Macro Monitor
U.S. High Yield Corporate Bonds: Maintain Neutral
Over the past few months we’ve seen the largest high yield bond fund outflow since 2000. We will exercise patience for now and wait for a better entry point.
U.S. Municipal Bonds: Maintain Neutral
The relative cheapness combined with the prospect of higher tax rates certainly makes us much more interested in Munis now. But we’ll exercise patience, waiting for the negative headlines to fade and interest rate volatility to subside before turning bullish on Munis.
U.S. High Yield Corporate Bonds: Maintain Neutral
Although the fundamental picture remains healthy for most U.S. High Yield issuers and defaults are expected to be low, the reversal of a crowded trade could lead to further substantial losses on these bonds.
U.S. Municipal Bonds: Maintain Neutral
We believe the sell-off in Munis is overdone in the short-term and these bonds look attractive relative to Treasuries. But in the medium-term the tapering risk will linger; this is a big negative for long maturity credits like Munis.
U.S. Investment Grade Corporate Bonds: Maintain Favorable
The longer term demand for safe spreads is likely to remain strong once yields normalize and volatility recedes.
RAI Rises Again, Stays On “Higher Risk” Signal—Remain Cautious
The RAI rose again in June and stays on a “High Risk” signal. June saw an acute case of carry trade reversal; we remain cautious and recommend higher quality within fixed income.
10-Year: 185-245 Range Broken & Higher Volatility
We think 3% is the upper bound in the short term. However, we believe it will settle back closer to 250 bps by the end of the year.
Time Cycle Composite Mid-Year Update—More Volatility & Lower Returns in H2
For the first half of the year, QE tapering disrupted the usual patterns for most interest rate related markets but equities are largely on track. In the second half, the common message seems to be higher volatility and lower returns.
Long U.S. Treasuries: Big Move In May, Downside Still Significant
20 Year T-Bond: 5 3/8’s, Maturity: 2/15/2031, YTM 2.88% (vs. April 30th YTM at 2.39%)
U.S. High Yield Corporate Bonds: Maintain Neutral
High yield bonds are not immune to the tapering of QE.
U.S. Municipal Bonds: Maintain Neutral
Inflows into Muni bond funds turned negative; higher interest rates currently the biggest risk.
U.S. Investment Grade Corporate Bonds: Maintain Favorable
Consistent with our overall cautious view on credits, we still like “safe spreads”.
RAI Rose Again And Stays On “Higher Risk” Signal—Remain Cautious
The RAI rose in May and stays on a “High Risk” signal. We remain cautious and recommend higher quality within fixed income.
Inflation Slides Again
April inflation numbers were generally lower than expected. We are shifting out our inflation outlook by six months. We believe inflation will be a non-factor for the next six months but will increase moderately in the following six months.
10-Year Still Range Bound Between 185-245 But Expect Higher Volatility
We think the 10-year yield will likely consolidate around 200-215 before taking a shot at 245. The 245 level looks like a strong barrier and will likely hold in the foreseeable future.
Global Yield Curve Confirms “Muddle Through” View
The global yield curve is in a sideways range bound pattern, indicating anemic demand for credit. An examination of developed and emerging countries confirms our “muddle through” view.
Weaker Currency = Higher Net Exports? It’s A Myth
In the medium term (1-2 years), weaker currency actually leads to lower net exports because export prices go up, instead of down, when currency depreciates.
"Muddle Through"
The global economy is stuck in a “muddle through” mode with developed and emerging countries showing divergence in terms of leading indicators. Despite this divergence, they share one thing in common: an upturn in inflation. How much more room there is for easing is a key determinant of asset market performance.
Implications Of The End Of Negative Real Yield
The 10-year real yield turned positive at the end of 2012 and has stayed there. We expect higher interest rates, a stronger dollar, and lower gold prices in the next twelve months.
The Weakening Yen — Too Far Too Fast
We are highly skeptical “Abenomics” can produce different results this time.
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