SPDR® General Portfolio Bond ETF (NEW YORK:SPAB) contains a fairly high duration of treasury, but also MBS and corporate bonds. It was highly praised based on the Fed’s strange pivot in Powell’s recent remarks. We go on the comments from our meeting and why we think the dual mandate is starting now, with Fed policy reflecting less on “success” in the inflation battle and more on economic concerns. While we still think inflation will be more stable, it is more reasonable to believe at this point that the Fed’s ceiling on rates has arrived.
Comments on Powell’s remarks and questions and answers
Reading in full Powell comments on the transcriptworth sharing some comments on what was said.
- The Fed has focused on the fact that labor market dynamics appear to be returning to normal pre-pandemic levels, with participation increases matching jobs and payroll growth, as well as low unemployment. Labor supply and demand are strong and balanced, leading to a good outcome for the economy. Additionally, the Fed has focused on the fact that many supply-side data have improved, which we expected over time.
- Another remarkable thing is that Powell fully acknowledges that there may be lags in the effects of policy on the economy, and therefore, just as things can tighten without further rate hikes, they should also begin to loosen before the inflation target of 2% is reached. hit or they will overrun. While this is quite intuitive, it is quite low, as they have shown that they are also taking the inflation mandate very seriously. Fire sharing means that economic concerns can be substantial.
- This may signal that they are more urgently considering the dual mandate part of the increase now. The economy is slowing and may continue to see upward pressures even after the Fed begins to pull back.
- Another really interesting point is Powell’s comment on rising inflation. He actually states that he does not believe that inflation is still in the last mile and that there are still supply issues that need to be resolved. This is a bit surprising given that supply side issues are on the back burner in most of our coverage universe. In other words, the Fed believes there is still low-hanging fruit to be reached on the supply side, although it is not sure how much more the labor supply can increase at this point. Frankly, we don’t see much evidence that there is still some way to go in easing supply at least on the commodity side. Maybe the end of The Ukrainian war which still has some effect in facilitating the export of basic materials and grain.
- Another element of anchored expectations is that Powell thinks that expectations anchored to 2026 and so forth demonstrate a fairly good curve and that expectations, at least those that matter, are still anchored at 2% levels, but not for some years. We are still worried in relation to shorter waits and think that they could very easily become the new normal, and that those 2026 expectations and projections are irrelevant and a weak argument that inflation is under control.
- Our unresolved concerns are around expectations and short-term anchoring. We actually think that inflation will be stable and that could beat expectations. However, we recognize that if the Fed sees that the data points to actually somewhat more restrictive conditions with more effects in the pipeline, they probably haven’t jumped the gun or caved in, especially since there isn’t much pressure on them. in terms of current economic data, although that may cause some pain.
The main point is that the growth mandate is starting. After all, it does matter, expectations are pointing to a fairly significant slowdown in US growth. There is also potential attention to the US public finances being paid, although this is not strictly part of the mandate, but related. All of this indicates that a ceiling is likely here.
SPAB is over 6 years in duration, which means it is sensitive to these rate revisions. Credit quality is high thanks to significant Treasury exposures.
The ETF has appreciated about 10% in recent revisions to longer-term rates, which have fallen fairly quickly due to the Fed’s benevolence. ETF expense ratios are low, and we think a higher duration bet makes sense right now. While there may be unresolved risks around inflation, which could cause speculation against the extent of the rollover, the fact that markets had priced in rate hikes significantly ahead of the remarks and that markets have been slightly volatile since then reflects a possible growing concern about the economy. the basics. The balance of the dual mandate means that we are probably at that ceiling, and that the difference in getting it up here is due to US hegemony and leverage to roll with the punches after the war in Ukraine and related strikes. supply.
Whether what is in the pipeline in terms of rate effects actually triggers a recession in its own right is not something we are sure of, especially since the velocity of money and positive forecasting are likely to moderate the effects of reduced availability. the first.
While duration bets like SPAB may not have much downside from these levels, if inflation is sustained, high returns will be needed beyond what non-opportunistic fixed income can provide. We think the play continues to be Japanese equities where many opportunities have yet to be reassessed and try to take a hands-off approach as uncertainties are still high. There is still the possibility of fewer rate cuts than expected, or even rate hikes, depending on whether continued progress on inflation is actually made and whether expectations may limit the downstream benefits of a more balanced bond market. work.
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