Displaying items by tag: fed

UBS shared its outlook on fixed income and high yield credit in a strategy piece. Overall, the bank is moderately bullish on the asset class, especially at the short-end of the curve, but doesn’t believe returns will be as strong as the first-half of the year.

Overall, it attributes strength in the riskier parts of the fixed income universe to a stronger than expected US economy which has kept the default rate low. This has been sufficient to offset the headwind of the Fed’s ultra-hawkish monetary policy. 

The bank attributes the economy’s resilience to lingering effects of supportive fiscal and monetary policy and the strong labor market. It’s a different type of recovery than what we have seen in the past where financial assets inflated while the real economy struggled. 

However, UBS believes that the default rate should continue to tick higher so it recommends a neutral positioning. It also sees a correlation between equity market volatility and high-yield credit. While this was a tailwind in the first-half of the year, it believes that it should be a headwind for the remainder of the year given high valuations. 

Overall, it sees a more challenging environment for high-yield credit and recommends sticking to the short-end of the curve to minimize duration and default risk.

Finsum: In a strategy piece on high-yield credit, UBS digs into its strong performance in the first-half of the year, and why it expects a more challenging second-half. 

2023 was supposed to be the year of fixed income. 

Coming into the year, the consensus was that fixed income would rally as the economy plunged into a recession, forcing the Fed to terminate its rate hike cycle and even begin cutting before the year was over. The bond bulls got another catalyst following the regional bank crisis which many believed would impair credit markets and also force the Fed’s hand.

Yet, these prognostications have proven to be false. Instead, the US economy continues to grow and add jobs every month. In fact, there are more signs that the economy could be re-accelerating rather than contracting. As a result, the Fed continues to hike, and bonds have given up all their gains on the year. 

Despite consensus predictions proving wrong, most Wall Street analysts remain bullish on fixed income. They continue to believe that yields are at or near their ‘cycle highs’ and that a trifecta of factors like cooling inflation, mild economic growth, and geopolitical risks mean that investors should continue adding exposure especially given that equities are unattractive from a valuation perspective at the moment. 

Finsum: 2023 was supposed to be a big comeback for fixed income given expectations of a recession in the second-half of the year. Yet, this has proven not to be the case.

At the latest FOMC meeting, Fed Chair Jerome Powell made some headlines when he struck a dovish tone despite resuming its normal schedule of quarter-point rate hikes. He also slightly upped his assessment of the economy declaring it growing at a ‘moderate’ pace while it has been described as growing at a ‘modest’ pace previously. 

In terms of fixed income, the asset class initially saw a decent rally due to many investors interpreting Powell’s dovishness as an indication that the Fed is in the final stages of its hiking campaign. But, these gains were quickly given back with yields spiking higher following the stronger than expected GDP print which came in at 2.4% vs expectations of 1.6%. 

Following this print, odds of the Fed cutting rates in the first-half of 2024 declined, and many market forecasters pushed back or revised thier prediction of a recession as well. With the economy robust despite higher rates, it’s likley that rates stay elevated for longer. Adding to the weakness was unemployment claims coming in lower than expected, adding to evidence that the labor market is re-accelerating following a period of softness. 

As a result, Treasury yields spiked hihger and are now approaching their 52-week highs.

Finsum: Fixed-income enjoyed a nice rally following the dovish FOMC meeting. But, the asset class weakened following a stronger than expected GDP print and lower than expected unemployment claims. 

For Barron’s, Steve Garmhausen conducted a roundup of various financial advisors to get their input on the best strategy for fixed-income. Some of the factors to consider are where the Fed is in terms of rate hikes, is a recession imminent or will the economy continue to defy the skeptics, and will inflation continue to decline or will it plateau at an uncomfortably high level.

Yet, what is certain is that Treasury yields are at their highest level in decades. Further, investors can lock in positive real returns for many years given the jump in yields, coupled with the decline in inflation.

According to Matt Kishlansky of GenTrust, it’s a great time for investors to buy short-dated TIPS given the 3% coupon. This would outperform Treasuries as long as the inflation rate stays above 1.9%. And, he believes that inflation will prove to be much ‘stickier’ than consensus forecasts.

Thomas Salvino, the CEO of Performance Wealth, recommends building a ladder of Treasuries to lock in yields at different durations. Overall, he still believes the best way to build wealth is to build a portfolio of high-quality companies that are regularly increasing dividend payments. 

Finsum: Fixed-income is in the spotlight as investors and advisors look to lock in lofty Treasury yields. Barron’s asked some advisors on their best fixed-income strategy.

For Bloomberg, Hideyuki Sano shared some findings from an Invesco survey of sovereign wealth funds and central banks. Invesco surveyed 85 sovereign wealth funds and 57 central banks which manage a cumulative amount of $21 trillion.

The major takeaway is that the group is looking to increase allocations to fixed income and gold due to a combination of higher yields, increased geopolitical risk, and a shaky economic environment. They continue to see inflation as the biggest risk to returns and is one factor in their bullishness on gold. 

Interestingly, the sovereign wealth funds and central banks remain cautious on equities despite the strong rally over the last 9 months. In fact, many are looking to tweak their asset allocation models in order to increase exposure to fixed income as they look to take advantage of higher yields. 

Within the fixed income market, they were most bullish on emerging markets and high-yield. Compared to last year, there was a sharp rise in those who are bullish on private credit funds due to their strong performance over the past couple of years in a challenging environment. 

Finsum: Invesco conducted a survey of 85 sovereign wealth funds and 57 central banks. The major takeaway is increasing bullishness on fixed income and gold due to concerns about inflation and a potential recession.