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DISCLOSURES

The opinions expressed herein are those of Asset Preservation Advisors, LLC ("APA") and are subject to change without notice. This material is not financial advice, or an offer to sell any product. APA reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs, and there is no guarantee that their assessment of investments will be accurate. There is no guarantee that APA’s strategies or recommendations will equal or exceed expectations discussed. Asset Preservation Advisors, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about APA including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request or by calling (404) 261-1333. www.assetpreservationadvisors.com Asset Preservation Advisors Copyright 2024

  • Kyle Gerberding

TAKEAWAY TUESDAY: TREASURY WHIPSAW



The consistent bond volatility we saw take place in 2022 was unprecedented for a 12-month period. The recent week(s) has made last year look sanguine. As shown by the ICE BofA MOVE Index, recent bond volatility easily surpassed the peak of March 2020, and the highest we have seen since 2008.




Source:  Bloomberg, ICE BofA MOVE Index


Much of that volatility has been largely driven by the short-end of the curve, with the 2-yr UST seeing, now, 9 straight days of at least 20-bp swings in either direction.




Source: Bloomberg, US Generic Government 2yr


This, of course, has led to wild swings, often on the back of low liquidity, of the 2/10 UST yield curve. As the market attempts to come to terms with the likelihood of a “hard-landing” and potential stagflationary environment, the yield curve has steepened, though still deeply inverted, from -110 bps on March 8 to a (at time of writing) -57 bps.




Source: Bloomberg, US 2yr and 10yr Note Spread


With the changing market dynamics, pricing for upcoming FOMC rate hikes has whipsawed all over with forward pricing showing a peak north of nearly 5.75% after Chairman Powell’s congressional testimony on March 8, with aggressive rate cuts being priced in by close of March 17. We still feel that, barring some major news over the next 24 hours (which is always a possibility), the market got a little ahead of itself with the idea the Fed would have to cut rates, and we expect at least a 25-bp hike tomorrow, the 22nd. While we do feel the recent market instability will cause The Committee to add some carefully crafted language to statement, inflation remains the number one battle, and there is still work to do on that front before, they feel, things really break.




Source: Bloomberg WIRP, Fed Funds Futures


The Credit Suisse AT1 Bond wipeout is in no way a representation of the broader IG corporate market, but it is a reminder as to how quickly corporate credit can change. Municipal event risk and municipal defaults are not only much more seldom, but recovery has historically been much stronger vs corporate counterparts. Full credit write-up to follow from our team, but a quick look at some of the larger headline defaults in the municipal market over the years, courtesy of Moody’s:




Source: Moody's US Public Finance, Municipal Bond Defaults and Recoveries, 1970-2021


Compared to most other fixed income markets across the globe, the municipal market is one of the few to actually shrink in size. Municipal issuers have done a great job of paying down debt, being more selective in new issuance, and building cash balances for slowdown.




Source: SIFMA, Federal Reserve


All that being said, we do continue to feel comfortable in adding strong A/BBB-rated names, upon these periods of spread widening, that are well-positioned to weather a potential economic slowdown.




Source:  Bloomberg; US Revenue A Muni BVAL TEY assumes 37% Fed Rate, 3.8% Net investment income tax; USD US Composite A BVAL Yield Curve; US Treasuries Monitor; March 20, 2023 close


Wishing you a great week. Please do not hesitate to contact our team should you have any questions.



 

Disclosures:


Past performance is not indicative of future results. Investing involves risk including the potential loss of principal. This material is not financial advice, or an offer to sell any product. This is not a recommendation to buy or sell a particular security. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable, or will equal the investment performance of the securities discussed herein.


APA is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill of training. More information about the advisor including its investment strategies and objectives can be obtained by visiting www.assetpreservationadvisors.com. A copy of APA's disclosure statement (Part 2 of Form ADV) is available without charge upon request. Our Form ADV contains information regarding our Firm’s business practices and the backgrounds of our key personnel. Please contact APA at 404-261-1333 if you would like to receive this information.


APA-2303-35

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