Fixed Income is Fun Again! – Halyard’s Weekly Wrap – 11/18/22
The Federal Reserve has aggressively raised rates this year beginning in March – with 6 consecutive increases in the overnight target rate. The Fed has gone from 0% to 3.75% in eight months and is expected to increase rates another 50bps to 4.25% at its upcoming FOMC meeting on December 14th. Fed Fund futures markets expect a terminal rate of 5.06% by June 2023 – implying another 75bps are in the pipeline over the next six months.
The markets have reacted acutely, and have been anticipating these hikes – as such, interest rates have risen sharply and the US Treasury curve has inverted. Since March 16th, the 2 year Treasury note yield to maturity has risen 258bps to 4.52%. The 2 year note briefly traded above 4.70% post the US Non-farm employment release that showed continued strength in the labor market. The rise in yields, however, proved temporary as the better than expected release of consumer prices for the month of October on November 10th, caused a massive reversal in the inflation trades. Bond yields fell, the US Treasury curve continued to invert between 2 years and 10 years while the US Dollar sold off versus most currencies. Stocks took the idea of a pause and rose as well.
With the rise in interest rates, the yield to maturity of our short maturity strategy (RCM – Reserve Cash Management) has risen to 4.60%. Our RCM composite has an average maturity of 254 days with a duration of .47 years. We maintain a highly diversified portfolio with the top ten corporate holdings equal to 21% of the portfolio. The RCM composite has an average credit rating of single A.
For the first time in more than 15 years, the yield to maturity on short maturity paper is in near 5%. We are happy to add these yields to our portfolios, but are still treading very cautiously. We believe that the Fed will continue to raise rates over the next few months, but we are seeing signs of a slowdown in economic activity. The Federal Reserve has begun to take note of the large amount of financial tightening that they have already introduced into the monetary system – and has begun to float the idea of slowing down the pace of future rate increases. They are being cautious to not give the market the idea that they are finished just yet. However, the 40bps decline in 5 year US Treasury Note yield and the 13 bps of credit spread tightening over the past two weeks might give the FOMC a bit of indigestion.
This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein. Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness. The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.