Anfield Fixed Income Update: May 2022
As equity and fixed income markets continue to react to monetary tightening, inflationary readings, and continued supply-chain disruptions, we feel it is important to take a moment to analyze what has happened thus far in the market. Most importantly for fixed income, the May Federal Open Market Committee (FOMC) saw the long anticipated 50bps rate hike as the Federal Reserve continues in their fight against inflation. While certainly a step in the right direction, the latest April Consumer Price Index (CPI) reading coming in hotter than expected at +8.3% YoY vs consensus expectations of +8.1% shows many more hikes are likely ahead. As of May 11th, market rate hiking expectations are roughly unchanged from before the Fed hike, as markets continue to price in 50bps hikes in both the June and July meetings, with a 3% upper bound on the policy rate by December 2022 (currently at 0.75 – 1.00%). As the markets continue to digest economic data and Fed Chair Jerome Powell’s comments at the May meeting, the US Treasury market responded accordingly. In all, the beginning of May saw the US Treasury 10-yr close at 3.13%, the highest level since November 2018 while the front-end yields edged lower as Powell effectively took a 75bp hike off the table.
Another development from the May FOMC meeting was the Fed’s announcement of its initial plan for Quantitative Tightening (QT). QT refers to central bank policies that reduce the size of their balance sheet, which expanded tremendously to a record $9 trillion from the accommodative monetary polices the Fed undertook in response to the pandemic. This announcement has pulled forward market expectations for a swifter transition to and pace of quantitative tightening than in prior cycles. On the corporate side, US Investment Grade (IG) bonds ended 1bp wider at 140bp from modest compression for AAAs and AAs while BBBs widened by 2bps. US High Yield (HY) widened by 25bps to an option-adjusted spread (OAS) of 418bps, with the index now sitting 108bps wider than YE2021.
Sources: CreditSights (spread data as of 5/11/2022)
Current Fixed Income Positioning:
Sources: Morningstar, Bloomberg, Manager as of May 11, 2022
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.
“Anfield Affection Gauges”: What fixed income sectors & exposures do we like, and what do we dislike?
Current Fixed Income Positioning Definitions:
o Duration represents the current value for each of the funds and indices noted
o Curve represents where each of the funds and indices are positioned on the yield curve
o Government represents the percentage allocated to Government bonds within the funds and indices
o Credit represents the percentage allocated to Investment Grade and High Yield Credit within the funds and indices
o MBS represents the percentage allocated to Mortgage-Backed Securities within the . funds and indices
o Yield (YTM) represents the Yield to Maturity of the funds and indices
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