Fixed Income Market Update

September 9, 2022

Let me start by expressing our condolences to the Royal Family and the English people for the loss of their monarch, Queen Elizabeth II. She oversaw tremendous change during her 70-year reign, much of it brought on by major discoveries in physics, chemistry and technology. Consider the impact of the atomic bomb, vaccines, or the integrated circuit. Yet thanks to her and other world leaders we have avoided another world war and seen a historic period of economic and technologic prosperity. It is events like this that remind us to first, be grateful for our many blessings, and while staying focused on the day to day, think long term.

Looking at the longer-term chart below this era of activist Fed policy has worked. Inflation has receded, and rates have come down and that has supported real economic growth. But it isn’t just Fed Policy that has moderated inflation, technology and demographics are long term deflationary forces in our economy.

Last week we talked about 3 scenarios where long-term rates could come down: The Fed defeats inflation, a recession happens, or volatility increases. We also predicted rates could go higher if inflation remains hot and the economy continues growing. Several Fed speakers have promised higher for longer, hinting at a: Whatever it takes to bring down inflation and regaining market confidence.

Those who don’t understand bonds and this relationship with inflation are known to say: The Bond Bull Market is Over. Those that do understand this, are known say: Enjoy the short rates while they’re here, because someday, potentially soon, rates are going lower. 

How do you think long term and hedge against lower rates? By balancing your portfolio, averaging into longer term positions, and locking in attractive yields. By doing this your portfolio could benefit from falling rates and produce gains that can be opportunistically harvested and reinvested into even more bonds, to generate even more income. All while you benefit from the higher rates you are earning, for now.

-Peter Baden, CFA
Chief Investment Officer

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

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Inflation and Interest Rates since March 1976

Inflation, Fed Funds, 2-Year UST, 10-Year UST

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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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