Fixed Income Market Update

October 28, 2022

The fixed income markets are abuzz with the potential of a Fed Pivot, or the idea the Fed might change from hiking to pausing to cutting. We say, will the Fed just relent? The Fed, focusing on not repeating the mistakes of the 70’s, is quickly raising rates to a potentially restrictive level, and, more and more economists think, pushing the economy into recession.

More importantly, the size and number of hikes has started to cause problems in the global financial system. Some have been direct, like the strength of the dollar against most other currencies, exacerbating the already inflated commodity prices, to be even higher as commodities like oil, copper and corn are traded in dollars. Others have been indirect, like the pension crisis in the UK that caused the Bank of England to step in and buy long term Gilts to support the pound, the bond market and many UK pensions that fell awry of a poor hedging strategy. Issues like these had a few Fed participants questioning the pace and the benefits of a near term pause to let the prior cuts take effect. However, the strength of the GDP report and the Employment Cost Index reported this week support the current path of higher for longer.

Currently, the CME Fed Watch Tool indicates the Fed will increase 75 bps at the November 2nd meeting 50 bps at the December 14th meeting and 50 bps in February of next year. While not showing signs of relenting, the market does seem to think the Fed will do those three hikes and pause around the 4.75-5.00% level. The last time we were at 5%? 2006, when the Fed cycle topped out at 5.25%.

We expressed concerns in the past and those concerns continue today, the likelihood of a recession grows more likely. Currently, the stage is set for a mild recession, but if problems keep showing up in the global financial system, a mild recession may be the best we can hope for.

Come on Chairman Powell, Just Relent!

-Peter Baden, CFA
Chief Investment Officer

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CME Fed Watch Tool

Source of Interest Rates: US Treasury Yields via Bloomberg LP see footnote at the bottom of this e-mail for which indexes are used.
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Indexes used for AAA Municipal Yields

2 Year: BVAL Municipal AAA Yield Curve (Callable) 2 Year (Symbol: CAAA02YR BVLI)

5 Year: BVAL Municipal AAA Yield Curve (Callable) 5 Year (Symbol: CAAA04YR BVLI)

10 Year: BVAL Municipal AAA Yield Curve (Callable) 10 Year (Symbol: CAAA10YR BVLI) 

30 Year: BVAL Municipal AAA Yield Curve (Callable) 30 Year (Symbol: CAAA30YR BVLI)

Indexes used for US Treasury Yields

2 Year: US Generic Govt 2 Year Yield (Symbol: USGG2YR)

5 Year: US Generic Govt 5 Year Yield (Symbol: USGG5YR)

10 Year: US Generic Govt 10 Year Yield (Symbol: USGG10YR)

30 Year: US Generic Govt 30 Year Yield (Symbol: USGG30YR)

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