Displaying items by tag: rates

Bond yields modestly rose following the February consumer price index (CPI) report which came in slightly hotter than expected. Overall, it confirms the status quo of the Fed continuing to hold rates ‘higher for longer’. Yields on the 10-year Treasury rose by 5.1 basis points to close at 4.16%, while the 2-Year note yield was up 5 basis points to close at 4.58%. 

The report showed that the CPI rose by 0.4% on a monthly basis and 3.2% annually. Economists were looking for a 0.4% monthly increase and 3.1% annual. While the headline figure was mostly in-line with expectations, Core CPI was hotter than expected at 3.8% vs 3.6% and 0.4% vs 0.3%. The largest contributors were energy which was up 2.6% and shelter at 0.4% which comprised 60% of the gain.

Based on recent comments by Chair Powell and other FOMC members, the Fed is unlikely to begin cutting unless inflation resumes dropping or there are signs of the labor market starting to crack. Current probabilities indicate that the Federal Reserve is likely to hold rates steady at the upcoming FOMC meeting, especially with no major economic data expected that could shift their thinking. 

Finsum: The February jobs report resulted in a slight rally for bonds as it increased the odds of a rate cut in June. Most strength was concentrated on the short-end of the curve.

The Bureau of Labor Statistics reported that the US added 275,000 jobs in February which was slightly higher than expectations. However, the report indicated some softening in the labor market as job gains in January and December were revised lower by a collective 167,000, and the unemployment rate inched higher to 3.9%. 

It resulted in bonds moving higher as odds increased that the Fed would cut rates in June. Additionally, the number of hikes expected in 2024 also rose from 3 to 4. Most strength was concentrated on the short-end, which is more sensitive to Fed policy as yields on the 2-Year Treasury note declined by 10 basis points. There was much less movement on the long-end as the 10-year Treasury yield was lower by 3 basis points. Earlier this week, bonds also caught a bid as Chair Powell’s testimony to Congress was interpreted as being dovish. 

Overall, the jobs report perpetuates the status quo in terms of the Fed remaining data-dependent, while the path of the economy and inflation remain ambiguous. On one hand, wages and the labor market have defied skeptics who were anticipating a downturn. But there has been acute weakness in areas like manufacturing and services which have historically coincided with a weakening economy. 

Finsum: The February jobs report resulted in a slight rally for bonds as it increased the odds of a rate cut in June. Most strength was concentrated on the short end of the curve.

State Street Global Advisors is looking to grow its model portfolio business from $5 billion currently to over $25 billion by the end of this decade. Model portfolios are experiencing increasing popularity among financial advisors and clients. They enable advisors to bundle funds into specialized, off-the-shelf strategies, creating more time and resources for client engagement and financial planning.

At the moment, Blackrock is the clear leader with nearly $100 billion in assets tied to its model portfolios. Recently, the asset manager predicted that over the next 5 years, model portfolios’ total assets will exceed $10 trillion over the next 5 years from $4 trillion as of July 2023. State Street is aiming to capture a piece of this expanding market. 

Peter Hill, State Street’s head of model portfolios solutions, remarked, “We are fully committed to investing in our model portfolio business to meet the needs of our advisors and our platforms as their adoption rate of models continues to grow.” To achieve this, State Street is investing in the segment from an ‘infrastructure perspective’. This includes hiring employees in sales and marketing while also increasing outreach to advisors.  

Finsum: State Street is looking to grow its model portfolio segment by 5-folds over the next 5 years. Over the next 5 years, model portfolio assets are forecast to exceed $10 trillion from $4 trillion currently.

BNP Paribas conducted its annual alternative investment survey which revealed some interesting insights. There were 238 respondents, collectively representing $1.2 trillion in hedge fund assets, who were surveyed in December 2023 and January 2024. 

Many allocators are expecting a regime change with more opportunities for alpha and beta with US equities underperforming. This type of environment is more amenable to hedge fund performance. 

In contrast, hedge funds struggled in 2023 with an average return of 7.6%, while the S&P 500 was up 24%. It was the inverse of 2022 when hedge funds outperformed while both fixed income and equities were down double-digits. Interestingly, hedge funds outperformed global equity markets by 5.7% over the full 2 years. 

Going forward, allocators seem bullish on hedge funds. History indicates the asset class outperforms during periods of ‘high, stable rates. Over the last 2 years, allocators increased their expected return from 7.5% to 9.1%, which is the highest over the last decade. 

In 2023, there was a $100 billion in net outflows due to rebalancing flows, underperformance, and competition from risk-free returns at 5%. This year, survey respondents are expected to add $17 billion on a net basis. 

Finsum: BNP Paribas conducted a survey of asset allocators. They are increasing allocations to hedge funds as the asset class has historically outperformed in high, stable rate environments.

There have been concerns that the housing market could be on the verge of a decline given the stress created by high interest rates and a weakening economy. However, one reason to be sanguine about the housing market despite near-term headwinds is that household balance sheets are in strong shape.

It’s sufficient to dismiss alarmists who see another housing crash on the scale of the financial crisis and Great Recession in 2008. While economic headwinds have started to damage the standing of renters, young people, and those with lower FICO scores, there is no indication that homeowners are in a troubled position.

In fact, bankruptcy and foreclosure rates have remained low even after the expiration of the CARES Act moratorium. This is a departure from the Great Recession when many households were overly leveraged, and higher rates led to a surge in foreclosures. Another major difference is that regulations have led to higher lending standards and the disappearance of exotic mortgages. 

Following the housing crisis, most buyers gravitated towards 30-year fixed mortgages. Periods of ultra-loose monetary policy also led to major waves of refinancing. Cumulatively, this means that the vast majority of households continue to enjoy low rates and have seen the value of their homes rise. 

Finsum: Inflation and higher rates have been damaging to certain segments of the population. Yet, homeowners are an exception as they have locked in low rates, while showing little indications of stress.