{"id":233707,"date":"2023-04-27T18:40:22","date_gmt":"2023-04-27T18:40:22","guid":{"rendered":"https:\/\/aptuscapitaladvisors.com\/?p=233707"},"modified":"2023-04-28T11:23:23","modified_gmt":"2023-04-28T11:23:23","slug":"thoughts-on-the-curve-and-municipals","status":"publish","type":"post","link":"https:\/\/aptuscapitaladvisors.com\/thoughts-on-the-curve-and-municipals\/","title":{"rendered":"Thoughts on the Curve. And Municipals."},"content":{"rendered":"
Curves are Inverted, Term Premiums LOW<\/strong><\/h5>\n

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The market continues to price in a return to the 2010 norms of subdued inflation pressure, with term premia below zero across the curve.<\/p>\n

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\"\"Source: TS Lombard. As of 04.12.2023<\/em><\/p>\n

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While slower nominal growth could put a ceiling on longer-term yields, we don\u2019t see long-term bonds serving as the portfolio hedge they have for the last 40 years. As seen last year, given persistent inflation, the correlation between stocks and bonds flipped positive. This shift creates a dangerous situation for balanced portfolios where both core asset classes can go down at the same time. We see this as a risk that could continue.<\/p>\n

With the stickiness of inflation, we do not see Central Banks coming to rescue the economy with large scale rate cuts in the event of a recession. If they prematurely cut rates, they risk \u201cun-anchoring\u201d inflation (central bankers will be well aware of the 70\u2019s cycle). In saying all of this, we see the higher for longer rate environment as a real possibility.<\/p>\n

Given this risk, and the fiscal degradation\/lack of central bank buyers because of QT, investors are likely to require a higher term premium for longer duration securities. Higher term premiums will also limit the effectiveness of long duration bonds in asset allocation portfolios. As the charts above display, current premiums are well below their historic averages.<\/p>\n

Bottom line, with the Fed\u2019s long-term neutral rate (R*) somewhere around 2.50% – 2.75%, and the average term premium the last 58 years at 162 bps, this puts the 10 year UST above 4%. So it appears unlikely to see longer term rates retreat back below 3%, unless the Fed does cut rates to 0% again.<\/p>\n

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Is the M2 (Money Supply) Change Really that Scary\u2026 Depends on Who you Listen To!<\/strong><\/h5>\n

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My Twitter feed is loaded with (bad) takes on the recent drop in M2 Money supply that want to lead you to the belief the world is about to burn. Taking a step back, the Money Supply remains about $3.7 trillion dollars above the 2010-2019 trend (Graphic 1), far from the catastrophic drop presented by graphics showing only the YoY change (Graphic 2).<\/p>\n

Graphic 1<\/span><\/strong><\/p>\n

\"\"Source: TS Lombard. As of 04.19.2023<\/em><\/p>\n

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Graphic 2 (YoY)<\/strong><\/span><\/p>\n

\"\"Source: Liz Sonders (Schwab). As of 04.25.2023<\/em><\/p>\n

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We all know that money is leaving banks for other higher-yielding alternatives. As we pointed out in a recent update<\/a>, there are four major categories not part of M2 that are expanding rapidly (below). In addition, Nominal M2 underwent a formula change beginning May 2020 where “savings deposits including money market deposit accounts” were removed from the calculation.<\/p>\n