsecured loan to that institution. The RCM is a strategy that holds the securities in the name of the client, in a separately managed account, at a qualified custodian, thereby eliminating counterparty risk.