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.


Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.