Fixed Income Market Update

December 16, 2022

With another good CPI report in the hopper, the market continued the relief rally it started when the October CPI report was released. There was plenty of good news on the inflation front, month over month was only up 0.1% and Ex Food and Energy was up only 0.02%. Heck CPI Ex Food and Energy was up a miniscule 6%! This is cause for celebration. Surely the Fed will see this as a trend and mitigate their “Higher for Longer” stance?

Chair Powell was definitive. In a highly orchestrated, hawkish speech, the Chairman ended the party and told everyone to go home and stop spending! This week the Fed Governors are making rounds emphasizing, it’s about the jobs situation. Looking at the Job Vacancies Report against the Total Unemployed Workers below we still need 5 million workers, just to fill the open jobs! The Beige Book, listed a number of instances where employers are resorting to entry level hiring and training up candidates to fill highly skilled jobs (Not a bad thing in the long term, but an expensive way to hire). 

But the market is not listening. The futures (See the CME Fed Watch Tool below) continue to show the Fed not raising above 5% and starting to cut in September.  At the same time, looking at the yield table below, the five-year BBB index is yielding about 145 basis points above the 5-year US Treasury, the ten-year 183 basis points. These spreads, while wider than year end, are not recessionary spreads.

We will say it again and now 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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Too Many Jobs for Too Few Workers

Joe Openings (Blue) versus Unemployed (Orange)

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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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