It is tough to be a fixed income investor in this market. Yields are rising, but in real terms even high yield securities are in negative territory given the inflated CPI environment. Some fixed income portfolio managers are spinning that now is a great time to be a fixed income investor because high yield securities are yielding more than the Federal Reserve’s 2% target CPI. This of course is purely marketing spin as the theoretical target CPI has nothing to do with where the CPI sits. Further, we believe that the Fed will reset its 2% target CPI at a higher level in the coming months.
We expect the Fed to raise its Fed Funds Rate by 50 basis points at its next meeting (May 3rd and 4th). Further, the Fed will begin to trim its balance sheet in May which will further drive yields higher. High Yield bonds will eventually become attractive, but the ICE BofA High Yield Index is still well below CPI at 6.6%. Thus, we expect for many institutional bond holders to continue to dump bonds, thus driving yields even higher.
The Fed finds itself in the unenviable position of tightening policy at a time when the economy is shrinking. We are in a recession. Last years’ growth was a function of printed helicopter money – an unsustainable phenomenon – as opposed to productivity increases which is a form of sustainable growth. The talking head crews at Bloomberg and CNBC will eventually get around to recognizing this period of low to negative real GDP growth, high public debt and elevated prices for what it is – stagflation.