GW&K Taxable Commentary – July 2022


GW&K Outlook and Positioning

Uncertainty is set to remain elevated for the time being and will only be made more acute by the Fed’s decision to offer less explicit guidance going forward. The significance of each
additional inflation reading, payroll report, and GDP print will therefore be even more pronounced. There is also the potential for other risks to manifest and alter the current narrative, given the slowing US housing market, a downbeat consumer, geopolitical friction, and various energy market dislocations.


July 2022 Review

Fixed income volatility receded in July, as fears of a recession overshadowed persistent price pressures. Preliminary second quarter GDP data confirmed a slowdown across the economy, even as inflation readings sit at or near multidecade highs and well above the Fed’s target. Other readings are similarly mixed, with a still-solid labor market and healthy personal spending alongside tentative business investment and morose consumer sentiment.



The FOMC raised rates 75 basis points to 2.25-2.50%. The accompanying policy statement acknowledged softness in spending and production even while noting strong job gains and elevated inflation. Powell’s post-meeting comment that it might soon be “appropriate to slow the pace of increases” seemed to have been widely interpreted as dovish, lending support to both rates and risk assets. The futures market is pricing in four more hikes in 2022 and the start of the next easing cycle in the first quarter of 2023.


Interest Rates

Interest rates rallied across the curve and the Treasury market posted its best monthly performance since early 2020. The prospect of an economic slowdown and the need for less restrictive monetary policy led investors to temper expectations for further hikes. The yield curve experienced additional flattening as a result, and several segments moved further into inversion territory. Breakevens were little changed, reflecting investor confidence that inflation has peaked and will reach the Fed’s target before long.



Corporate spreads briefly touched multi-year wides early in July before rebounding to close tighter on the month. Sentiment was lifted by the view that the worst of the tightening cycle had been priced in, while corporate earnings provided a further boost with results generally free of any major red flags. The investment grade primary market was active and new issues traded well at launch, while the high yield primary market remained essentially closed. Rating agency actions were broadly balanced and the default rate stayed below its historical average.


Mortgage-backed securities outperformed Treasuries as spreads tightened throughout the month, benefiting from a decline in rate volatility. Lower origination as a result of higher mortgage rates and better-than-expected prepayment speeds also drove tightening. The Fed gave no indication that it intends to change its quantitative tightening plan, suggesting limited near-term risk of outright MBS sales.












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