Investors are on alert—these past few days have provided a very high dosage of volatility in the markets. First, this is a risk-off environment in the bond market, with still more room to run in the 10-year treasury as these waves of ‘flight to quality’ recur. The rate cut last week was one of several to come, in our view, despite Fed Chairman Powell’s posturing for a ‘one and wait and see’ approach.

Second, the shape of the yield curve has steepened on the longer end and remains inverted from three to 10 months, albeit 30 basis points lower across the long part of the curve. We continue to be more wary of credit, particularly high yield and split-rated credits, as we believe the spreads in lower investment grade and high yield are too tight and are ripe for widening as the economy continues to cool. This scenario may be insulated somewhat as treasuries continue to rally.

With the U.S. equity market selling at a premium, we are not surprised at the correction over this past week. We are seeing a clear tug of war between the effects of looser monetary policy and more restrictive trade policy. Not only is this impacting overall market direction, but also market internals. When the market is buoyed by monetary policy, we’re seeing a preference for more volatile stocks and stocks of companies with less earnings certainty. On days like Monday, where trade tensions dominate the headlines, higher dividend yielders and more profitable companies are outperforming.

What We Are Watching

  • The Fed—as it appears, more rate cuts look to be baked into the curve; we expect at least two more cuts in 2019
  • The trade war—the latest move by China to manipulate the Yuan will likely result in higher tariffs
  • Geo-political events—North Korea will likely return to a new version of their old ways, causing more trepidation
  • Global bond yields—with negative yields in many countries, there is continued support for bonds that will actually pay you money to hold them
  • Rolling up the yield curve—this is now a very real concern, as two month bills yield 2.07%, and three year bonds yield 1.54%. Short duration accounts may out-yield longer duration accounts for the near term
  • Inflation—we have a Fed that may be admitting it doesn’t quite know how to reach target inflation given all the above-mentioned events converging. While the Fed ends QT and likely cuts rates at least once, and both sides of the aisle agree to allow increasing debt even as we’re near full employment, might we ignite inflation? If so, investors will have to deal with a paradigm not seen in quite some time

Where We See Relative Value
Fixed Income

  • Short, investment grade bonds
  • Barbell structures with exposure to very short maturities, avoiding the belly, and exposure to longer bonds, moving portfolio duration near to neutral
  • For taxable clients, munis continue to perform well, seemingly insulated from the taxable market. Supply/demand characteristics that are a big driver in munis continue to be favorable on a ratio basis and on a tax-adjusted basis. Bonds with maturities 12 to 15 years appear to offer best value for yield/duration tradeoff


  • Market direction is hard to call. Instead, relative positioning within the market tells us to strategically overweight areas which have seen dramatic underperformance:
  • Small-caps
  • Value style


This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. No mention of particular securities should be construed as a recommendation or considered an offer to sell or a solicitation to buy any securities.