Macro Monitor
U.S. Municipal Bonds: Maintain Unfavorable
There is still a lot more room for Munis to underperform Corporate bonds.
U.S. High Yield Corporate Bonds: Maintain Neutral
We will be looking for a good follow-through to consider an upgrade of these bonds.
Risk Aversion Index—Ticked Lower But Stayed On “Higher Risk” Signal
We believe a short term rally is more likely and recommend a neutral stance towards credits at this point.
New Bond Market Record: G5 10-Year Average Hit All-Time Low
Despite the improvement in market sentiment, U.S. bond yields were dragged lower by their international counterparts.
Muddle-Through Still Has The Benefit Of The Doubt
The market’s latest infatuation with bonds was driven by grave concerns that the weakness in energy and manufacturing sectors might be spreading to the U.S. economy as a whole.
Market’s Message To The Fed: Stop The Tightening!
We think the Fed’s projection of four more hikes this year is absolutely unachievable, and we are no doubt siding with the market’s current projection of one hike, at most (if any), this year.
The Current State Of Stock-Bond Relationship: Risk-Off
The transition we saw last year from a mostly Risk-On (or Easing) environment to a more challenging Tightening (or Risk-Off) environment has made the relationship especially volatile.
Risk Aversion Index—Moved Up; A New “Higher Risk” Signal
We are aware of the oversold condition in oil but we expect volatility to remain high in the near term. We maintain a defensive stance towards credits at this point.
2015 - All Risk And No Reward
The U.S. 10-year yield was quite volatile, fluctuating in a 100 bps range between 160 and 260, and ending up a mere 10 bps higher for the year. But it was still better than most other major asset classes which saw all risk and no reward.
2016 Time Cycle—Not Likely To Be A Typical Year
The 2016 pattern looks good on paper, but if the excitement in the first week of the year is any indication, we highly doubt 2016 will turn out to be another typical election year.
Risk Aversion Index—Moved Up But Stayed On “Lower Risk” Signal
Despite the mechanical “Lower Risk” signal, we are clearly in a risk-off environment. We recommend a defensive stance towards credits at this point.
Impact Of The First Hike - This Time Might Really Be Different
At this point, the worst outcome for the risk markets would be no hike in December.
Risk Aversion Index - Stayed On “Lower Risk” Signal
Fewer uncertainties surrounding the Fed’s policy decision probably helped, but the renewed sell-off in oil is a big concern for all credit classes. We recommend caution and a neutral stance towards credits at this juncture.
A December Hike Likely
Our interpretation of the current Fed stance is that it has shifted from “hike if the data and the market support” to “hike unless the data and the market perform poorly.”
Party Like It's 1998? One Big Caveat
Based on the four key features of the current macro environment: global disinflation, monetary conditions divergence, an extended bull market, and sub-par economic performance, 1998 ticks all the boxes.
Risk Aversion Index— A New “Lower Risk” Signal
We are moving to a more constructive stance towards credits within the Fixed Income space.
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