Displaying items by tag: fed

Charles Schwab shared its midyear outlook for fixed income. It notes that the asset class has been unusually volatile despite not changing much in terms of fundamentals and monetary policy.  

In the second-half of the year, Schwab sees Treasuries gradually strengthening, particularly on the short-end of the curve. So far, longer-term Treasuries have started to outperform, while shorter-term notes have weakened due to the Fed’s continued hikes. 

However, the firm sees strength across the board in response to slowing inflation and the end of the Fed’s rate hikes due to a weakening global economy. While it anticipates a pause in Fed policy imminently, it believes that the next rate cut cycle will also quickly begin as rates at these levels are quite restrictive especially in an environment of lower inflation.

Further, Schwab believes that longer-term trends are also supportive of fixed income given that fiscal policy will be contractionary, the manufacturing sector is in a recession, wage growth is slowing, and key drivers of inflation such as food, used cars, and energy have also normalized. Loosening Fed policy and falling inflation will be strong tailwinds for fixed income. 

Finsum: Charles Schwab shared its second-half outlook for fixed income. Overall, the firm is bullish and believes that underlying trends of fiscal policy, monetary policy, and inflation are supportive.

In an article for SeekingAlpha, Principal Financial Group previews the third-quarter and lays out the opportunities and risks it sees in fixed income. Overall, the firm expects the asset class to have a modest tailwind given its expectations for a recession by the end of the year.

As evidence, Principal Financial cites the unprecedented tightening over the last 16 months, slowing economies all over the world, tightening credit standards, and the inverted yield curve. It believes that the next 2 hikes will be the Fed's last in this hiking cycle. 

However, the firm doesn’t believe the central bank will be successful in engineering a ‘soft landing’ despite this increasingly becoming the consensus position over the last couple of months. Instead, the firm anticipates a final lurch higher in yields with the breakout ultimately being rejected.

Amid this period of volatility and uncertainty, the firm believes that active funds are best positioned to take advantage of market conditions, and it sees the most upside in high-yield fixed income given that the firm’s base case is for a mild recession. 

Finsum: In Q3, Principal Financial Group sees upside for fixed income due to a softening economy, and it sees the most value in high-yield.

In an article for MarketWatch, Jamie Chisholm discusses whether stocks can still rally despite the recent surge in bond yields following a spate of positive economic data. Fixed income enjoyed strong performance for most of the first-half of the year, however the asset class gave up a portion of these gains in June as it became clear that the Fed was not done hiking rates given resilience in inflation data and the jobs market.

However, Chisholm warns that as yields get above these levels, they have a tendency to become a headwind for equities. He cites Mark Newton, the chief technical strategist at Fundstrat, who believes that bonds are due for a bout of strength. He believes this pullback in yields will fuel the next leg higher in equities. 

Newton believes that yields will find resistance at these levels and sees more risk of a breakdown in yields rather than a sustained breakout to new highs. He also believes the market is going in the wrong direction in terms of over-rating the Fed’s hawkishness in response to recent data. As evidence, he cites trader positioning which shows that the bulk of traders are betting on more rate hikes into year-end. 

Finsum: Bond yields are now trading at their 52-week highs following a series of better than expected economic data. Can equities still rally with yields at these levels?

In a piece for the ETF Database, Todd Rosenbluth examines whether the strong performance of fixed income ETFs will continue in the second-half of the year. In total, the asset class had $200 billion of inflows which represented 49% of all inflows despite fixed income ETFs only accounting for 19% of total assets. 

Given the uncertainty around the economy and monetary policy, it shows that investors are looking to take advantage of higher yields as well as a structural shift towards the asset class. Both stocks and bonds have posted positive returns following a down year in 2022. 

This is despite a headwind from the Fed’s rate hikes which look likely to continue into year-end following a recent spate of positive economic data. Due to this, yields on Treasuries have exceeded their March highs. So far, the strength in the bond market has been contained to the long-end especially following the recent inverting of the curve following a string of better than expected employment data. 

Within the asset class, active fixed income ETFs saw $8 billion of inflows. Active fixed income ETFs have a better track record of outperforming their benchmark due to the ability to buy durations and assets that are unavailable to passive fixed income funds. While only 26% of active equity funds outperformed the S&P 500, 48% of active fixed income funds outperformed their benchmark in 2022.

Finsum: Fixed income ETFs saw a surge of inflows in the first-half of the year due to attractive yields. However, there remains considerable uncertainty in the second-half of the year given the economy and Fed.

In Bloomberg, Garfield Reynolds covers the weakness in bond markets following a flurry of better than expected economic news which is making clear that a recession is not imminent. Between March and June, bonds were in the midst of a spectacular rally due to inflation slowing, increasing signs that a recession was likely in the second-half of the year, and financial stress caused by the failure of regional banks.

Yet, these gains have been quickly wiped away in the past month amid strength in the labor market and consumption. Also, it’s now apparent that the Fed’s hiking cycle is not over. Consequently, a global index of government bond yields have hit their highest level since September 2008 which precipitated the Great Recession. Adding to bond woes is the consensus expectation that Treasury yields had peaked. 

It’s also impressive that despite weakness in regional banks, there has been no contagion effect in terms of tighter credit which could potentially add to recessionary impulses. However, some market participants are wary that further weakness in bonds could result in strains to the banking system and result in a ‘deposit flight’ to Treasuries. 

Finsum: Fixed income has been in a brutal bear market over the past month as the market’s consensus about a bond bull market, slowing economy, and the Fed being finished in terms of rate hikes have proven to be false.