The curve continued on its flattening trajectory, with 2-year yields rising 20 bps, while 10-year yields rose only 4 bps, and 30-year yields fell 5 bps. While the curve is fairly flat, we are not yet nearing an inversion, which many would read as a sign of an impending recession. It will be important to continue monitoring the shape of the yield curve as the Federal Reserve expects to raise rates three more times in 2018, while at the same time they hope to continue increasing the amount of Treasury and Agency bonds that are eliminated from their portfolio holdings.
Incoming Fed Chairman Jerome Powell was welcomed by a Congressional interrogation. He came off as intelligent and self-assured, failing to become flustered, even when aggressively, and perhaps disrespectfully addressed by those present. He did note, “I think the case for raising interest rates at our next meeting is coming together.”
Not surprisingly, the market currently puts the chance of a December rate increase at 98.3%.
Municipals had a rough month due to concerns over potential tax cuts reducing the demand for tax-free bonds.
Additionally, there is potential for a deluge of deals coming into the market prior to year-end as issuers try to take advantage of current rules which will disappear in 2018 if tax reform is successful. Fears are likely overblown, as reduced demand should be offset by reduced supply as the tax bill decreases the number of entities qualified to issue tax-exempt bonds.
High Grade and High Yield spreads widened slightly in the month, but remain near historically low levels. Very little additional yield is being offered to compensate for the inherent credit risk, at a point quite late in the cycle.
We currently favor higher quality holdings for this reason.
Alternative Investments
Alternative Investments posted mixed results in November. The U.S. Dollar, as measured by the DXY Index, lost -1.6% on the month, even as prospects for tax reform and a December rate hike by the Federal Reserve remain in vogue.
Tax reform talks gained steam in the final days of November, but didn’t manifest itself in a stronger Dollar.
Additionally, the Senate confirmation hearing for newly appointed Fed Chair Powell was positive and the probability of a rate hike at the Fed’s December 12-13 meeting stands at 98.3% according to data compiled by Bloomberg. The weaker Dollar didn’t provide much of a boost for Gold, as spot gold prices rose a few dollars to $1,275/ounce, a gain of +0.3% on the month. Gold prices have remained relatively stable over the past few months, and remain a viable hedge against global geopolitical risks and equity market volatility that may emerge in the future. The weaker Dollar did propel the Euro, which gained +2.22% on the month to close at $1.19 USD/EUR, near the highest level in 3-years.
Strong gains from U.S. equities (the S&P 500 gained +3.07% during the month) and gains from the more “unloved” sectors of the year, helped Real Estate catch a bid. REITs, as measured by the FTSE NAREIT All REIT Index gained +2.4% during the month, with the index hitting a new 52-week high; however, REITs remain an underperforming asset class versus the broader market, returning +11.41% YTD.
West Texas Intermediate (WTI) crude oil gained $3/barrel, or +5.6%, during the month, to close above $57/barrel on the NYMEX. Crude’s gains were stronger intra-month, having neared the psychological $60 / barrel mark for the first time since June 2015 as prospects for an new OPEC production deal were anticipated and confirmed on November 30.
Under the new deal, production curbs will be extended through December 2018; however, a number of OPEC countries remain exempt and continue to bring on additional supply, while the U.S. continues to pump oil at near record volumes. Despite the strong gains in crude, the broad based Bloomberg Commodities Index shed -0.6% on the month and remains down -2.1% for the year.
Hedge Funds continued to struggle in November, with only 3 of 10 strategies posting positive returns. All 10 strategies have posted year to date gains; however, even the top strategies on average trail the S&P 500 by more than 10 percentage points, highlighting the difficulties hedge funds have had in the current bull market.
This article was written by Nottingham Advisors, a participant in the ETF Strategist Channel.