Around the Horn: Fixed Income Roundtable with UBS Asset Management
The desk highlights a resilient fixed income market, aided by recent macroeconomic signal adaptability, as outlined in UBS Asset Management's recent roundtable discussion. Per the full note, January saw positive returns across major fixed income indices, with both the U.S. Aggregate Treasury and Municipal Bond indices up by approximately 0.5%. As we move through Q1 2024, the focus will likely be on assessing further Fed policy adjustments and reactions from bond investors, particularly as earnings and inflation data begin to surface.
What the desk is arguing
The desk believes that despite January's initial uncertainty, the fixed income market's resilience indicates investor confidence amid evolving economic signals. According to UBS, this positivity is reflected in the 0.5% gains within key indices like the U.S. Aggregate and Municipal Bond indices, highlighting a strong start to the year.
Furthermore, the potential for year-long attractive returns in the fixed income space remains a focal point, particularly as the Federal Reserve continues to signal its policy direction in response to ongoing economic data trends. Such dynamics are critical as traders anticipate how the Fed might pivot moving forward.
Where it sits in our coverage
Our current consensus target for the USD paired against the EUR is 1.075, aligning closely with projections from jpmorgan at 1.10 for March 2026, while bofa estimates a more conservative 1.04. This frame places our desk's viewpoint near the upper range of expectations.
Given the robust macroeconomic data and the anticipated Fed policy decisions, this stance aligns with the bullish outlook for fixed income from several contributors while positioning itself directly against more cautious forecasts.
How other firms see it
Several firms are aligning with the optimistic view of the fixed income market trajectory, including jpmorgan, which indicates a bullish stance. Conversely, firms like bofa project a more bearish perspective, suggesting limited growth in the short term.
It's essential to monitor the relationship between fixed income and major currency movements, particularly looking at how the USD/EUR exchange rate may be influenced by Fed decisions and investor sentiment in the upcoming weeks. Trends in inflation data will also be crucial for gauging further market behavior.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01January saw fixed income indices, including U.S. Aggregate and Munis, gain about 0.5%.
- 02UBS Asset Management stresses resilience despite initial market volatility.
- 03The Fed's continued policy signals will greatly influence bond market dynamics.
- 04Traders should watch for shifts in market sentiment as macroeconomic data unfolds.
Market implications
Traders should closely observe the USD/EUR exchange rate around the anticipated Federal Reserve policy announcements, particularly as inflation data is released. A sustained increase in bond yields could signal a bullish sentiment shift that may influence major pairs moving forward.
Risks to this view
A significant reversal in this outlook would occur if the Federal Reserve indicated a firmer stance against inflation through unexpected rate hikes or policy shifts, which could destabilize investor confidence and tighten spreads.
Welcome back to our ongoing series Around the Horn with UBS Asset Management's Fixed Income Team. I am pleased to welcome this month's featured speakers, top portfolio managers, and business heads from AMs, MUNI, taxable fixed income, and liquidity teams. We'll hear candidly from them on markets and what they believe financial advisors should be focused on within the fixed income space.
Joining us today, we have Anthony Liotti, head of the Fixed Income SMA Advisory Group, and our moderator for today. Anthony is joined by Dave Walczak, Senior Portfolio Managers for AMs Liquidity Strategies, Dave Vignolo, Head of AMs U.S. Corporate Fixed Income Strategies, David Michael, Portfolio Manager for Emerging Markets, and Ryan Nugent, Senior Municipal Bond Portfolio Manager.
As I mentioned, Anthony is going to moderate our discussion today. So, with that brief introduction, I'll pass it over to you. Great.
Thank you, Siobhan. Much appreciated for that. As you heard, we have a really good lineup here, a little bit thinner than we typically do.
I did some scheduling, but nonetheless, a great team here to get us through the February around the horn call. So, let's – I'll begin with some macro comments and then turn it over to the PMs. But I'd say this, you know, despite the initial uncertainty in January, the market definitely demonstrated quite a bit of resilience, you know, adapting to the evolving economy and policy signals.
For the month, broadly speaking, just about every major fixed income indice turned a good start to the year, decent returns considering that it was a very unstable and volatile rates market. And, you know, to kind of give you just a little bit of look into returns in January, both the U.S. Ag, the main U.S.
Treasury Index, and the Muni Index all posted positive gains of about half a percent. Nothing to write home about, but I think if you analyze that, that would be a very attractive gain for the year. At the Fed's last policy meeting, which was in late January, it was widely anticipated and the committee did decide to keep the Fed funds rate unchanged and also reiterated their less dovish view on further cuts, which was, I'd say, further reiterated by Powell's testimony yesterday, where he stated that there are no hurry to cut, quote, unquote.
Powell told the Senate Banking Committee that the economy remains strong, the labor market is not a source of significant inflationary pressures, all right. Today, though, we did see the release of the monthly CPI, otherwise known as the Consumer Price Index, which did spike much higher than anticipated. You know, we do tend to see some seasonal adjustments during the month of January, but nonetheless, the figures came in high on both the headline and the core, and the core saw the biggest monthly gain since August of 2023.
So we all know these single numbers don't necessarily make, you know, we don't necessarily look at them as, you know, future trends, but clearly, you know, it is important to note that this is a key leading indicator, and it does support the Fed's recent comments and lack of action to remain on the sideline and be a bit more, exhibit some further patience. I would say as both policy and the presidency cabinet takes shape, the obvious challenge here facing investors globally is uncertainty, right? We're dealing with this a bit every day, even on weekends now.
How do we factor in tariffs? At what level? To whom?
Do we factor in a smaller workforce due to deportation, coupled with government layoffs? Do we factor in higher rates and the potential for more debt, or refactoring lower rates by the way of an economy that is once again supercharged via tax cuts and the American reinvestment? It is challenging.
Markets don't like uncertainty, and I'd say, broadly speaking, that is what we are and will probably be dealing with for the foreseeable future. I will say this, before I turn it over, let's stick to the fundamentals. What remains true is that the economy is strong.
Yields remain elevated across the yield curve, and credit remains on solid footing, and I think you'll probably hear that reiterated by the PMs on the call today. This provides a good investment backdrop for fixed income investors. We've got attractive yields.
We've got clients who are being compensated well in the form of consistent and predictable levels of coupon interest in the portfolio and holdings, which is obviously the main reason for their investment in the asset class. With that, let me turn it over to Dave Walczak on the front end. Dave, why don't you take it away, my friend?
Yeah, thanks, Anthony. I think you did a really good job in terms of laying out some of the key components of the CPI report and just the broader backdrop, but maybe just a few additional items on the CPI report today. It was pretty interesting when looking at that core figure.
We did see the 0.4% rise month for month. That was actually the third consecutive January where we did see a rise of 0.4%. You were mentioning the seasonal effects earlier.
I was reading some commentaries and it makes sense that we would tend to see a stronger figure in January. A lot of companies do tend to, if they are going to take any pricing actions, do so in January. But even with some of the seasonal adjustments that we see every year, it still comes through with a relatively strong report, at least as we've seen the past few years for January.
I think in terms of how the Fed is reacting to it, as we heard from Chair Powell today actually testifying before Congress, and as you mentioned yesterday, I think he acknowledged that there has been progress on inflation, but clearly not quite there yet in terms of reaching their 2% targeted goal. What that means for them from a policy standpoint is, I think, and as Powell indicated today, they're likely going to keep policy restrictive for the time being. That means likely keep rates on hold here, at least for the next few meetings.
Looking at the reaction in Fed Funds futures today after the CPI figure, we did see some adjustments, which isn't too surprising. So now the first meeting that's pricing in a full 25-basis point cut is actually the December meeting, showing about 27 basis points worth of cuts. We did see on the back of the CPI report about nine basis points of cuts being taken out of the curve.
So not surprising to see that reaction, given the strength that we did see in the inflation report. So yes, I think the takeaway is the Fed will continue to be data-dependent. I think as the Fed has always said historically too, they don't necessarily make adjustments based on one month's data.
They'll want to see any persistence in terms of the underlying strength of inflation over the next several months before they would consider a change in tax from a policy standpoint. But as you mentioned too, there's a lot of other cross-currents besides just the reported inflation. Of course, any news on tariffs, any news on legislation that's put forth by Congress.
So a lot of variables and unknowns for the Fed to weigh in terms of how they set policy going forward. Just looking in terms of what we're seeing in terms of flows here in the front end, money market fund flows continue to be strong. The last report that we got with data through February 5th, money market fund AOM across the industry stood at just a little bit over $6.9 trillion.
That's up about $70 billion year to date. So continue to see flows into money market funds. So I think obviously with rates being on hold at the Fed meeting in January and expected to be on hold here over the next several meetings, it continues to be a favorable backdrop for money market fund assets.
Moving a little bit further out the curve, just in terms of what we're seeing in kind of credit space and also the shape of the curve, you mentioned, Anthony, just corporate credit kind of being still quite good and attractive, looking at one to three year OAS currently that's at about 53 basis points. That's about three tighter year to date. It is a little bit wider than the 49 base point height that we saw back in November, but still, you know, spreads are overall hanging in there.
And again, just comparing where spreads are today at 53 basis points, compare that to the 59 base point average over the past year and 79 basis points over the past three years. And you can kind of see, you know, spreads still remain, you know, on the tighter end of the range there. But still, you know, not like we're seeing any, you know, near term things causing us to really get concerned overly with credit, you know, things continue to hang in there.
As it relates to the shape of the curve here on the front end, you know, I think that is another interesting point to bring up, especially if you look at the three month to two year part of the curve, you know, that currently stands at positive two basis points and that's up about seven basis points today alone on the back of the CPI data, and much steeper than the negative 140 basis points that we saw back in early September just before the Fed started cutting rates. So I think that, you know, continues to be a theme here that we're seeing in the front of the curve and across the curve more broadly, you know, just that we're starting to see a more normalized shape of the yield curve. So again, for fixed income investors, I think that's, you know, at least a much better environment than, you know, clearly being faced with an inverted yield curve.
So with that, I'll pass it over to David Nolo to talk about corporate credit further off the curve. Thanks, David. I think, you know, on the investment grade side, you know, corporate bond spreads, you know, for the start of the year, these last six weeks have really been, you know, David Walzak mentioned in the front end, you know, quite resilient.
Our spreads have really been range bound. I mean, I'd say the movement tight high to lows has been roughly five basis points. So we're sitting, you know, around 82 basis points.
So spreads, even though we've seen macro volatility and this and that, the overall movement in the corporate bond market from a spread perspective has been, you know, very, very minimal. And I think, you know, we've seen a lot of, every year in January, we see a lot of new issue supply. This year was no exception.
Actually, we broke a record for January at 200 billion of new issue supply, which was well choreographed. Everybody's expecting a position for it and it was well absorbed in the demand, you know, quickly took that in as, and I think why did the spread stay where they are, even though we had a record amount of supply in January is because yields are attractive. I mean, you know, Anthony mentioned it, David Walzak mentioned it, you know, with overall corporate yields in most part along the curve, you know, above 5% historically, that's a pretty attractive entry point for investment grade credit.
And I think a lot of things in terms of the Trump administration, I think, you know, Anthony talked about fundamentals and positive growth, and that's definitely one of the key drivers, but really the other thing is with the Trump policies and what's going to happen here, the markets are really, I think the credit markets are really focused on, you know, tariffs and fiscal policy and how does that, you know, unfold over the coming six to 12 months. And there hasn't been really material implementation there. There's been a lot of talk and then changes in terms of the tariffs and, you know, we saw what happened with Mexico and Canada, they got pushed off.
So it's been very, it hasn't been so black and white abstract and hit us, you know, fast and furious right over the gates from those two areas. So that's been, you know, from that standpoint, you know, credit's been, you know, a good standing there. And I think that, you know, when you look at these types of things and you see the first six, you know, the administration and they start the policies up, I think Anthony mentioned at the start, you know, yields, it looks like you're going to stay high and stay higher for longer because, you know, the uncertainty around the fiscal and tax debate.
So as that unfolds, you know, yields up around, you know, the 10-year treasury around 450 and corporate spreads in the fives. That's attractive for investors as long as growth remains, you know, positive. I think the other thing that's interesting is that the expectations that all the, you know, the U.S. policies, they're all targeted to boost U.S. growth versus other regions in the world.
So when you look at Europe, which is flat growth and other parts of the world that are, the growth is struggling and the focus here to push U.S. growth up, that draws money in from around the world into our asset class because growth is going to stay, you know, positive and supportive. And that gives comfort to investors overseas looking to invest and to invest for great credit. The other thing I like to talk about from a policy perspective is that the optimism on deregulation and how that's going to support corporate America and businesses and invest from great corporate bonds.
So another thing that's a very, I think, supportive, positive driver for credit, and I mentioned the tariff situation, we haven't seen a blanket tariff implementation. So is it kind of, it looks like that'll be more fluid, which that's a little more palatable. We can handle that and then manage that.
But I think, you know, that's another factor that I think is very positive for credit. So, you know, as we're going through it, fourth quarter earnings have been kind of ongoing right now. They were good.
But really what I like to look at, you know, going forward is that early indications on first quarter growth from some of the Wall Street firms, it's over 2%. So that's good. That's good for corporate America.
So, you know, all that's good from a positive, from a fundamental standpoint, policy standpoint, and the technical side has been the driver of spreads of demand for all of 2024. And that was the most dominant driver, which was the attractive yields and put broad investors under the asset class. And I think, you know, David Walzak mentioned this about spreads being relatively toward the tight end of their historical range.
That's no different for my stuff out the curve a little bit, and we're definitely toward the tight end of the range, but really overall yields have kind of been winning the battle because everything else is supportive. The Fed, even though they might be pausing now, and they might not cut till December or whenever the changes again, but we all know they've got a lot of ammo. So if things change and things start to slow suddenly at some point, you know, this year from a growth perspective, they got the ammo to cut fast if they have to.
So that's very, I think from a kind of your back pocket, and I think as an investor, that's that gives me comfort that they have that opportunity to cut if they need to, if they have to revise, even though lately the cuts have been going the other way and being taken off the table, but we know that they have them. So I think as we kind of move through in the first quarter here, you know, we're still very comfortable with credit. From a curve perspective, we really like the belly of the curve.
And I say that because the treasure curve is continuing to become more positively sloped. The two's 10 treasure curve, I think the pickup now is around 25 basis points. It was out at one point in the 40s.
So as that treasure curve normalizes, it becomes more positively sloped. It makes that belly of the curve, I think, very attractive for investors. You lock in that yield for longer and you have the advantages as those bonds mature and become shorter bonds and they get repriced off a lower treasure yield, you get that price appreciation, which I think is very attractive.
So we still like financials. We still like the energy sector. We're a little more cautious on the pharma sector and managed health care.
We still like the utility sector. So there's a lot of good things, but I would say to summarize, there's definitely going to be more idiosyncratic risk in 2025. We'll have to be more tactical and nimble in this environment because of the ebbs and flows.
And probably a little more, you'll see a little more rotation for our strategies from a sector perspective as we see opportunities present themselves. But I think in general, as we go through this environment, quarter by quarter right now, credit is on very strong footing and I think continues to be a very attractive asset class for investors with where the yield is, where growth is positive, the Fed still, even though they're pausing a little longer than was initially thought, still have the chips on the table to cut if they have to down the road. And I think the inflation view that even though it's sticky in the numbers of today, we're not what we were expecting or we're a little stronger than expected.
There's still belief that eventually it will ultimately start to trend down again. So I think that's all positive for credit. So with that, I will pass it on to David Michael to talk about the emerging market sector.
Thanks, David. Overall, risk tone continues to be set by U.S. rates, President Trump and tariff related headlines. Over the past month, emerging market spreads have been resilient to political risk and these tariff headlines and have tightened by six basis points.
We combine that with a small recovery in U.S. Treasuries and emerging market debt have total returns around one percent or higher for the last month. Emerging market primary debt supply started off the year fairly robust and slowly declined as we moved through January, leaving net supply around 80 billion dollars.
This was mostly offset by over 60 billion dollars of coupons and maturities we had in the month. And in 2025, we expect to see the same positive technicals that we've seen over the last two years, where investors are receiving more cash and coupons for maturities than there are when it comes to availability of new bonds. Further, emerging markets are attracting more and more cost over non-dedicated inflows.
They're primarily accessing the primary market, but we've also seen an uptick in retail flows and ETFs net buying emerging markets the last few weeks. This just adds to the positive technicals for emerging market. Some headlines that have been driving E.M.
Ruska over the last few weeks, Lebanon lawmakers elected Army Commander Joseph Anun as president, and this ended more than a two year political stalemate. We see the formation of a government as a positive first step to opening up the economy, accepting foreign aid to rebuild the country and restructuring of their sovereign bonds. Mexico continues to face tariff threats from President Trump.
Trump agreed to a 30 day pause on tariffs after speaking with President Scheinbaum, and Mexico took steps to appease concerns on border security and drug trafficking. Tariff threats are likely to continue to reemerge, not just this month, but again, before and after that April 1st deadline. This is more of what we're expecting over the next few years.
But again, as we've seen over the last month, a lot of this is negotiation and really trying to level set the trade balance. In Venezuela, the US agreed with Maduro on deportations and prisoner exchange that boosted sovereign bonds as it reflected an increased chance of a pragmatic US approach and eventually a possible debt restructuring. Last weekend, Ecuador held the first round of their presidential elections, with results shocking both markets and pollsters when opposition candidate Luisa Gonzalez emerged with a 43.95 percent of the vote to incumbent Daniel Naboa's 44.18, leading them in a dead heat heading into the second round in April.
And in December of 2024, Argentina's crude oil production averaged 765 million barrels per day. This surpasses Colombia and now leaves Argentina as the third largest crude oil exporter in South America behind Brazil and Venezuela. We continue to see positive tail risks that can emerge over the next year in emerging markets.
As geopolitical tensions ease and or ceasefires are negotiated, this leads to a very positive backdrop for EM. A consensus on Trump policy implications and inflation on the dollar may be challenged and are expected to remain volatile. Market volatility mixed with political headlines underpins what David Nola was saying earlier, the importance of having active managers and fixed income and emerging markets.
In this environment, we believe idiosyncratic stories in emerging markets are likely to help drive positive performance. Now, let me hand it off to Ryan for an update from our meeting. Thank you very much, David.
The municipal market was able to start 2025 off with a positive January, albeit with some yield volatility in the middle of the month. However, the Bloomberg Municipal Index was able to post a positive 50 basis point return in January and start the year off in the right direction. Supply and demand has been a major theme in 2024 and 2025 started off with a similar trend. 2024 experienced a tax and primary supply spike of 36 percent year over year as we surpassed 500 billion in issuance for the first time ever and reached 526 billion in new issue supply for 2024.
January started the year off with 37.1 billion in new issue supply, up about 8.6 percent over January 2024. Initially, this level of supply was well received as reinvestment remained strong, but demand wasn't able to keep pace as the month progressed. We saw industry outflows in weeks one and three of January, according to LIPR data, which put pressure on yields, forcing them higher.
However, strong demand based off of inflow data in the final two weeks of the month brought the Bloomberg Municipal Index back into the positive. Supply estimates for 2025 range from unchanged to slightly higher, but it appears that after a strong January issuance, most dealers are looking to push their estimates higher for 2025. The wild card for supply curve direction of rates are the current policies of the President of the United States.
There appears to be many investors employing a wait and see approach in the muni market, just looking to see how the market digests the various topics and rhetoric on taxes, tariffs, and international policies. Having said that, we've employed a duration neutral stance as we enter 2025 and will consistently revisit as more clarity emerges. In January, the municipal curve experienced a month of full steepening, with a rally in the two, five, and ten year maturities and a sell off in the 30 year maturities.
The two year rallied the most, with yields lower by 13 basis points, while the five year while the five year yields were lower by eight basis points. The ten year yield rallied by six basis points, while the 30 year yield experienced a sell off of seven basis points, with longer dated paper losing some reinvestment steam as the month progressed. As we spoke about how we approached, I'm sorry, as we spoke about, as we approached the last quarter of 2024, the inversion of the municipal curve has all but disappeared.
While the front end of the curve may still experience some flatness, it isn't as punitive as it has been as most of the case in 2024. We're still employing a barbell strategy to start the year by pairing short term maturities and VRDNs, variable rate demand notes, with the 17 to 22 year maturities. We're still strategically underweighting the three to 12 year area of the curve.
The most compelling issuers are opportunities present themselves. However, we believe that the uncertainty we are experiencing to start 2025 regarding President Trump's policies will create changes to this mix as we move forward throughout the year. So we'll constantly revisit on a month to month basis.
And back to you, Anthony. Thank you to all of the participants. I think one of the constants on this call that we've had over the past couple of years has been the word volatility.
That has not stopped, and nor do I think from what you've heard from today's call, it will. I think the constant theme or narrative on these calls has been to utilize patience. We're putting money to work, and we're here to provide that guidance when appropriate, especially to kind of leg into the market, especially when we see those pockets of opportunity of volatility like we're seeing now.
So thank you again, and we look forward to talking to you next month. Stay well. Bye. along with our video offerings, such as UBS Trending.
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