Halyard’s Weekly Wrao – 3/11/22
The bond market continues to suffer from the consistent selling pressure that commenced last fall. The rate rise has not been limited to the government bond market. Municipal bonds, Investment grade corporate notes and high yield bonds have all suffered losses. The price of the $35 billion Blackrock I-shares investment grade bond ETF (LQD), the vehicle many investment advisors utilize for their fixed income exposure, is down -9.25% year-to-date. Similarly, PIMCO’s MINT is down -0.79% and Blackrock’s NEAR is down -0.65% year-to-date. As with LQD, both are frequently used by investment managers as an alternative to holding cash.
Ongoing inflation fears and concerns that the Fed is on the precipice of an aggressive rate hiking cycle has prompted investor to sells the short end of the curve and widen credit spreads. Investor consensus, as measured by Fed Fund futures, is that the Fed will push the overnight rate close to 2.0% by this time next year. We think that’s not likely, especially if the recent spike in gasoline proves sustainable. In fact, if gas prices continue to average more than $4 a gallon, then we think a recession is likely, and the Fed is certainly not going to raise rates as the economy contracts. Unfortunately, should a recession come to pass, there is not a lot the Fed can do to stimulate demand given that rates are already artificially low and COVID-related stimulus is about to end.
However, there is a bright side to the higher interest rates. Now that portfolios have reset to a higher weighted average yield, the monthly coupon income will generate more monthly income and provide some offset to any further rise in rates.
Of note this morning, the University of Michigan survey of inflation in the next year, an excellent measure of the average consumer inflation expectation, jumped to 5.4%. That will certainly be part of the discussion next week when the FOMC meets. We expect that given Russian aggression against Ukraine and the corresponding weakness in equity prices, the committee will limit their rate hike to 0.25%.
While it’s been a trying week on many fronts, we were happy to learn that Major League Baseball and the players association have agreed on terms that will allow for a full 162 game season. “Hope springs eternal!”
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.