Fixed Income Market Update

July 1, 2022

We said it, the Treasury Secretary said it, and even the Fed Chair has said it, the Fed is behind inflation and needs to do historic interest rate increases to catch up to inflation. But given the potential of another 75-bps increase, the downturn in some commodities and recent economic releases, it’s appropriate to ask: Is the Fed behind again?

Currently the Overnight Fed Funds rate is 1.5-1.75%. The Fed Chairman strongly hinted at another 75 basis point rise at their July 27^th meeting, bringing the rate to 2.25-2.50%. As of this writing, around noon on July 1^st, the CME Fed tool projects the rate to top out at 3.25-3.50% (See Below). That is better than the 4% we saw recently, but still another 1.75% higher from today.

Meanwhile, copper futures are down over 26% from their high on March 7^th, and Cotton futures are down 28% from their high on May 16^th (See Below). Add to this real personal spending dropped -0.4% in May and the Atlanta GDP Nowcast has 2Q2022 GDP SHRINKING 1.0%. This following a revised 1Q2022 GDP Quarter over Quarter -1.6%.

The Fed has artfully used their PR tool to manipulate the bond market to cause a slow down in the economy. Now they need to become data dependent and perhaps slow their pace and consider a lower peak rate. Alas, that seems unlikely, and the prospect of a recession becomes more likely. Thus US Treasuries rallied in a flight to safety, while corporates and municipals traded roughly flat. Some exposure to US Treasuries can certainly help a portfolio through this difficult period. More interesting, start to look into longer dated high quality corporates and municipals. Perhaps we are early on this call, but the yields are attractive, given the risk, and we could potentially see lower rates in response to a recession.

-Peter Baden, CFA
Chief Investment Officer

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

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CME Fed Watch Tool

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Copper Generic Future

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Cotton Generic Future

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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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