Tag: Market & Economic Commentary

Making Sense of Fed Policy During COVID-19

Posted on by Sage Advisory

The Fed’s response to the economy and market breakdown engendered by the COVID-19 crisis has been unprecedented — not only in scale, but how quickly new policy tools have been used to address rapidly tightening financial conditions. The following is a short post intended to demystify the “alphabet soup” of Fed tools and what each tool is trying to fix, and provide a list of additional policies we can reasonably expect in the near-term.

A global health crisis ultimately requires a scientific solution, but earlier this month within the span of days, the health crisis morphed into economic stress (with the uncontained spread of COVID-19 in Italy), and eventually threatened to become a full-blown financial crisis (after the OPEC oil shock on March 7). Ultimately, the intensity of the Fed’s policy tools was targeted at containing and preventing market stresses from turning into a financial crisis while the world dealt with COVID-19.

 

Notable policy tools the Fed has employed thus far include:

Interest Rates Cut to Zero

The Fed has cut rates to zero, first on March 3 by 50 basis points, and by a further 100 basis points on Sunday, March 14. As market stresses intensified effects on short-term fixed income both in the U.S. and overseas, which was caused by interest rate differentials, the FOMC had to cut rates to zero two days before its scheduled March meeting, underscoring the urgency of the situation.

Unlimited Quantitative Easing (QE)

The Fed started a $700 billion QE program on March 14, and nine days later, it expanded the size of QE to be open-ended. To put this into perspective, after the global financial crisis (GFC), the span of QE1 to QE3 took 5 years. It took only nine days for the Fed to expand QE to be open-ended. Put another way, the Fed will buy more assets this week than it bought post-GFC during the years 2010 to 2012.

 

Commercial Paper Funding Facility (CPFF)

In order to support the commercial paper market, which is a short-term funding vehicle for the corporate sector that seized up last week, the Fed announced a $100 billion purchase program backed by $10 billion of funds to cover loan losses from the U.S. Treasury’s Exchange Stabilization Fund (ESF) (typically used to intervene in foreign exchange markets).

Money Market Mutual Fund Liquidity Facility (MMLF)

On March 18, the Fed created the MMLF to lend money to banks so that they can purchase assets from money market mutual funds, supporting functioning of the money markets. Again, this program is $100 billion in size, backed by $10 billion from the U.S. Treasury’s ESF.

Corporate Credit Facility (PMCCF, SMCCF)

On March 23, the Fed created two vehicles to purchase corporate bonds in both the primary and secondary markets. Notably, the Fed announced the purchase of corporate bond ETFs. This program to buy IG corporates was truly a new tool (not used during the GFC), which has calmed credit markets in the near term. The total size of this program is $300 billion, backed by $30 billion from the ESF.

Term Asset-Backed Loan Facility (TALF)

Also on March 23, the Fed established the TALF to buy asset-backed securities that are backed by auto, student, or small business loans. The capacity of this vehicle is included in the $300 billion to buy corporates and ETFs.

 

Our takeaways and expectation for future policy:

The Fed and U.S. Treasury are in coordination, and thus, monetary and fiscal policy are one.

The Fed is in the fiscal arena now. By creating vehicles to effectively support the debt markets and make loans to businesses backed by the U.S. Treasury, the Fed is now squarely conducting fiscal policy, and we believe this trend will continue with future policy moves.

The Fed will roll out a Main Street Business Lending Program.

The Fed announced a “Main Street Business Lending Program,” the specifications of which are currently unknown, but we believe it will be of similar structure to the ESF-backed facilities mentioned previously.

These facilities and programs are going to get larger, much larger.

In the CPFF, MMLF, SMCCF, etc., the lending capacity of these vehicles are backed by capital from the U.S. Treasury. For every dollar from the U.S. Treasury, there may be 10 dollars of lending capacity. Of the announced programs, there is roughly $500 billion of lending/market support capacity backed by $50 billion of capital from the ESF. The “Phase 3” stimulus bill upsizes the ESF by $450 billion. Put a 10x multiplier on that and $4.5 trillion is the size of market support and lending capacity that would be available to the Fed. To put this into perspective, the Fed’s balance sheet is currently at $4.6 trillion after over a decade of monetary accommodation since the GFC! A $2 trillion fiscal stimulus program could have the effect of a $6 trillion stimulus program, which is over 30% of U.S. GDP! That would dwarf any stimulus deployed during the GFC by multiples.

The Fed and Treasury are truly doing “whatever it takes.”

We are optimistic that market functioning and liquidity will slowly return. The Fed and Treasury have shown a sense of urgency to support the economy during the COVID-19 pandemic and hopefully, when the virus starts to taper off, we believe we could see a material rebound in financial assets.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

3 Key Macro Themes for the First Half of 2017

Posted on by Sage Advisory

While politics and fundamentals continue to drive the investment outlook, at Sage, we believe it is the global macro landscape which is central to investing in the first half of 2017. As the new year unwinds, we see an overall favorable backdrop for risk assets given improving global data, robust earnings outlooks, and fiscal stimulus expectations. At the same time, we anticipate slowdown in the “trump trade” – or bullish near-term momentum – given that much of the optimism is already priced into markets. Still, the macro picture remains dominated by global monetary policy, fiscal policy follow-through and a volatile political landscape, leaving markets vulnerable to wide swings, overshooting and undershooting fair value. In greater detail, here is what we at Sage see as the three main factors influencing the next six months – and how we are adjusting accordingly:

Expect a more stable first half for fixed income

After the historically poor fourth quarter for fixed income, we expect both a more stable first half and some upside potential in the first quarter. We believe the rate sell-off was overdone into year-end and expect yields to remain in a fair value range during the first half of 2017. Increased equity volatility is also on the horizon, with some profit to be had in risk assets, and a slowdown in the pace of improving economic data supportive of core fixed income returns. While rate hikes combined with upside growth and inflation potential will continue to apply upward pressure to rates, we expect this to materialize later in the year. As in 2016, we expect upside opportunities in the first half and the second half to be more about risk mitigation.

Look to international diversification within equity allocations

We believe developed international markets will benefit from the global reflationary trend, weaker currencies, and still favorable monetary policies relative to the US. In addition, international markets, particularly Europe, are attractive from a valuation perspective. Given how much optimism is already priced into US markets, and the level of pessimism toward international markets, we see greater upside overseas in the next few quarters.

Take advantage of relative value opportunities

Two markets we believe had run too far into year-end were rates and the dollar. To this end, we have pursued relative value opportunities by adding duration and Gold to our strategies in order to benefit from the rollover in both rates and the dollar. While it may be tempting to focus on the domestic front for the first half of 2017, discounting the macro picture will do you no favors. With stability for fixed income, optimism for international equities and an emphasis on relative value investing, 2017 provides ample opportunities for those who invest wisely.

For more insight, please visit our Asset Allocation and Fixed Income Perspectives or reach out to the team at 512-895-4130.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Trump’s Impact on Fixed Income Markets

Posted on by Sage Advisory

While the country prepares for the first hundred days of a new Commander-in-Chief, contrasting market dynamics warrant a closer look for investors of all types. Whether you’re following the Treasury market or your Twitter feed, here are a few factors to keep in mind when it comes to making investment decisions over the next few months.

Trump-onomics call and response

What exactly underlies so-called “Trump-onomics”? It is the aggregate effect of potential tax cuts, fiscal stimulus and de-regulation, which are presumed to be cornerstones of Trump’s economic agenda.

Unexpected though it may have been, Trump’s election has spurred optimism and firmer consumer and business data globally, raising growth expectations. The end result? A dramatic repricing of yields that has pushed equities and the Dollar higher.

While the bullish tone of risk markets makes sense, our advice would be to avoid overzealousness. A lot of optimism is now priced into markets, and the follow-through in policy and growth fundamentals will evolve slowly, leaving markets vulnerable to disappoint with periodic reality checks in 2017.

Policy follow-through is key

While Trump may be dominating the headlines and hearts of investors, the investment environment remains dominated by global policy concerns.

The macro backdrop is heavily dependent on global monetary and fiscal policy follow-through. Combined with the volatile political landscape, risk markets will be apt to wide swings around fair value.

The big picture is that the Fed has been cautious normalizing the interest rate environment, only raising rates twice in two years. And, looking forward, the December Fed meeting provided a projected path that is only slightly more aggressive than previous Fed forecasts. With these expectations now priced in, rates are fully valued and likely to drift down at the first sign of data or policy disappointment.

Factoring in the future

Taking these dynamics into account, we remain generally bullish, with data and sentiment supporting credit spreads into the first quarter.

Flexibility in fixed income will also be key throughout the year, as there are pockets of opportunity to tactically allocate across fixed income sectors. With the recent rise in short-term Treasury yields, suddenly the risk/reward characteristics for short-term fixed income investors looks very attractive.

Given the uncertainty around implementing the new administration’s policies, the market may have overshot the potential for substantially higher-rates. As the first half of 2017 progresses, look for fixed income performance to stabilize.

For more insight, please visit our Fixed Income Perspectives or reach out to the team at 512-895-4130.

 

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

 

 

Brexit Video Commentary June 2016

September 2, 2016 — In light of the recent Brexit referendum and the reaction of the markets on a worldwide basis, Sage shares their thoughts on the future and their portfolio strategies moving forward.

Build America Bonds, The Fiscal Cliff & Insurer Portfolios

September 1, 2016 — With about two weeks to go until the stated deadline for Congress to address the automatic spending cuts set to be imposed on most federal agencies, one component that may have slipped under the radar for many insurance companies is the impact that the “Fiscal Cliff” (as these mandatory cuts are being called) would have on Build America Bonds (BABs).

Brexit Vote Commentary

June 23, 2016 — The UK’s shocking and close decision to leave the European Union (EU), the second largest trading block in the world, after 23 years will create significant political consequences and economic challenges for the 5th largest global economy. In simple terms, this was a form of divorce from the EU and like most of them it will likely be messy, take years to finalize and involve long legal negotiations regarding trade and tariffs as well as many other things.

Build America Bonds — Promises Made, Promises Broken

March 1, 2013 — The Build America Bond (BAB) program, established under the American Recovery and Reinvestment Act in 2009, was touted by the Obama Administration as a more efficient way for municipal issuers to sell bonds to the public, while maintaining revenue neutrality for the Federal government’s balance sheet. The proponents of this program claimed BABs to be a new era in municipal finance that would lower borrowing costs and increase demand for municipal bonds. With the expiration of the program at the end of 2010, a total of $182 billion of BABs where issued, all of which were structured as direct-pay. In an effort to restart this program, President Obama is proposing a similar plan called “America Fast Forward” which would provide a reduced interest rate subsidy of 28%.

U.S. Election Macro Review

November 1, 2012 — The status quo outcome of the elections was a victory for Democrats and President Obama’s administration. This was countered to some degree by the return of a Republican majority in the House of Representatives which has left us with an unchanged mix of policymakers in Washington. Importantly, we note that while many of the federal elections were tilted toward Democrats, the Gubernatorial races across the country were largely won by the Republicans. Indeed, 30 U.S. statehouses were won by the Republicans, the most in a decade. These election successes were largely based on pledges to cut taxes and spur economic growth. Overall, while the election results suggest that voters have very mixed views about the direction of taxation it is clear that they are expecting their respective politicians to focus most of their attention on promoting job creation both at the Federal and local level. How best to do it will remain the debate of the day.

Insurance Investment Trends, ETFs Offer Smart Solutions

August 1, 2012 — Since 2008 the insurance industry has been facing a variety of business challenges that put outsized demands on their investment activities. Significantly lower interest rates, increased investment market volatility, rising regulatory capital requirements and a continued soft macro-economic environment have served to constrain the industry’s risk appetite and pressurize its investment activities. These conditions have motivated insurance entities to rethink traditional ways of managing investment portfolios and explore new practices that can help to manage their portfolios more effectively and efficiently. Increasingly, they are incorporating liquid, low-cost exchange traded funds (ETFs).

Multiemployer Pension Plans — Many Complex Challenges, Few Simple Solutions

November 1, 2019 — Multiemployer defined benefit (DB) pension plans, also known as union plans or Taft-Hartley plans, are often described as the smaller and ailing cousins of single-employer DB plans. Indeed, according to the Pension Benefit Guaranty Corporation (PBGC), in 2008 there were approximately 1,500 multiemployer plans covering 10.1 million participants, compared to 27,900 single-employer plans covering 33.8 million participants. As to the health of multiemployer plans, the storm of 2008 inflicted much damage on the plans’ funded status: according to the International Foundation of Employee Benefit Plans, the number of multiemployer plans that were less than 80% funded has quadrupled from 20% to 79%, with 38% of plans being less than 65% funded.