Market Musings

​

Surfing A Shape-Shifting Curve (5/1/24)

The belly/long end of the curve backed up a virtually parallel 45-50bps in April, while the front end didn’t really move much at all. The curve is still inverted however, and fixed rate sectors were in the red for the month (and further in the red YTD) despite all the spread tightening in IG/HY. As the Fed keeps its stance at likely “higher for longer”, CRT and other floater coupons continue to benefit not only from higher coupon carry, but also from an intrinsic up-rate defensive convexity advantage over medium/long duration fixed rates. (Read more here)

​

With Credit Contained for Now, Look for Convexity Edge (4/1/24)

Deal-to-deal credit risk differentiation has perhaps moderated a bit across the complex, making good old-fashioned convexity a more discerning relative value factor than it has been recently, especially given the vast majority of the sector is trading at a premium right now. (Read more here)

​

“Bond Gravity” Limits Price Upside, But Carry Remains in Orbit (3/1/24)

At this point in the cycle, benchmark GSE CRT has likely limited price upside as “bond gravity”, including premium amortization effects and historic spread ranges, provide an increasing drag on how high market values may go from here, but carry remains substantial. (Read more here)

​

Add Recent Issues Down the Stack, Hold Seasoned Paper Amidst Steady, Supportive Backdrop (1/31/24)

Heading into February, sector relative value themes continue in the same vein as the beginning of the year: seasoned paper for risk/reward and scarcity value, newer issues relative to IG/HY, but with a few minor tweaks given the backdrop from the 4 Cs of fixed income relative value right now (we added a fourth C to last month’s commentary: conditions). (Read more here)

​

2024 Sector Outlook - From Asymmetric Reward to Asymmetric Risk (12/29/23)

When it comes to the 3 Cs of fixed income relative value – credit, convexity, and carry, the stars aligned for the benchmark GSE CRT market in 2023 to produce an all-time sector-record annual total return of 17.69%. For 2024, a repeat performance may not be likely as several key 2023 tailwinds at the least may stall out, or even possibly become headwinds, which would bring returns for 2024 back down towards more earthly levels. (Read more here)

​

Floater Coupons On Fed Watch (11/30/23)

Fed tightening has certainly helped floaters since March of last year. SOFR has gotten stuck within a few-bps range following every hike, and it hasn’t moved much from the 5.30%-ish level since the last Fed Funds raise in July. With the current economic backdrop at this point in the cycle, the risk of Fed cut/hold/raise is much more biased towards cut/hold as the inflation rate has tempered, but not necessarily to the Fed’s 2% target yet. Historically, the Fed has hiked to stave off inflation, cut to counter declining growth. The latest resilient GDP numbers would likely keep the Fed holding steady, but as soon as that changes and dips appear, historically unemployment and rates follow…

​

​

​

​

​

​

​

 

 

​

​