Today’s report discusses Municipal bond strategy at a time when Treasury yields have peaked but risky spreads have not. The good news is that the starting point for S&L finances is the best it has ever been, providing ample cushion to help weather revenue disappointments. However, this must be weighed against the darkening economic outlook and poor market liquidity. Muni yields and spreads are attractive out the curve, but should total return investors and asset allocators take the duration risk?
Read MoreThe answer is no. America’s LNG exports have been rising since 2021, while natural gas prices have also soared. Any large increase in LNG exports to Europe will further fuel the surge in natural gas prices, hurting President Biden’s efforts to bring down energy costs and inflation for Americans.
Read MoreThe dollar bull market is not over and may even accelerate. One source of support: the U.S. is energy self-sufficient (Chart). As a result, the surge in oil and the rising risk premium on security of energy supply is better for the U.S. than either Europe or Japan. This increases the odds that speculators will supercharge upward pressure on the greenback until something changes.
Read MoreU.S. household finances are in great shape heading into the economic downturn. Similarly, the underlying fundamentals of consumer ABS pools are favorable, including substantial buffers against defaults. ABS has been a great place to pick up a little spread this year while waiting to see how the economy responds to rising interest rates. However, the problem for ABS is that the Fed will continue tightening until unemployment rises and consumers buckle. Is it time to downgrade? See today’s report.
Read MoreSome argue that improved corporate balance sheets will allow issuers to weather the coming recession, precluding a major default wave. Are U.S. companies really that healthy?
Read MoreWhile everyone is fraying about inflation, commodities are sending a different message. This chart shows that both industrial and agricultural commodity prices have fallen sharply for the last few days, with aluminum and grain prices dropping 38% and 25%, respectively.
Read MoreHigh-yield corporate bonds are cratering as investors begin to grapple with how much corporate profits could suffer over the next year. Some are calling this a buying opportunity. We disagree. Value has improved, but it is too early to nibble given that the earnings contraction has not even begun. The market is discounting a rise in the default rate to about 5%, but there is still plenty of upside. Even a mild profit recession could generate a HY spread blowout of 500bps. Almost 800bps is likely in a garden variety recession.
Read MoreThe next phase of the bear market for spread product has begun, as investors shift focus from interest rate/convexity risk to credit risk. Surging CDS spreads on corporate bonds highlight that investors are beginning to focus on the next shoes to drop: falling profits and rising defaults. Funding liquidity will dry up long before the Fed’s balance sheet shrinks back to “normal”. Municipal bonds are not a safe haven, but investors that must hold some lower quality paper should favor this sector over Corporates or non-Agency CMBS.
Read MoreCorporate bond spreads are under pressure again as the Fed ratchets up the pace of tightening. Nonetheless, IG and HY corporate spreads are still narrow by historical standards. A key reason is the favorable starting point for corporate financial health and record high profitability, in part driven by strong pricing power. All that is about to change as Q1 likely marked the peak in profit margins for the cycle. Many tailwinds that drove this extraordinary cycle have turned into headwinds, and the zenith for the level of profits is approaching. Read today’s report to find out what this means for fixed income investors.
Read MoreTwo key bond market trends have resumed: a flattening Treasury curve and widening risky spreads. Both trends will have legs as the Fed endeavors to dampen demand and tame inflation. Severe Chinese lockdowns are stagflationary for the U.S., but ultimately will be positive for long-term Treasurys. Despite Fed asset sales, Agency MBS will outperform lower-quality spread product as the economy weakens. This week we also provide a sneak peek at our new state-of-the-art Yield Curve Trading Indicators that use machine learning to identify profitable trading positions.
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