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Transcript

Hello and thank you for watching this Asset TV fixed income master class where we'll cover the Fed inflation, volatility and everything you need to know about the fixed income markets. Joining us now it's an honor to introduce our panelists Nolan Anderson, Co Head of Fixed Income at Whites Investment Management, Noah Wise, Senior Portfolio Manager. Plus fixed income at all Spring Global Investments and Kevin Flanagan, Head of Fixed Income Strategy at Wisdom Tree. Well everyone, thank you for being with us today. We'll dive more into all of these topics throughout our panel discussion. But broadly speaking, Kevin and kicking us off here, how are inflation volatility and the new rate regime impacting the bond market in 2024? Well, it's, it remains front and center. To me the new rate regime is perhaps one of the more important aspects that we've learned, let's call it post Fed rate hike cycle. I think we're done raising rates at this stage of the game that seems to be changing on a regular basis kind of tongue in cheek there, but I mean we're looking at interest rates now in the US bond market that we haven't seen 10/15/16 seventeen years. So it is kind of a new old rate regime that rates have gotten back to what we would argue to be more normal levels but this. Uncertainty surrounding Fed policy has created heightened volatility. Now it had it had kind of slowed down a bit, but now with us trying to figure out from the beginning of the year six rate cuts, Fed said three, now the markets are expecting maybe just two. It has once again created an elevated volatility stance in the bond market and obviously inflation is is the underpinning for it all the you know if you want to call it somewhat hotter than expected reads we've had this year. Or maybe the lack of continued progress has created this environment for the changing Fed outlook and for this uptick in volatility of late? Turning to you Nolan, trying to predict the feds path forward has been like trying to predict to the path of a cat through a mirror maze. First it's five or six rate cuts, then three, now two cuts or maybe just one. How is this level of volatility impacting what you're doing in your portfolios? Yeah, Jenna continues to be a a very volatile environment and by our count just in the past year the markets seem to have seaside between a hard and soft landing maybe 3-3 or four times and now are starting to price in a so-called no landing scenario. So instead of trying to predict the future outcomes, we kind of think about the different markets and different environments and how we can adjust our portfolios based on what actually happens in the market. So what we do is we adjust our duration up and down in our positioning along the yield curve based on shifts and interest rates in terms of credit exposure. We adjust our positioning based on how interest rates and volatility impact various spread sectors. We may get into this later, but. Over the past year or so, mortgage spreads have widened significantly on the back of elevated interest rate volatility and we have leaned into that. We also continue to invest in floating rate securities as they may benefit from a Fed that isn't able to cut rates as much as the market predicts. Yeah. No, uh, the Fed signaled a pretty dramatic pivot back in December that they plan to cut rates this year. The market got very excited thinking we're going to see big rate cuts this year only for those expectations to be dialed back. the Fed is still expecting rate cuts, but not as dramatically as initially anticipated. However, is there enough information in the data to suggest that the Fed actually needs to cut rates? How? We would agree that there's enough forecasted data to support forecasted rate cuts. Unfortunately, there's not enough actual data to support doing that yet. And. Really there's two issues here. First, there are forecasts have been wrong and and I think you know as is Nolan mentioned just general macro forecasts like that are are very, very challenging. So you do have to question how much stock can you put into their more recent forecast which are just a few weeks old and they're already starting to to look a little stale and to to be fair markets implied forecasts. Have arguably been even more wrong than the Fed. The the Fed has been talking about or at least implying within their dot plot since last December that there would be 3 cuts this year at the peak of of kind of fixed income euphoria. The market was actually, as as you talked about earlier, dialing in six to seven cuts this year. So we haven't seen the data yet. The forecasts would indicate that the Fed. Could start their easing cycle later this year, but we're still in wait and see mode at this point. And of course that led to kind of a reverse 2022 situation where both stocks and bonds got up. Very excited about the the idea of this pivot no further. Kevin, can you provide an overview of recent Fed policy talk and what's ahead for the money and bond markets? I I think Noah hit it right on the head it. The term that I was using was you know we had we had kind of a rally for the ages in in the bond market fourth quarter of last year rates in the two year 10 year treasury yield dropping a hundred 120 basis points in just you know basically a three month time frame. But what we were warning at the time getting back to the point that I think that Noah was making you needed validation at some point for that to occur. It's one thing to discount what you expect. To happen at some point that has to be validated and what we have found out so far here throughout the first quarter and moving into the second quarter, there's been no validation. So that's where you're getting. I think also the Fed was kind of guilty maybe of the same thing not perhaps being as aggressive as the market expecting six rate cuts and you know their dot plot 3, but now maybe adjusting to two. It's interesting that just you know a few weeks ago you did have Powell I think. Pretty much saying the dot plots seemed like a reasonable case scenario for rate cuts, but some recent appearances by the Fed chairman, you know he's now talking about they need more that perhaps they're going to have to push back the timing, which if you push back the timing, more likely than not, you're also adjusting the magnitude for the rate cuts as well. So I think that's where we're at right now. The data have to lead the Fed, but you do get a sense from from Powell and maybe even. New York Fed President Williams, I think they do want to cut, right? It almost feels like they're itching to cut rates. They just need to get there. The data needs to bring them to that point. And so far that hasn't been the case. And if you look at the economic numbers, the labor market in particular, jobless claims, one of the 10 leading indicators out there would suggest, you know, you may not be getting it from that vantage point. In other words, people were waiting to see the labor market soften up. Maybe that doesn't come to fruition. So that's the other part of the dual mandate. You turn to inflation that that progress. We've been saying that last mile, hey, far be it for me. I've never run a marathon, but I hear the last mile is the most difficult and I think that's what we're finding out on the inflation side. So I do think if somebody were to ask me, you start at the dot plot, do you think the Fed is going to raise rates three times more than three, less than three. I think that the reasonable case now is less than three for this year. Yeah. In my case, it was the last step, 13 miles, not just the last mile that got me. But Nolan, why do you think spreads across the fixed income landscape are continually grinding tighter? And how's the current spread environment impacting the ABS and CLO markets? Yeah, I'm Kevin and Noah, both really hit it on the head though. You gotta, you gotta put the Fed front and center here. I mean when you, when you step back and you think about the broad fixed income markets, until the fourth quarter of last year, the broad indices were on pace to have losses for three years in a row, which hasn't had happened in a very, very, very long time. So I think everyone is kind of over this bond market in the pain, it's kind of put on investors and with the Fed kind of signaling. The pivot in November, it seemed like investors finally got the all clear signal that they wanted to to kind of get into credit into it to finally buy yields after just a voracious increase in both the Fed funds rate and 10 year longer treasuries over time. So I think that really the I think the Fed has had a huge impact. But also too one of the really unique arts about fixed income is the different players in the fixed income markets in their different investment objectives you have significant. Rules of capital, whether it's insurance companies, endowments, pension funds, governments, institutions that are kind of always systematically buying in the market. And again going back to the Fed with them kind of saying we're done raising rates, we're going to cut rates, it seems like everyone wanted to go ahead and lock in those yields before the Fed cut. So you've just seen significant demand, increased demand on top of that kind of steady demand and then also equities have just. This is Governor alluded to as well. We just had a significant rally at all risk assets. So you think about balanced portfolios and equity and fixed income equities have forbid very, very strong and so end of last year into this year you saw some rebalancing across these investor types as bonds started to weaken in the first quarter. So I think that has caused significant inflows into bond funds which is further exacerbated the demand but. You know at being active in the the new issue and secondary markets every day, I'm sure knowing that would agree. We're just seeing an unbelievable insatiable appetite for credit in particular. There simply isn't enough supply to meet the demand that we're seeing. So what does that mean? We're seeing incredibly high levels of subscription across your issue markets both benchmark like credit investment grade, high yield bonds, but it's also trickled down into off benchmark sectors. We're seeing incredible demand in EBS, close even even CMS, even though commercial real estate is going through a tremendous cyclical downturn right now, credit curves have flattened and inverted. We're seeing investment grade and high yield spreads near 10 year lows. So really investors have bought into this belief that there is a rate cutting cycle and if not that the economy is going to continue to be very strong and then inflation will eventually get under control. Noah, Kevin, anything you'd like to add to that? Well, the one thing that I would, I would add to it, I mean it gets back to what we're saying kind of like the new old rate regime that you had it generation of advisors and investors who really had not experienced interest rates at levels were talking about right now, right. They grew up with zero negative rates, one or two percent. I've done some seminars where I ask people you know, 1516, seventeen years ago, you know where were you were you in college, you know and you see how many people raise their hands high school, junior high and you get the sense that. This is a whole new cycle out there of advisors and investors maybe trying to get educated to what normal interest rate levels are like. And then how does fixed income play in your overall portfolio that it is returning to its more traditional role. And I think that gets to the point that Nolan's mentioning why your seat continued demand. The only thing I would add is well is we've had this period of a really strong equity market run. Investors haven't really been penalized for not rebalancing their portfolios. So you have this backdrop of yields and fixed income providing some really attractive valuations. But also you know this this large difference between how a lot of portfolios are currently positioned relative to to what kind of a normal neutral long term allocation. Would look like and so I think that provides A tremendous amount of of support and and really is a big reason why you're seeing some of the subscription levels that that no one talked about and and and really the tighter spreads across a lot of different fixed income sectors.