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  • Jonathan Poyer

The AGG Is Bad, But Is It That Bad? Yes….Yes It Is

Things are not looking that great in the markets. And that would be across the markets. 2022 has started out as one of the worst performance years in the last 35+ across all asset classes:

Stocks and bonds are both down significantly and we have not seen any real safe haven in broad markets as we have seen in previous years under duress. Just check out 2008 in the chart above.

Just looking at stocks and bonds, to maybe think through a 60/40 allocation, we are certainly in the doldrums. And it is not just the result of rates. For instance, 1994, 2015, and 2016 all saw more rate hikes than we have seen this year. But the returns have been far different. The Barclays Aggregate has only had 4 negative years since inception in 1976. In addition, since 1989, the Yield-to-Worst has dropped from 9.5% down to 3.7% while the Duration has increased from 4.6% to 6.4%:

Digging a little deeper into these fixed income markets, capitulation has been in bonds and not stocks. In 2020, we saw record outflows in bonds at magnitudes far, far beyond what we have seen before. But despite the very sharp drawdown and amazing levels of outflows, we saw a quick snap back. This time, we have seen a prolonged, dragging outflow of bond assets. Not all of this is tied to credit. Rather, liquidity and trading is pushing prices down:

But really, what is impacting securities most significantly is spread widening. Especially for securities with longer duration, these credit spreads are wreaking havoc on prices and liquidity. For high yield specifically, we are seeing near record highs. This has impacted the RMBS market severely as well. This has most broadly impacted the mezzanine tiers of the market although Alt-A has been impacted as well.

Despite strengthening fundamentals and a much better credit profile than corporates, these RMBS securities are feeling the pinch. But what might happen if these spreads were to tighten? You could see a snapback occur at a magnitude even greater than what we saw in 2020.

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