Weekly Commentary | March 20, 2022

Macro Picture

Equity markets moved higher for the fourth straight day as the Fed lifted off on their tightening cycle.  The strong month erased losses in the trailing month and cut YTD losses in half.  The only sector in the red was Energy thanks to those falling oil prices.  

Markets were supported by multiple factors including sharply falling oil prices, news that Russia did NOT default on their sovereign debt, and the FOMC meeting where rates were raised the quarter-point expected.  Additionally, while fighting continues to rage on in Ukraine, investor sentiment is starting to position for an end to the conflict.  

As expected, the Fed raised rates by 0.25% to a policy range of 0.25% to 0.50%.  They also indicated that they expect to hike rates by a quarter point at each of the six meetings remaining in 2022.  This was the first hike since late 2018.

The meeting was more hawkish than most expected as rates rose as the press release came out and in the following day.  The 10-year yield hit as high as 2.25% before dropping later in the week.  Powell said that the central bank could hike rates more quickly if the committee feels it is appropriate.  He also warned that the labor market tightness may have reached "an unhealthy level."

High yield spreads came in sharply last week falling back below 4% and ending the week at 3.8%.  

The clarity that the Fed provided the markets last week was what it needed to put an unknown into the known category and move on.  This helped kick off a massive rally, including in growth and tech names despite the move higher in rates.  

I still contend that the 'under' of the 7 hikes this year is more likely than the 'over' as the long-end of the curve continues to not cooperate with the Fed.  A flattening yield curve is something we will have to watch very closely for the rest of the year for signs of a slowdown.

The yield curve is now inverted on several pieces.  For instance, the 5s - 3s, 10s-5s, 10s-7s, and 30s-20s.   The long end of the curve appears to be topping out.  The 30-year actually rallied on the week.   Perhaps the top is in?  

And then we'll see the 10-yr yield top out soonish if that is the case.  

Gundlach was on CNBC this past week commenting on the economy and his forecast for the future, for what it's worth.  He thinks the market is oversold and commodities overbought.  Gundlach noted that the yield curve is extremely flat for the start of a tightening cycle, something I noted a few weeks ago.  His forecast is simple:  buy the vol now and then sell it later this year when the curve fully inverts.

DoubleLine's CEO, Jeffrey Gundlach welcomed on CNBC's new show "Closing Bell Overtime"

CEF Market News

Discounts in taxable CEFs tightened up nicely but all other sectors were relatively flat.  Still, most NAVs were up in the taxable space while tax-free NAVs fell by approximately 1.0% on the week.  Equity CEF discounts and muni CEF discounts were relatively flat on the week.  

Discounts continue to hang around the 66-75th percentiles for the bond side of things.  That hasn't moved all that much in recent weeks.  We did reach, briefly, the 83rd percentile in munis, and the 74th in taxables at the widest point about 8 days ago.