“Don’t Pick Up Nickels in Front of a Steamroller:” Warning for Fixed Income Investors

Wells Fargo. We are up almost 2% right now for the b Welcome back to Morning Trade Live. It's time now for the big picture. Let's welcome inCooperf fixed iResearch and Strategy, Schwab Center for Financial Research. Good morn you, coop. Hope you hace weekend. What's your outlook for the week? Morning, Sam. I hope you had a nice weekend too. If you look at the week ahead, I do think that it's going to be a light week er. Obviously, we get the fed meeting minutes on Wednesday, so I think that thoing to be important inerms of kind of the big event this week. I of light under the surface of ultimately, what led the fed to hike interest rates. And I wouldn't be expecting too much in terms of that. So we all know that they're very focused on the inflation front, and they're just seeing it run a little too hot and continu remain too hot for an extended period of time. If you just look at PCE or CPI, it's been running above the Fed target for five plus years now. So I do think that that obviously is a concern. So in terms of what will probably come out of the fed minutes, I think that that's goingbe important. But also more importantly would beny potential about further rate guidance. So in our expectations rht now, Sam, we do expect thated's going to hike at least one more time this potentially into next year. do think it really boils down to the breadth as well as theace of inflation. So we saw last week that not moving in the rightection. And also the breadth isn't necessarire. So I think that that's going to be important for going forward. Yeah. And as we can see here according to CME Fed Watch, I mean a lot of icing in has been sort of backed out until December. Now for that rate we've gone down to 21.6% for an October possibility here. So as far as what you're saying to clients right I mean, you and I discussed last week, wouldn't suggest extending duration just yet. I mean, how e a lot of t around, obviously nomi GDP running at 8.5%. S there is some expectation we co see some further upside from here. Yeah. So I think whak down is fundamentalactors of why why yields are m a little bit higher versus the momentum s of things. And if we look at the fundamental factors, you and I have spoken about tfore, but we like to break it down into fed fund fed funds expectation Excuse me. It's a Monday morning here as well as inflation ctations ase term premium. And if you look those like you mentioned haven been backi off a little bit. So those fmental factors are starting tolow a little bit. However, the momentum side of things is still the we don't think that it's really an opportune time to try to add duration into your portfolio, just because it's really akin to trying to pick up nickels in front of a steamroller. At this point, it's not to that we would note too favorable on fixed income in this environmendo think that there are opportunities within the fixed income environment because of whe absolute yields are, and that really bodes well for longer term income oriented, investor in oriented investors, as well as inv who are more focused on a total return mentality. Okay, let's talk about some of those opportunities becauseou've highlighted muni bonds. You an I have spoken about that before. They did have a tough September, but looking at the flow of funds and some of Bfa's charts on Friday for the week. And Muni bonds had their biggest inflow ever at $4.2 billion. Just break down what's going on there. Yeah. So it's been a very difficult month for munis in September. And they actually declined over about 5%, which is pretty bad month for the market overall. But really what that's led to is it's led to valuations as well as yields to be fairly attract levels, in our view. Sam, if y just look at the Bloomberg Municipal Bond Index, that's at levels that haven't seen in about the past two decades. So we do think that that's a pretty attractive point to consider. Muni bonds also, a thing that we like to look at is the muni to treasury ratio. And that's really metric that compares the yield on a Triple-A rated municipal bond to that of a Treasury. And right now, that's north of 70%. That got all the way up to as high as 80%. And again, thatwast we've seen over the past year. So historically speaking, what that really means is t municipal bonds are paying attractiveevels of income re to where treasuries are right now. A we look forward, a higher muni to treasury ratio tends to be that muni's o longer term period, whether it's six months or 12 months, have historically outperformed that of treasuries. So for investo are in those higher tax bra right now, Sam, and it's not even just the top tax bracket of 40.8%. It can even be a moderate tax bra save 24%. For example, we think that the tax equivalent yield that munis can offer right now can fairly attractive to those investors, assuming that they're investing in a tle account. Okay. Understood. How are you looking at credit spreads right now, you and thett wondering, are you hearing a lotut how this is flashing yellow warning signs? Not red at the moment. I were looking back at, you know, 2008, butt certainly is the direction that they're heading in that some people seem to be notiht now. I'm just about that space at the moment. yeah, definitely some widening there is ae bit concerning, but like mentioned, we don't think that they are flashing red s right now. And in fact, i look at the high yield corporate bond market as well as the investment grade coe bond market, right now, our team has a little bit more of a favorable view onthosa little bit surprising, part of the reason is that theyoffere absolute yields. So likeve mentioned for other parts of thed income market, those yields that high yield corporate bonds offer, as well e bonds offer they are fairly attractive in this environment. Now, I won't dismiss that. do further rise then that is a potentialfor it. So I'd be a little bit cautious about that. So we're not suggesting that investors dive all in. But we do think that a small allocation to types of investments can make sense, assuming that they hav a longer time horizon, well as a little bit greater of a risk capacity and risk tolerance to stomach those potential tility g. Understood. Cooper. Always a pleasure to pick your brains on a Monday morning. Thanks so much for that.