Displaying items by tag: fed

Over the last decades, there has been a constant trend in equities trading towards lower transaction costs, increased transparency, fractionalization which have made the markets cheaper and more accessible for everyone. This is only beginning to happen in bond markets where the majority of trading still takes place over the counter.

One startup, Moment, is taking on the challenge as it’s raising $17 million in a Series A round led by Andreessen Horowitz. It’s expected to be a major opportunity especially as interest in trading bonds has increased amid the spike in rates since last year. 

Currently, the major electronic venues for trading bonds are MarketAxess and Tradeweb. Moment’s API seeks to pull data from all these fragmented markets and liquidity pools and provides execution services in addition to analytics and portfolio management tools. The company plans to cover all types of fixed income investments including municipal bonds, Treasuries, and corporate debt. 

The company believes it will be able to be the premier platform for retail investors when it comes to fixed income trading. It sees upside opportunity in that only 3% of US households own individual bonds, while 23% of households own individual equities. 

Finsum: Interest and activity in fixed income has soared along with rates. Moment, a startup backed by Andreesen Horowitz, is looking to build a platform for retail trading of bonds.

The economy and financial markets have faced potent challenges in 2023. These include concerns of an imminent recession, a hawkish Federal Reserve, stubbornly high inflation, a sputtering banking system, etc. Unlike last year, the price of oil hasn’t been a major headwind as it’s traded between $60 and $70 per barrel for most of the year. 

The situation is now changing as the front month contract for WTI crude oil settled above $90 for the first time this year. Higher oil prices are a negative for the economy and markets as it detracts from consumer spending and contributes to inflationary pressures. Until inflationary pressures fully recede, there is unlikely to be a change in Fed policy. 

So while there has been constructive news on the finaltion front regarding real estate and the labor market, the mild tailwind from lower oil prices is now becoming a headwind. For oil, the major catalyst is on the supply front as OPEC producers have been cutting production in anticipation of an economic slowdown. 

But, demand has been less impaired than anticipated even accounting for the weakening Chinese economy. Another factor supporting demand is that the US is a buyer of crude oil given the need to restock the strategic petroleum reserve. 

Finsum: Crude oil prices moved past $90 per barrel for the first time in 2023. Here are some of the reasons behind its recent strength.

The Bureau of Labor Statistics released the CPI report for August which showed a 3.7% increase in inflation which was above expectations of 3.6%. Core CPI came in at 4.3% which was in line with expectations.

It marks the third straight monthly increase in inflation as July saw CPI at 3.2%. Some of the factors contributing to this were a 5.6% increase in energy prices and a 7.3% increase in owners-equivalent rent. 

Initially, Treasuries weakened on the news as it incrementally increased the odds of another hike by the Federal Reserve. However, the fixed income complex was quickly bid up on the drop as market participants seem willing to look past the hotter than expected inflation data.

Two major components of the inflation report - housing and wages - are softening which spells relief for the market. Rents are already dropping in key markets, while recent labor market data shows that unemployment is ticking higher. Much of this data will take time to be reflected in the CPI. Thus, investors are willing to use the weakness to add to fixed income. 

Finsum: Fixed income was bid up despite a hotter than expected CPI report. This seems to be because investors are increasingly confident that inflationary pressures will continue to recede.

Citigroup conducted a survey of 268 family offices to gather information on their positioning and thoughts on the current market. Overall, the family offices decreased exposure to equities while more than half increased their fixed income allocations. According to Citigroup, it was the most significant change in family office positioning since 2020. 

The bigger trend is that family offices are becoming more conservative given the challenging economic environment. In terms of their biggest concerns, they identify inflation, a hawkish Federal Reserve, and a spike in geopolitical tensions specifically around the US and China.

Currently, the average family office has 16% in fixed income, 12% in cash, and 22% in equities. Even within these allocations, they are focusing on areas with less risk. For equities, it means companies in traditional industries with positive cash flow and attractive valuations. For fixed income, it means a bias towards higher credit quality and shorter duration. 

In total, these family offices that were surveyed control more than $1 trillion in assets. Specifically, the family offices that are adding fixed income exposure have a cumulative total of $568 billion in assets. 

Finsum: Citigroup surveyed 268 family offices to find out their thoughts on the current market. More than half are increasing fixed income allocation and selling equities. 

Money has been pouring into fixed income and money markets as investors look to take advantage of high rates and protect their portfolios from inflation and market volatility. While the advantages are clear, investors should also understand the tax implications especially since there are more complications than equities. 

For one, taxes on interest income must be paid. However, there are some caveats. For instance, an investor can avoid state taxes by investing in a US government security such as Treasuries although federal taxes must be paid. In contrast, no state or federal taxes are paid on interest income from municipal bonds. 

Some investors choose to keep their fixed income investments in a tax-free retirement account. Despite taxes on interest income, fixed income continues to deliver positive, inflation-adjusted returns for investors. However, the tax bill should be considered prior to making these investments especially in high-tax states.

Ultimately, fixed income offers many benefits which investors are eager to capture. In this frenzy and focus on yield, many investors are losing sight that these expectations should be tempered given that the income is taxed. But the challenge is that this ‘penalty’ differs based on every owners’ geography and financial situation. 

Finsum: Fixed income has exploded in popularity due to high rates and recession risk. Yet, many investors are overly focused on the income and taking into account tax considerations.