Management Thoughts for Jan 24, 2017

Yellen will raise rates again soon – inflation in wages and costs are starting to be passed on to consumers. Markets should soon start to anticipate two fed hikes by the May Fed meeting. Yellen sounds hawkish, warning about delaying rate hikes for too long; US consumer inflation is over 2%, shelter CPI is higher with rental inflation hitting 4%, and nominal wages in the US are rising at 2.5%. Oil prices have doubled since January 2016, which means headline CPI may be pushing 3% in April even if transitory. Will rising rates affect HY bonds? We all know the story. Even with two rises in short rates soon, Fed Funds are only at 1% or so. The UCITS are earning 6-7% gross yields. But see the generic spreads of HY over equivalent treasuries. Credit is long in the tooth.

 

Screen Shot 2017-01-20 at 11.06.13

 

The US and global economy is doing much better than it has in many years. A recession scenario at this point would eventually come from an overheating job market inducing the Fed to tighten into 2018.

In the meantime, equities are supported. The markets continue to look resilient – despite investors’ nervousness about the inauguration today. The S&P 500 index is stable even though bears have tried to take it lower several times recently and failed. This looks supportive. Investors are still motivated by expected higher earnings and multiples, which could come from lower corporate tax rates and improved animal spirits.

What to expect from the first 100 days of Trump? Trade tensions should figure prominently. Border adjustments (import/export tax policy) could be messy. Hype such as the Mexican wall could cause volatility.

Meanwhile,

Strong US corporate credit performance continues in 2017 with US high yield outperforming, All segments of the US fixed income market are positive year to date. Corporate credit inflows are strong. Loans in particular are benefitting from strong inflows as investors have become increasingly concerned about the prospect of rate increases

European high yield is generating positive returns attributed to the expectation of higher economic growth in 2017 as well as to strong inflows. The ECB is likely to introduce the idea of tapering well ahead of any actual tapering and we have to watch for this.

I understand there is also strength in our Asian HY book although I have no input. All event driven and arbitrage positions are producing.

We are on the right track building out GMS management styles.

Posted in Blog.