Transcript
It was an interesting year, you know, we had, I think three, you know, my guess, events that occurred, the first event was being the banking crisis that we saw in the first quarter with some bank failures that they were being managed probably pretty poorly from a risk management perspective. And then you had the concerns about increased issuance from the Treasury, and what that was going to do to longer term interest rates. And then in the fourth quarter, you know, we had a pretty significant rally in risk assets and interest rates as the Feds become a little bit more dovish, on future policy.
The move came down to the Treasury pushing off issuance from being out the curve to maybe more T bill and shorter duration issuance, along with the Fed coming out. And given the better inflation data that we've been seeing, talk about for the first time, maybe they've reached a level of rates that from a policy perspective that they don't need to go any higher. And that coupled with the expectations of some cuts in 24, really set rates falling, and then as rates fell, and the Feds kind of shifted their focus from, I would say, the inflation concerns to more growth concerns, meaning they don't want to over tighten, risk assets, kind of kind of fully priced in the soft landing type scenario, credit spreads equities, other risk assets.
What to Expect in 2024
I view as three different, I guess, three big questions for 2024. Is that is inflation going to continue to move down in a way that allows the Fed to follow through on their rate cuts. And I think the other offshoot of that is, is the Fed going to meet the market in terms of rate cuts, there's about 75 basis points of difference between what the market is expecting, which is roughly 650 basis points versus what the Feds kind of indicating through their economic projections, which is 75. And so how that reconciles whether it's the Fed moving towards the market, or the market moving towards the Feds going to be a pretty big driver in 2024. And additionally, it's all kind of related. It's the soft versus hard landing, you know, every hard landing looks like a soft landing at one point. And so as we learn more about the economy, and how the tight policy from the Fed is going to be impacting various parts of the economy, it's going to, you know, we'll see ups and downs in various areas. And we'll see if the economy can actually handle in aggregate what's going on from policy.
Investment Implications of Declining Rates
if you look at historically, when the Fed starts to cut interest rates, I think the a slight misnomer is that all interest rates fall by the same amount. And I think you really have to be a little bit more nuanced on that where, you know, the Fed cuts interest rates, which is going to impact the shorter term bonds more because that's has more influence on Fed policy. But the impact on longer bonds is a little bit less certain. You know, if interest rates fall, which means that we're closer to economic growth down the line, so therefore, inflation could rise. So long term bonds could go up. So when you're building a portfolio, you have to think about all Parts of the yield curve. And I think that's, that's something that when you're putting together a bond portfolio, it's just not as clear cut necessarily as just buying duration, he's really asked to be more nuanced on, we're positioning bonds across the curve, given our expectation, and it also matters. How many cuts we think the Fed has to end up doing. If the Fed doesn't have to cut all the way back down to two to two and a half percent. They only have to get to three, three and a half percent that has pretty big consequences for longer term bonds, given where they are trading today.
It's our view that the Fed will be cutting rates 75 to 125 basis points in our from our perspective, and that you will probably have a flat two positively sloping yield curve by the end of 2024. Another thing given how much performance has been pulled forward, in our view, in terms what credit spreads did in the fourth quarter, expecting that soft landing? You know, we're not saying that there's going to be a recession, but we have to be aware that that's a possibility. And right now, we're credit spreads are priced at that level in terms of expecting that soft landing, you know, it's spreads are tight. And we think that being higher quality than the normal probably makes a lot of sense, if that hard landing ends up being an outcome.
Rates were clearly attractive in the beginning of the fourth quarter last year, but I think if you still look at where all in yields are on high quality, fixed income portfolios, you can still earn you know, four to 5% maybe more if rates do follow a little bit so you know, yes, the probably the peak was has passed, but I still think that given we're all in yields are in fixed income, you know, it's still as a very important part of an overall asset allocation and and still should be getting looks from a investment perspective.