Even though the front end of the curve is rising with rising hedging costs, in our view net hedged yields are still attractive.
Figure 2: Net Yield to Worst (EUR)
Figure 3: Net Yield to Worst (JPY)
2) Volatilty Can Create Opportunity
Although we expect more volatility in the market over the next coming months as the Federal Reserve moves forward with its first rate hike in the US, we believe the majority of the rate hikes expected in 2022 have been priced into the market already. The unknowns in this cycle remain inflation, the unwinding of Quantitative Easing and the reduction of the Federal Reserve’s balance sheet. These factors may potentially determine the shape of the yield curve for the remainder of the year and will present the market with continued volatility, and opportunities.
3) Credit Fundamentals Intact
Our view is the fundamentals of taxable municipal credits remain sound and we expect growing investor demand for high quality, monopoly-like municipals where issuers have the ability to raise taxes and user fees on their essential services. This allows issuers to maintain adequate debt service coverage, stabilizes credit ratings and reduces bond price sensitivity to rising rates and higher inflation. Furthermore, we believe active management with tactical trading in these volatile periods should create alpha opportunities for the remainder of 2022. In this current environment, we will continue to maintain some cash and liquidity in portfolios to take advantage of these opportunities, and would welcome any additional capital allocations.
Availability of this document and products and services provided by MacKay Shields LLC and/or MacKay Shields Europe Investment Management Limited (collectively, “MacKay Shields”) may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for informational purposes only. It does not constitute investment advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction.
This material contains the opinions of certain professionals at MacKay Shields and are subject to change without notice. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.
Past performance is not indicative of future results.
©2022, MacKay Shields LLC. All Rights Reserved.
To obtain entire/whole article, including full disclosures and source attribution which must be read with and form the complete version of the above commentary, please select “Download Article” above.