It is time to check in on fixed income. This year has been uniquely difficult for all bond investors. The fixed income frustration may have culminated on June 14th when the yield on the 10-year Treasuries spiked to 3.5%. The Bloomberg Aggregate Bond Index, the most closely watched fixed income benchmark, had fallen almost -13% from the beginning of the year to that point. Remember for bonds, rising yields mean falling prices. It was a point of peak pessimism for fixed income, and the fall in bond values is one of the key reasons that investors have felt so uneasy this year.
Since mid-June, we have seen yields retrace a bit. In the chart above, compare the yield curve on June 14th (the line with orange diamonds) to the later, lower curve on July 8th (the line with turquoise triangles). With this downward movement, we have seen bond prices appreciate again. The reasons for this are currently being debated in the financial press. Are bond gains due to the peaking of forward inflation expectations or to the increased prospect of a recession? We are more in the former camp, as the possibility of a recession has not changed much in the last two weeks. However, we have seen over the past month a dramatic fall in the price level of input commodities which should reduce inflationary pressures going forward.
Looking at the chart below, we can see that over the last month commodity prices have fallen significantly. The price of all of these economic raw inputs has peaked and is now trending downwards. Market inflation expectations have also fallen over the same period.
On some level, it doesn’t matter whether the declines are caused by the improvement of supply chains or the reduction of global demand, for everyday consumers it just matters that these prices have stopped accelerating up. And for ordinary fixed-income investors, it means that they may receive some relief from an otherwise very painful year.
Past performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
Model Updates
There were no trades in EWM Investment Solutions models during the week ending on July 9, 2022. All major equity market sectors are currently in a long-term unfavorable trend, and the Asset Allocation models remain at their lowest possible tactical equity exposures, with domestic stocks favored over international shares.
Quote of the Week
State Dept. anti-corruption czar Rich Nephew admits jokes about name are ‘hilarious’
The headline last week in the New York Post concerning the recent appointment of Richard Nephew as the new United States Coordinator on Global Anti-Corruption and the subsequent social media chatter about how fitting it is that someone named “Rich Nephew” should investigate nepotism’s ill-gotten gains.
On A Lighter Note
How telling is the spelling of a dwelling? A “shop” is a dirty, noisy place where ill-tempered men work on automobile transmissions, while a “shoppe” is a delightful destination where pleasant ladies offer free samples of artisanal cheeses. The name is the same, yet the particular arrangement of letters casts a spell on the reader.
In fact, some American writers have realised that using British spellings can give their normally boring prose a more cultivated flavour. And the more absurd you can make a word, the better. For example, in Hollywood actors are given “roles”, yet true scholars of cinema know that performers have “rôles”. The smudge over the o makes the language ridiculous but refined.
This troubling trend isn’t something new. At the dawn of modern English, academics added a silent, subtle b to everyday words like “det” and “dout” to make “debt” and “doubt”. This was an homage to the words’ Latin roots and an attempt to befuddle the common folk. Whether this practice should continue was the most pressing issue of the day. Even Shakespeare’s Hamlet pondered, “To b or not to b, that is the question.”
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on July 1, 2022 to closing price on July 8, 2022
1 Month = closing price on June 8, 2022 to closing price on July 8, 2022
3 Month = closing price on April 8, 2022 to closing price on July 8, 2022
YTD = closing price on December 31, 2021 to closing price on July 8, 2022
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