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Anfield Fixed Income Market Update: Mid-September 2022



During the first week of September, investors saw a data point unseen in over a generation—global bond markets are officially in a bear market. As of the time of this writing, the Bloomberg Global Aggregate Bond Index is down nearly 22% from its January 2021 peak (source: Bloomberg). Perhaps unsurprisingly, not all financial news publications responded in like manner. First, the Wall Street Journal with a matter-of-fact headline: “Global Bond Index Fell Into Bear Market.” Next, Bloomberg with another factual take, albeit with additional color: “Global Bonds Tumble Into Their First Bear Market in a Generation.” And finally, Reuters, with a headline that many surely sympathize with: “Analysis: Bond bear market: 'Worst year in history' for asset as inflation bites.”


A question many are understandably asking is, “Where do bonds go from here?” We want to highlight two important factors which we believe will impact bond prices going forward:


  1. Inflation – We don’t believe investors will see inflation prints meaningfully higher than those we’ve seen in recent months (+8.3% YoY in August, +8.5% YoY in July; +9.1% YoY in June) given the Fed’s explicit commitment to fight inflation—a commitment which was reiterated by Fed Chair Powell at the recent Jackson Hole summit and then again during the September FOMC meeting. We believe this means that at least for a while, the Fed will continue to keep monetary policy tight, i.e. more rate hikes and ongoing balance sheet size reduction, resulting in moderating inflation prints, at least on a year-over-year basis. But it’s important to note that we see inflation moderating from these high levels, NOT falling drastically closer to the Fed’s 2% historic target. This should keep rates elevated at both the front-end and long-end of the yield curve, at least in terms of recent levels.

  2. Economic Contraction – We don’t believe the current economic slowdown will result in a bond bull market where investors flock to perceived safe-haven assets like Treasuries and other high quality fixed income instruments. Regardless of one’s definition of a “recession”, we’ve had two consecutive quarters of negative GDP growth (Q1: -1.6%, final estimate; Q2: -0.6%, second estimate); the economy is clearly slowing. During this contractionary period, the 10 Year Treasury yield has risen from 1.52% at year-end 2021 to 3.57% as of September 20, 2022. This is hardly the “flight to quality” we’ve seen in past recessions (e.g. Great Financial Crisis, COVID Pandemic) and given both Fed actions and inflation (see above), we don’t expect to see a flight to quality trade assuming the market is correctly pricing in a mild to moderate recession. In our view, even if we are in an official recession, this doesn’t automatically mean that aggregate bonds will or should rally.


So where do bonds go from here? We are still of the view that there is more pain coming in aggregate bond indices. To be sure, plenty of pain (and possibly most of the pain) has been felt already in YTD bond returns (more below). However, the macro environment as described above does not paint a happy outlook for bonds, even when factoring in YTD losses. The Fed will very likely keep pressure on the front-end of the curve and the market will likely keep pressure on the long-end given decades’ high inflation. Our message to clients is this—keep duration low and pick your risks carefully.



Current Fixed Income Positioning

Universal Fixed Income Strategies: Benchmark agnostic and line-item bond security portfolios looking to highlight our best ideas in bond space


Dynamic Bond strategy: Benchmark aware to the Bloomberg Barclay’s Aggregate Index and is a top-down macro-focused ETF of ETFs.



Forecasts



“Anfield Affection Gauges”: What fixed income sectors & exposures do we like, and what do we dislike?

 




Disclosures:

  • Current Fixed Income Positioning Definitions:

  • Duration represents the current value for each of the funds and indices noted

  • Curve represents where each of the funds and indices are positioned on the yield curve

  • Government represents the percentage allocated to Government bonds within the funds and indices

  • Credit represents the percentage allocated to Investment Grade and High Yield Credit within the funds and indices

  • MBS represents the percentage allocated to Mortgage-Backed Securities within the funds and indices

  • Yield (YTM) represents the Yield to Maturity of the funds and indices

Anfield Capital Management, LLC is a registered investment adviser with the SEC. This report is for informational purposes only and does not constitute advice, an offer to sell, or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities. The contents of this report should not be relied upon in making investment decisions. The information and statistical data contained herein have been obtained from sources that we believe to be reliable but in no way are warranted by us as to accuracy or completeness. The accompanying performance statistics are based upon historical performance and are not indicative of future performance. The types of investments discussed do not represent all the securities purchased, sold, or recommended for clients. You should not assume that investments in the securities or models identified and discussed were or will be profitable. Results of the models do not reflect the performance result of any one client. Not all clients have experienced this specific return level. Actual client returns may differ materially from the performance of the models due to actual fees incurred by clients, timing of cash flows, or client restrictions (e.g., restrictions on specific securities, industries, or types of securities). Clients who invested in the models after our initial trade date for any security may have experienced materially different performance and may have lost money.


While many of the thoughts expressed in this report are stated in a factual manner, the discussion reflects only Anfield Capital’s beliefs about the financial markets in which it invests portfolio assets following the models. The descriptions herein, are in summary form, are incomplete and do not include all the information necessary to evaluate an investment in any model. The models described represents current intentions. However, Anfield Capital may pursue any objectives, employ any techniques, or purchase any type of financial investment that it considers appropriate for the models and in the best interests of its clients.


Any prior investment results or returns are presented for illustrative purposes only and are not indicative of future returns. An investment in the models presented herein involves a high degree of risk and could result in the loss of your entire investment. Investments with Anfield are subject to significant risks, which include, but are not limited to, the risk of loss of principal, lack of diversification, volatility, and market disruptions. Prospective investors are referred to our Form ADV 2A for a more detailed discussion of risk factors, which can be (a) found on the SEC's Investment Adviser Public Disclosure website at: http://adviserinfo.sec.gov, or (b) provided upon request. You should not construe the contents of this report as legal, tax, investment, or other advice. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein by Anfield Capital, its employees and no liability is accepted by such persons for the accuracy of completeness of any such information or opinions. Registration as an investment adviser does not imply a certain level of skill or training and no inference to the contrary should be made.

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