Gregg Greenberg’s Post

Transcript

Joyce, entering 2024, we were expecting up to six Federal Reserve interest rate cuts. Now I'm not sure if we're going to get any. What's your view? Definitely it's a very, very interesting about face. We believe that there is still room for the Fed to cut one or two times. They are truly going to be data dependent as they've always said. So let's see how the next few months of inflation print and we'll have a better idea probably towards mid year. And what could cause them not to cut? We think this is a very small tail risk. I mean, Jerome Powell basically promised us a Fed cut this year. So for them to not only not do a cut, but to do a hike, it would be a pretty high bar to cross. So I would think that inflation would have to surge dramatically, not just go up point 1.2% month over month, but you'd really have to see it go up significantly, like by 1% or more for there to be a Fed hike on the table. And what are your expectations for? Economic growth that might cause one of these cuts or even erase if it gets much faster. So we're still leaning towards the likelihood of there being a Fed cut rather than a hike because our base case in terms of economic growth in the US is a slowdown. So it may not turn into an actual recession where we have negative GDP growth, but it's going to feel like 1. So if we come off above trend growth from last year into this year, we're expecting, you know, very tepid growth, let's say .51% GDP growth, mostly driven by consumer spending. Really fading. And before we take all this into account and discuss how you're playing the fixed income market, I wanna get your idea about what's going on with the 10 year right now because it's really snuck up to about 4.5% and this is the benchmark 10 year treasury that everybody watches. Why has it been sneaking up? For sure. I mean honestly we were pretty surprised when the tenure fell so much at the end of 2023. If you sort of extrapolate where the tenure was in October to now, it really hasn't changed that much. I think the market just got really ahead of itself at the end of last year when we had just over exuberance like you said, the market was pricing in seven Fed cuts At that point in our minds that was totally unrealistic. So the backup in rates make sense to us and we don't think that it's likely to continue to go up. Are not in the 5% ten year camp. So we do think this is likely peak. So a lot of people last year and into this year they had a lot of money in cash because they were getting nice returns in their CD's and in their money markets. Can you talk about reinvestment risk now if you're advising them to put the money back into bonds? Sure. I mean it it sounds great to have basically a risk free 5% return, but if you think about what happens when the Fed does eventually cut interest rates? Whether you're on our side and you believe that it will happen this year or if it happens next year, the Fed tends to cut almost 2% in every cutting cycle. So soon consumers won't be able to get 5% in cash. They're looking closer to 3%. And when you take away inflation, you're basically looking at close to 0% real return. So we think with the way yields are very attractive on investment grade bonds, you don't have to step out and take a lot of risk to get much higher potential returns. Oh, how are you advising clients right now if they're putting money to work when it comes to things like high grade bonds for sure we still believe staying high quality makes a lot of sense given our base case of economic slowdown. But we believe you really have to be active and look for the issuers who are going to be able to pay their coupons and refinance especially in the high yield market during these more tumultuous times. We really favor some of the, you know, non cyclical. Consumers, sectors of corporates, so things like utilities, you're more traditional coupon paying bonds as well as some isosteric areas in securitized. So a lot of people haven't paid a lot of attention there, but you are getting a lot higher yields for similar duration. Alright. And in terms of duration, how long do you want to go out? We're advocating for a little bit of a barbell approach. So having taking one step out of cash into the short end of the curve around that two year mark, I think can insulate you from a little bit of that reinvestment risk. And the yield curve is still inverted, so you're picking up a little extra yield in the short end. However, by going intermediate, let's say closer to the US agg duration 6-7 years, you're going to be able to benefit when those rates fall first in the face of more tepid economic growth and then you'll be able to. Also get that negative correlation to equities if you go longer duration. Alright. Well, thanks for coming over talking about it. Thank you.