Finding Value in Callables
January 7, 2019

It’s the first full week of a new year and the market seems to have settled with the help of Powell’s words on Friday that the Fed is "…listening carefully with – sensitivity to the message that the markets are sending and we'll be taking those downside risks into account as we make policy going forward".  Also helping to calm the waters are another round of trade talks between the U.S. and China.   After President Trump and Xi met about a month ago, there has been some relief and good faith activity seen such as new orders for U.S. soybeans.  Tensions remain somewhat escalated between the two nations as can be seen in the back and forth rhetoric in travel advisories. 

Stocks are up this morning while bonds are a couple bps cheaper from Friday’s close.  U.S. Treasury 2yr and 10yr yields are currently 2.48% and 2.65%, respectively.  The curve still looks like a shallow sauce pan with the 1yr T-bill yielding nearly 10bps more than the UST 3yr (bottom of the curve).  Supply this week in US Treasury 3, 10, and 30 year maturities should put pressure on yields to rise.  However, there will be focus on the FOMC Minutes (Wednesday), Powell’s speech to the Economic Club of Washington (Thursday) and CPI (Friday).

Strategy: Bonds are still on the rich side from the view that the Fed is still on a hiking path.  However, the market is still pricing in a cut in mid-2020 being the Fed’s next move.  The market is nervous about an upcoming recession and is looking to the Fed for reassurance that they aren’t going to unnecessarily push the economy into a recession by inverting the curve directly with an additional hike.  The mood of the market currently appears to be on a teeter-totter, which explains the added volatility.  With that, bonds with call features are cheapening providing attractive yield pick up to bullet bonds.  If you are looking for added yield, consider a callable agency, muni, or newer MBS.    

Kelley Frye
Investment Officer

Scott Carrithers
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