Topic Tags: Fixed Income - Global

The Yield Curve Inverts: Time to Hunker Down?

This morning, the key range of the U.S. Treasury yield curve that is viewed as the bellwether of recessions — the 2-year versus the 10-year — inverted. The 10-year yield fell to 1.61%, below the 2-year’s 1.62%, as of the time of writing. The yield curve serves as a key indicator of market sentiment on future interest rates and therefore the future state of our economy. An upward sloping curve signifies a growing economy, while an inverted curve portends a contracting economy.

This newsletter details what investors should be aware of in light of the inversion, including the possibility of a recession, effects on the equity market, and other current events that may contribute to uncertainty and volatility.

Read > The Yield Curve Inverts: Time to Hunker Down?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Lower for Longer, or Negative Forever?

With Trump’s surprise announcement of additional tariffs at the beginning of this month — a day after the Fed’s rate cut — the yield curve continued its free fall and flattening that began in earnest at the beginning of 4Q18’s dislocation and the gradual heating-up of the tariff war. Sunday’s Argentine Presidential primary election surprise, where pro-free markets incumbent Macri lost to populist duo Fernandez/Kirchner by a wider than expected margin, further exacerbated that trend.

In this newsletter, we examine the driving forces behind this persistent yield curve decline and flattening and potential remedies to the “lower for longer” norm.

Read > Lower for Longer, or Negative Forever?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Second Quarter Review of Asset Allocation: Risks and Opportunities

Overall, the second quarter was positive for financial markets, thanks to strong economic fundamentals and expected Fed stimulus. Unemployment remains low at 3.7% and inflation (1.8% year over year) is near the Fed’s long-term target of 2%. However, there are increasing concerns about a global economic slowdown and early forecasts for 2Q GDP growth are around 1.5%, far lower than what we’ve seen in recent quarters. Globally, the most important trends we see are the following:

  • The U.S.-China trade conflict remains ongoing as talks between the two countries resumed, but little progress has been made;
  • The Federal Reserve is expected to cut rates in July and markets are forecasting another one to two cuts by the end of the year;
  • Business sentiment is declining ­— most notably in the PMI manufacturing index, which is now dangerously close to falling below its growth threshold;
  • Britain continues to struggle with its Brexit and elected a new PM (Boris Johnson) on July 23rd;
  • China and Europe are expected in increase their stimulus measures to combat slow growth and overall global uncertainty;
  • Late-cycle dynamics in credit and equity markets.

The impact of these trends is explored further in this newsletter as we review second-quarter performance and expectations going forward for each of the major asset classes.

Read > Second Quarter Review of Asset Allocation: Risks and Opportunities

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

When Will the SOFRing End?

Global authorities such as the SEC, Federal Reserve, European Commission and European Central Bank are currently transitioning the market’s use of LIBOR as a base rate for floating-rate securities such as bank loans, CLOs and private credit towards the use of the current front runner as a replacement: SOFR, which stands for the Secured Overnight Financing Rate.

This newsletter explains what a base rate is and how it is used in investing, why LIBOR is being transitioned to SOFR and the key differences between the two, and when the change is expected to take effect.

Read > When Will the SOFRing End?

For more coverage on LIBOR, please see our Bank Loans Position Paper and recent Chart of the Week, The Sixth Fed Hike and Rising LIBOR.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2019 Market Preview

Coming off a difficult 2018, investors face a litany of questions going into this year, whose potential answers will undoubtedly have an impact on the capital markets. The following set of newsletters examines the primary asset classes we cover for our clients, with in-depth analysis of last year’s performance and more importantly, trends, themes, and projections to watch for in 2019. We hope these materials can assist you and your committees as you plan for the coming year, and please feel free to reach out to any of us should you have further questions about the articles or wish to review the 2019 Market Preview Webinar recording. Here’s to a better year from the capital markets in 2019!

U.S. Economy: The View from the Top?
by Jeffrey Hoffmeyer, CFA, Lead Analyst, Asset Allocation

Fixed Income: Kicking Off the Year with Moderate Valuations, a Less-Hawkish Fed and Growing Global Tariffs
by Ben Mohr, CFA, Senior Research Analyst, Fixed Income

U.S. Equities: The Pro-Growth Narrative Fizzles Out
by Samantha T. Grant, CFA, CAIA, Senior Research Analyst, U.S. Equities
and Rob Britenbach, CIPM, Research Analyst, U.S. Equities

Non-U.S. Equities: Can They Get Back on Track?
by David Hernandez, CFA, Senior Research Analyst, International Equities
and Nicole Johnson-Barnes, Research Analyst

Real Estate: Navigating Through a Late Market Cycle
by Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Infrastructure: Stable Cash Flows in an Uncertain Market Environment and the Evolving Landscape
by Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Hedge Funds: Is Market Volatility Here to Stay?
by Joe McGuane, CFA, Senior Research Analyst, Alternatives

Private Equity: Poised for Robust Deployment
by Derek Schmidt, CFA, CAIA, Senior Research Analyst, Private Equity

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Are Bonds Approaching Moderate Value?

This week’s chart looks at how bonds have fared during the global volatility of the last two months. In summary, bonds have retrenched a bit but have protected principal overall as expected and served as good diversifiers to other asset classes such as equities and alternatives. Spreads have widened moderately and are now showing some value across the board.

The four sections of the chart show the spread versus the average for core bonds, bank loans, high yield bonds and emerging markets debt. The timeframes are from the end of 2008 to today, but the averages are based on the last 20 years excluding 2008 and 2009 as outliers. As we can see, each of the spreads are rising and approaching averages. They are no longer near post-2008 tights anymore. This signifies that there may perhaps be some moderate value in fixed income today.

The fundamentals and the global macro backdrop support a moderate outlook. U.S. and European high yield and leveraged loan default rates remain low. Leverage, coverage, issuance and outstanding amounts do not point to a frothy market. Aggressive issuance is experiencing a shift away from high yield and into bank loans but remains modest overall. As the effect of Trump’s tax cuts continues to be felt through strong corporate earnings and the global tariff escalation continues to evolve, the Federal Reserve has enough optimism about the economy to warrant its continued pace of rate hikes. Collectively, these trends suggest stable if not improving valuation, fundamental and macro factors as we approach the New Year.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Deciphering the Bond Markets: How Much Duration and Credit Risk Should I Take?

2018 Investment Symposium flash talk by Ben Mohr, CFA

Given the current fixed income environment of rising rates and tight credit spreads, investors are questioning how much interest rate risk and credit risk they should hold in their portfolios. This session addresses the questions of how much duration (interest rate risk) and credit risk investors should take by examining current market conditions, anticipated changes, and an overall assessment of where we are in the credit cycle.

A summary of this flash talk can be downloaded here.

Italy Looks to Increase Its Budget Deficit

The yield on Italian 10-year government bonds has risen this year as investor concern about the country’s fiscal policies mounts. This week Italy approved its 2019 budget targeting a 2.4% deficit to gross domestic product — a larger number than markets anticipated and a higher targeted deficit than 2018’s 1.8%. The Italian coalition government is targeting higher spending to implement a monthly income for low-income citizens and reduce the retirement age despite its high public debt to GDP ratio, 131% in 2017. The European Union will provide its formal comments on the proposed budget in the coming weeks and this will likely create some short-term market movements.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

A “Halftime” Review of Asset Allocation for 2018

As of June 30th, the Russell 3000 index was up only 3.2%, a far cry from its 10-year annualized return of almost 9%; the MSCI ACWI ex-U.S. ­— a broad proxy for international stocks — has been even more disappointing, down 3.8% compared to its 2017 return of 27%. Furthermore, most bond strategies are negative for the year, thus dispelling the notion of diversification. However, the year is only halfway complete and as we have seen repeatedly in the capital markets, fortunes can change rapidly and unpredictably. In an effort to formulate explanations and expectations, the following newsletter investigates the disappointing performance from the first half of the year, as well as potential outcomes for the remainder of 2018.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Socially-Responsible Fixed Income Investing

Socially-responsible investing (SRI) is one of the fastest-developing segments of investing and we see a ballooning trend of true action taken by investors. Specifically for fixed income, socially-responsible investing is growing and a great deal is evolving in the recent landscape, particularly in terms of philosophical changes as well as the development of new products where “the rubber meets the road.”

This white paper explores trends in socially-responsible fixed income investing and assesses the challenges. In addition, we examine the prevalence of Environmental, Social, Governance (ESG) issues and compare their uses in fixed income versus equities. Finally, we evaluate methods to invest in fixed income for the responsibly-minded investor.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.