Fixed Income Market Update

December 9, 2022

The bond market can be a pretty good forecaster. Looking back over the last 50 years, it’s been very good at forecasting recessions.  The track record? Seven for seven. And the crystal ball it uses to do this prediction? The yield curve, specifically an inversion of the yield curve. 

The yield curve inverts when short term yields are higher than long term yields, for our discussion we are focused on the three-month US Treasury Bill (Yielding 4.28%) and the ten-year US Treasury Note (Yielding 3.54%). Why would anyone lend money longer and get less return for it? Perhaps you want to lock in higher rates, you might think inflation is going down, or historically the ten-year has been negatively correlated to stocks and a great diversifier for a portfolio.

What makes this inversion unique is the continuation of Fed rate hikes. Looking back fifty years, the curve has predicted all seven of the recessions. Five of those seven times, the Fed left rates unchanged or cut them. The other two times? 1978 and 1980. The seventies the Fed keeps mentioning it learned from, hiking in the face of a recession, and creating a bigger recession. 

We will say it again, it’s a great time to be in bonds. While we remain cautious extending into credit, we see opportunities in fixed income without having to take credit risk. Short US Treasury issues have attractive yields and are an excellent place to ride out the coming volatility. We also see good value in longer high-quality tax-free municipals and high grade, liquid corporates where yields are attractive, and rates should be stable. 

Use this recovery in the market to reposition portfolios to reduce risk, increase liquidity and prepare for the fallout from the 2022 rate increases. When the turmoil comes, you will have plenty of liquid bonds (Potentially with some gains) to sell and reposition into cheaper risk assets.

-Peter Baden, CFA
Chief Investment Officer

Click on the above links for more information on important investment and economic concepts.

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Yield Curve Inversion

Generic 10 Year Yield less the Generic 3 Month Yield

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CME Fed Watch Tool

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Contact Genoa Asset Management

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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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