The Fixed Income Bomb: Some Facts and Considerations
While not expecting to be a deep dive, I thought that we might take a shot gently wading into some analysis of the fixed income markets.
Taking a look back at Q3, the story seems to rhyme with quarters 1 and 2: historic losses in both stock and bond markets with both falling for each of the first three quarters - "a never before seen feat".
2022 is on track to finish as the worst performance year in the last 35+ years across all asset classes:
And so how has that manifested itself while looking at where asset allocations are at present? Money market are at historic highs as dry powder waits on the sidelines:
And, man alive, what was once a hedge to years when equities were having a tough go at it, the bond market has not been of any help. In fact, the bond market has been a major source of drag as it appears that the bond bull market might be officially over and done:
So what to do? I have heard it said that when markets are risk off, it looks for cash wherever it can get it. That means everything gets sold and this pushes correlations to 1. It seems like we have reached that point.
However, when money comes back in, it is very discerning. It is going to find the greatest reward with risk that it can find and fundamentals will be a very important consideration. We have seen blue chip strategies with covered calls perform okay. Perhaps a case can be made for real estate as well. Afterall, the interest rate on mortgage debt outstanding is 3.3%. Perhaps we are seeing the balance sheet shift for homeowners turning to the mortgage on the asset side and the home on the liability side of the ledger. Is this a potential area of opportunity as money comes back to the market???
More on that in a future note...thinking for now.