Please fasten your seat belts and return your tray tables to the upright and locked positions — we will be landing soon.
The current economic conditions:
- Peak inflation is behind us (9% in June 2022 vs. 6.5% in December 2022)
- The Fed is closer to the tail end of its new terminal rate
- The U.S. job market is still hot
We can’t tell you if the landing will be soft or choppy. But what we do know is that most of the Fed rate hikes are behind us. We are now looking at an attractive total return in the fixed-income markets. Finally, for investors seeking income, there is a place to park money — investment-grade bonds (both in the municipal and the taxable fixed-income domains).Bonds are back! That’s not to say that the fixed-income markets are without risks:
- The yield curve is flat, so investors aren’t being paid to extend maturities beyond five years
- Real yields are still negative for longer maturities based on backward-looking measures
- Our confidence in implied inflation measures is strained at best
- Credit spreads are still tight, so if a recession does materialize, lower-rated securities should underperform
That said, the correlation between bonds and stocks is reaching a long-term equilibrium point. That means bonds should begin to provide the ballast they have historically delivered as part of a balanced portfolio.
2022 was the exception to the rule — more fallout of free money.
Throughout the Fed's rate hikes, we at CDI have maintained the stance that Headline CPI will end up in the 3%-3.5% range. While multiple risks still need to be solved in both the global and U.S. economies, we remain optimistic about investment-grade fixed income. We believe that higher quality bonds and generating attractive income are good places to be if the landing turns out to be choppy.
For more information about how City Different Investments can help you, schedule a meeting today!
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