By Rob Williams, Director of Research
1) This Tightening Cycle is More Aggressively Priced In than Usual. Compared to previous Fed interest rate hiking cycles, this one has been priced in earlier, which means returns are far worse than what is the usual pattern during rate cycles.
2) Are We Close to Max Pain for Fixed Income? Fixed income investors can take comfort in knowing that the curve is almost fully priced in for 2022 Fed moves. Yield carry is also a more significant factor with core fixed income indices above 2% for the balance of year. If growth fears become more prominent and inflation shows signs of peaking in the coming months, we have likely reached max pain for fixed income returns.
3) Fixed Income Positioning: Stay Defensive. Overall, it still makes sense to play defensive, remain short duration and lighter on credit given the uncertainty and macro risks.
4) Mortgages Offer a Compelling Risk-Adjusted Opportunity. MBS are attractive from a risk/reward perspective given spread widening and clarity on the FOMC balance sheet runoff. Credit spreads have been resilient but are vulnerable, and we expect better opportunity to add credit later in the year.
5) Municipal Fixed Income Presents an Attractive Entry Point. While the municipal bond index has experienced its worst start to the year in more than 25 years, we believe Fed policy and interest rate movement have largely been priced in. At some point, higher rates will entice value-driven investors to rebalance into municipal bonds.
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