Fixed Income Portfolio Management for Current Market Volatility

0:00Joining me here on the set to talk about the broader market at the Fed and inflation. I'm joined by Lael Federer, who's the co-lead municipal sector and Singapore Folio Manager at Bed Fund. Well, thanks so much for joining us today. There's a lot of moving parts from an fixed income perspective. How would you characterize the markets right now? Well, again, there's been a tremendous amount of volatility, right, as the war ebbs and flows. You know, I think we were talking earlier about wars being the new Fed governor potentially. How is he going to handle this? Yeah. You know, we've been actually pretty much range bound. Ten years have been in this four and a quarter to four percent range. We look like we may. We're going to maybe break out from that earlier this week, but then the news on the war kind of settled down and now Treasuries are back to four, twenty four, twenty one areas. So, you know, volatility's up. I think people are nervous. Corporate credit spreads have held in pretty well, so from a risk perspective, there hasn't been a huge risk event, but a lot going on, so a lot of things to, I guess, be concerned about. Yeah.

1:00Let's just start with the ten year because obviously we've done that short-term round trip. And as you say, we're currently just above four, twenty right now. Obviously, we've seen this backing out of rate cuts in the market just, of course, because of the renewed energy shock we're dealing with. And as you say, what kind of risk that poses to the Fed now, or at least, I suppose, the difficulty for the Fed to focus on that job side of the mandate when they now have that inflationary impulse and pressure coming from that conflict. So, how should we be thinking about that if, you know, we could be de-stary down the bowler, or potentially fewer rate cuts than we were pricing in at the start of the year? Yeah. And again, it's changing, I mean, almost hour by hour, because you had the job report came out last week and actually, you know, that number was a little bit weaker than expected. You had the change and what was going on in the war, so the market quickly replaced. And then today you had inflation data, which was a little bit higher. And I think if you read it, the expectation is that PC is also going to be a little bit

2:01higher than expected. So, everybody had built in, I think, a couple of cuts by the Fed kind of mid-year. That's been pushed back. I think you told me now the first, you know, the probability of September now, and then another one, maybe, small chance in December. So I think, you know, from me that would lead to a steeper yield curve, I think, in that, you know, with all the uncertainty, I would think the front end would hold in a little bit better and maybe the back end get a little bit weaker, but we just haven't seen that. You know, in fact, the Treasury market's a little bit flatter. You know, ironically, the muni market's actually steeper this year. So, you know, different signals coming out of the market. Yeah, and there's a degree of resilience, I think. I'm hearing from a lot of those out in the market with respect to the US markets versus what we're seeing sort of internationally. I mean, particularly when you look at Europe, I mean, you've got the guild's market. So we're obviously at the front end, you've seen like a 37 basis point jumper in like the two-year or something like that. We've got this global repricing of rates, but I do want to pick up on what you just mentioned

3:03about muni bonds, because obviously this is something that you're in the business of and looking at. Just talk to us about the demand here, what you're seeing this year, because I've seen that there has been a lot of demand, but also getting quite expensive. Yeah, so again, relative to tax bulls, they're getting expensive on the front end of the curve. We look at the ratio, if you take cat taxes in the consideration, at 60% of the yield on a treasury for a two-year municipal bond, it's kind of break even for your top marginal taxpayer. The long end's a little bit different in that rates are back around 90% of treasuries. Supply has been fairly robust and it's expected to pick up on the flip side though, demand remains strong. So, thematically, I think we've been saying, look, there's a huge amount of demand for fixed income. Absolute yields still look pretty attractive, with three, three and a half percent on munis that's five to six percent tax adjusted. Looks still pretty good when people are talking about what's expected to return on the stock market, maybe six percent plus or minus. So on a risk adjusted basis, we think fixed income looks attractive.

4:07It's done pretty well in terms of the muni market specifically. And so what we're saying is maybe you should think about looking at your portfolio and maybe moving out the curve a little bit where you can pick up the steepness of the yield curve. I want to talk about that portfolio. I mean, what are you hearing or at least telling clients about the position or that part of fixed income within their portfolio? Because it's been interesting as far as a safe haven trade, which has typically not been acting as it normally does in an environment like this because you have that energy shock. So what are you saying to clients out there about that part of the portfolio and that is a sort of diversifier against what we're seeing, for instance, in stocks? Yeah. So again, the nice part about fixed income in today's world versus three or four years ago is you actually have yield. Yeah. The thing you don't have necessarily is a lot of additional spread for buying risk assets, corporates, high yield.

5:07Even mortgages are pretty tight in here. And so what we're saying is look, you probably want to be positioned conservatively within your fixed income portfolio. You want to go up in quality. If you look across our portfolios, both tax one, tax exempt, our average credit quality is the highest it's been in quite some time. So you want to have dry powder, not only if credit spreads widened or if rates go up, but again, from a long-term perspective, those absolute yields look pretty attractive. And there's a lot of things you can do in terms of this. The curve is, again, once again, more normally sloped. So you can get rolled down the yield curve and there are other strategies that you can do to enhance not only the income you have, but again, the other thing would be keep some dry powder so that if you do see some volatility, you can step in and put that money to work. We're not calling for a huge risk off trade because the US economy actually looks like it's going to remain fairly robust. But we're probably past peak credit.

6:08What about the record core pretty issuance? What do you make of that? I mean, when you hear about some of these hyper scalars, I think it's Amazon, I mean, you do. I was just talking offline about the US bonds and in Euros as well. I mean, they've been obviously looking to diversify as far as maybe cheaper ways to find that money. They have to issue so much debt, right? In terms of the expected cost of building out these data centers. So they're trying to figure out what's the best way to access the market. So you see them coming in the US fixed income markets, you see them come globally. They're looking at other structures as well. So our message has been, it's very difficult to play the hyper scalars in terms of the fixed income market because our view is that they're not all going to win, obviously. A lot of money is being spent. And so within the equity markets, you can identify and buy a basket of stocks. If you get two or three right and the other six or eight, lose a lot of money, you still

7:10can make money, right? But within fixed income, we talked about this earlier. The best you're going to get is power back at maturity, so you need to be very careful about what you own and then also do it in a very diversified fashion if you're going to own them. Wonderful chat and really useful as far as it. You know, where to find some of these opportunities in fixed income right now across the board. We have to wrap it up there. Thanks so much for joining us. Thanks for having us. We really appreciate it. Come back and do it again soon, Lyle. That is Lyle Futura there, who's at the Co lead municipal sector and senior portfolio manager of their fund.