Fixed Income Market Update

June 10, 2022

Earnings season and investor days always make for great sound bites. No one is better at this than Jamie Dimon at JP Morgan. His wonderful headline:

“You know I said there’s storm clouds, but I’m going to change it… it’s a hurricane”

Jammie Dimon, JP Morgan Analyst Day

But does Jamie put his provision for loan losses where his sound bite is? Last quarter JP Morgan reserved $1,463mm against future loan losses. This is the first addition to provisions in 5 quarters and is very close to the $1,427mm loan loss provision from 4Q19. But it doesn’t come close to pandemic provisions of 1Q20 $8,285mm and 2Q20 $10,473mm.

Dig a little deeper, beyond the headline, Mr. Dimon qualifies his sound bite saying that, while conditions seem “fine” at the moment, nobody knows if the hurricane is “a minor one or Superstorm Sandy,”.

Combining the provisions and the qualification, he seems to be thinking along the lines of our scenarios: Rate hikes, inflation cools and no recession, or rate hikes, recession and inflation cools, or rate hikes, recession, and continued hot inflation (i.e., Stagflation). Like us, he might be leaning more toward the second scenario, with a recession happening. 

There is no precise way to gauge how bad a recession might get if we have one. But typically, the more debt on the consumer and corporations, the worse the recession. Two readings we follow are both produced by the Federal Reserve System, the Household Debt Service Payments as a percent of Disposable Personal Income and the Nonfinancial Corporate Business: Debt as a Percentage of the Market value of Corporate Equities (See graphs below). Both of these measures are at very low or historically low levels versus historical levels. This leads us to believe the potential recession may not be severe.

Given that our last two recessions were the Great Recession and the Pandemic, the markets (And our) fear is understandable when the “R” word gets mentioned. We’re saying don’t fear the recession, quantify it, and prepare your portfolios for the volatility.

-Peter Baden, CFA
Chief Investment Officer

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Federal Reserve Debt Readings

Source: https://fred.stlouisfed.org/

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Disclosures

Indexes used for AAA Municipal Yields

2 Year: BVAL Municipal AAA Yield Curve (Callable) 2 Year (Symbol: CAAA02YR BVLI)

5 Year: BVAL Municipal AAA Yield Curve (Callable) 5 Year (Symbol: CAAA04YR BVLI)

10 Year: BVAL Municipal AAA Yield Curve (Callable) 10 Year (Symbol: CAAA10YR BVLI) 

30 Year: BVAL Municipal AAA Yield Curve (Callable) 30 Year (Symbol: CAAA30YR BVLI)

Indexes used for US Treasury Yields

2 Year: US Generic Govt 2 Year Yield (Symbol: USGG2YR)

5 Year: US Generic Govt 5 Year Yield (Symbol: USGG5YR)

10 Year: US Generic Govt 10 Year Yield (Symbol: USGG10YR)

30 Year: US Generic Govt 30 Year Yield (Symbol: USGG30YR)

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