Inside The Bond Market
Risk Aversion Index: A New “Lower Risk” Signal
Our Risk Aversion Index fell enough last month to generate a new “Lower Risk” signal. This is certainly not a “no brainer” risk-on signal. We recommend higher quality spread products within fixed income.
2018 Time Cycle—Mid-Year Update
2018 has been very atypical so far. But if the historical pattern is any guide, a near-term pull back should be expected in most equity markets, followed by nice year-end rallies.
Risk Barbell Or Middle Of The Road?
The underperformance of investment grade credit this year prompted the question of whether a risk-barbell portfolio of safe Treasuries and risky high-yield bonds may offer better performance than a middle-of-the-road portfolio of 100% investment grade corporate bonds in a highly-uncertain environment.
Risk Aversion Index: Stayed On “Higher Risk” Signal
We believe the negative impact of central bank liquidity reduction is here to stay for the foreseeable future. We recommend defense within fixed income.
Investment Grade Widened More Than High Yield: Implications & More
As credit spreads widened, something rather unusual happened: investment grade Corporate bonds performed far worse than High Yield bonds.
Risk Aversion Index: Stayed On “Higher Risk” Signal
Volatility among non-equity asset classes has gone up noticeably while the VIX dipped lower. We still expect volatility to stay high and continue to play defense within fixed income.
All Crowded Trades Are Vulnerable—Even The Yield-Curve Flattener
Bond market volatility picked up quite a bit in May but the higher-low/higher-high pattern in the 10-year yield is still intact, indicating the primary uptrend has not reversed.
Risk Aversion Index: Stayed On “Higher Risk” Signal
We expect volatility to stay high and still recommend defensive positions within fixed income.
Rates & Credit At A Major Crossroads—A Few Things To Watch
April saw a valiant attempt by the U.S. 10-year yield to crack the upper band of the multi-decade downtrend channel (around 3.0%-3.05%).
U.S. Investment Grade Corporate Bonds: Maintain Neutral
Our overall view toward credit has turned decidedly cautious over the last couple months and that includes our long-term favorite.
Risk Aversion Index: Stayed On “Higher Risk” Signal
While concerns about a trade war might be easing and the credit market has been largely unaffected by the surge in Libor rates, we have to recognize the fact that Trump’s policy focus has become increasingly market-unfriendly while global central banks are in a liquidity-reducing mode.
Trade War & Libor—More Bark Than Bite?
Isn’t a trade war more bark than bite? We think a full-blown trade war may be eventually negotiated away but the process is not necessarily painless to investors.
Risk Aversion Index: A New “Higher Risk” Signal
While the late rebound in risky assets pared back earlier losses, weakness was observed in all major risk asset classes. We continue to recommend defense for the time being.
More On The Dollar Bear Market
A potential trade war (not quite there yet) is not good for the dollar as it will inevitably invite retaliation and sour sentiment toward dollar assets.
U.S. Rates: Looking For A Dip
The U.S. 10-year ended the month 15 bps higher but non-U.S. bonds fared much better with bond yields in Europe and Japan 4-5 bps lower.
Risk Aversion Index: Turned Higher But Stayed On The “Lower Risk” Signal
Our Risk Aversion Index turned higher last month but stayed on the “Lower Risk” signal as of the end of January. The first few days of February brought a big surge in this index and would suggest a “Higher Risk” stance for the near term.
Anatomy Of A Dollar Bear Market
With the dollar index breaking below the 2017 low, we believe the dollar bull market that started in 2011 (based on the trade-weighted dollar index) is most likely over.
Risk Aversion Index: New “Lower Risk” Signal
Our Risk Aversion Index turned lower in December and reached an all-time low. We remain favorable toward higher quality credit within fixed income.
2018 Time Cycle—Beware A Fall Correction
The most common 2018 time-cycle pattern among major markets is a fall correction, with the U.S. and Japan faring better than their European counterparts.
Four Divergences—A Steepening Correction
While we still believe flattening is the more likely scenario over the medium term, we do feel the recent flattening move is a bit overdone and there are several divergences that suggest a short-term steepening correction is in store.
A New “Higher Risk” Signal
The index ticked up on the back of higher VIX, a High Yield credit mini sell-off, and EM underperformance. We are turning a bit more cautious toward credit but still recommend safe spreads within fixed income.
Anatomy Of A Flattening Cycle—Flatter For Longer
The calm appearance of the 10-year yield masked a big curve-flattening move that has accelerated the last few months.
RAI Stayed On “Lower Risk” Signal
The range-bound interest rate action provides a friendly environment to earn the carry, through moderate duration and high grade credit exposure.
Two Curves, One Theme
Our data shows the traditional Phillips Curve relationship between the unemployment rate and wage inflation still holds.
Risk Aversion Index: Stayed On The “Lower Risk” Signal
We believe the “Goldilocks” environment is still intact. Earn the carry.
Balance Sheet Reduction ≠ Higher Rates
Overall, the impact of balance sheet reduction on interest rates is weak, at best. Inflation is a much bigger longer-term driver of interest rates.
U.S. Rates: Range Intact, Bias Higher
The mini bond market sell-off in September was fueled by a string of positive developments, which should support the case for further upside in the Economic Surprise Index in the fourth quarter.
Risk Aversion Index: Stayed On The “Lower Risk” Signal
With the “Goldilocks” scenario still intact, we believe earning the carry is the right approach and high grade credit fits the bill.
Goldilocks—Alive And Well
If we look beyond the daily noise from North Korea, the global macro picture still fits our “Goldilocks” view pretty well.