Halyard’s Weekly Wrap – 3/18/22
All eyes were on the FOMC outcome this week. As expected, Powell and the FOMC raised short term interest rates 25bps to a range of 25ps to 50bps. Market participants interpreted the accompanying statement and Powell’s post meeting comments as decidedly hawkish. This flattened the US Treasury curve further, with an inversion seen in 3 year US Treasury Notes and 5 year Notes exceeding the yield to maturity of the 10 Year Note. A signal usually portending slower growth in the future as interest rate increases slow sectors of the economy most dependent upon leverage.
Currently Fed fund futures are indicating a 42% of at least one 50bps move in short term rates by July and at least one 25bps move at every meeting well into 2023. The Market is looking for Fed funds to end 2022 at 1.55. So far this morning we have had two Fed Officials, Bullard and Waller, pound the table for more aggressive rate hikes to counter the current inflation rate and help maintain the Fed’s inflation fighting credibility. To be honest the Fed has already lost credibility on that front in our opinion. And not just for the “transitory” mistake, but also for adopting an average inflation approach without defining the average time period.
The 2 year US Treasury Note has borne the brunt of the markets expectations for higher rates and has nearly priced in all of the FOMC expected tightening after just one actual adjustment. The 2 Year Note yields 1.96% up nearly 150bps since November 2021. The rise in interest rates across the curve has resulted in significant drawdowns in short and intermediate bond portfolios. The Bloomberg Aggregate Bond Index has fallen 5.4% year to date while LQD (the IG corporate ETF) has fallen nearly 8%.
We did see a bit of a relief rally in intermediate rates and spreads Thursday and into Friday trading. The market is fully buying into the prospects that the Fed can: 1) raise rates at every meeting this year and 2) be successful in engineering a soft landing – an economic slowdown that eases price pressures without raising unemployment. We remain skeptical that the FOMC will be able to raise rates that aggressively going forward. Much of that depends upon the outcome in the Ukraine / Russia conflict and the rate of change in month over month inflation readings which are expected to move lower later this spring and summer. We are watching for signs that the gas “tax” may have meaningfully dented consumer spending and are cautiously awaiting the upcoming earnings season.
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