Fixed income outlook in 5 charts

By Rob Williams, Director of Research

1) This tightening cycle has a more aggressive price than usual. Compared to previous cycles of Fed interest rate hikes, this one has been priced in earlier, meaning yields are much worse than usual during rate cycles.

Source: Sage, Bloomberg, as of 03/31/22

2) How close are we to Max Pain for fixed income? Fixed income investors can take comfort in knowing that the curve is almost fully priced in for the Fed’s moves in 2022. Yield carry is also a bigger factor with core bond indices above 2% for the rest of the year. If growth fears become more prominent and inflation shows signs of peaking in the coming months, we will likely have hit the peak of trouble for fixed income yields.

Source: Sage, Bloomberg as of 04/18/2022

3) Fixed Income Positioning: Stay defensive. Overall, it still makes sense to play defensively, keep duration short and reduce credit given the uncertainty and macro risks.

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Source: Sage, Bloomberg as of 04/13/2022

4) Mortgages offer a compelling risk-adjusted opportunity. MBS are attractive from a risk/return perspective given the widening of spreads and the clarity of the FOMC balance sheet. Credit spreads have held up well but are vulnerable, and we expect better opportunities to add credit later in the year.

Source: Sage, Bloomberg as of 04/13/2022

5) Municipal fixed income presents an attractive entry point. Although the municipal bond index had its worst start to the year in more than 25 years, we believe that Fed policy and the movement in interest rates have been largely priced in. At some point, higher rates will prompt value investors to rebalance into municipal bonds. .

Source: www.ici.org, Bloomberg Barclays municipal data as of 03/31/2022


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