Michael Contopoulos, director of fixed income at Richard Bernstein Advisors, looks ahead to today’s much anticipated announcement from the Fed as he comments:
Obviously, there has been a lot of volatility in the front end of the curve, as investors have constantly been repricing Fed expectations and the impact of the debt ceiling. This goes to show that the market has very little idea of what rates are going to do over the coming years, though recently it seems to be beginning to price in ‘higher for longer’.
It’s entirely reasonable to expect the curve to invert towards the lows of this cycle. As growth expectations slow but inflation stays sticky, that should translate into more inversion.
The bond market is pricing in one more hike and one cut by the end of the year. It is likely going to be more binary than that. Either the Fed does not cut, or growth falls off so hard it is cutting a lot. My guess is the former, not the latter. Higher than expected CPI could very well tilt them to a hike. Otherwise, I think they will pause.
Further down the line, the bond market is pricing in 200bp of cuts in 2024, so that would mean the recession does not happen until next year. I tend to agree with that.
Our biggest concern is a credit crunch that sends spreads meaningfully wider. I believe this will happen too, and that is why we have no consequential exposure to corporate credit. Default rates in the weakest companies are accelerating – this is the canary in the coal mine.
We believe in balance to your fixed income portfolio. Look for total returns at the long end of the Treasury curve and balance that with high quality short or no duration products – cash etc.
Do not fall victim to the corporate bond sales pitch and be prepared to be tactical. Contrary to popular opinion, fixed income will not be easy this year and will require active management.
