Displaying items by tag: rates

Tuesday, 26 March 2024 18:11

Bonds Slightly Higher Following FOMC Decision

Bonds and stocks were higher following the Federal Reserve’s decision to hold interest rates steady. The rally was a result of Fed Chair Powell reaffirming that rate cuts were still on track for later this year. He also added that the ‘policy rate is likely at its peak’. 

The dot-plot also showed that FOMC members are forecasting 3 rate cuts by the end of the year, which is in line with the market’s consensus and a reduction from their previous forecast of 4 rate cuts. Committee members also upped their forecast for GDP growth to 2.1% from 1.4%, while modestly lowering their forecast for the unemployment rate to below 4%. 

According to Fed futures, there is a 75% chance that the first rate cut will be at the June meeting. However, the larger message from Powell is that the Fed can afford to be patient given that the economy remains in a healthy place despite restrictive monetary conditions. 

Another catalyst for equities and fixed income was Powell’s comments on the balance sheet runoff. So far, the Fed has reduced its balance sheet by about $1.4 trillion since June 2022 by letting proceeds from maturing Treasuries and mortgage-backed securities roll off the balance sheet instead of being reinvested. Powell indicated that this round of quantitative tightening was nearing an end and that discussions were ongoing about when it would be ‘appropriate to slow the pace of the runoff fairly soon’.


Finsum: Stocks and bonds were higher following the Fed’s decision to hold rates steady. Two particular catalysts were Chair Powell’s affirmation that the Fed’s next move would be to cut rates and comments about slowing the pace of quantitative tightening.  

Published in Bonds: Total Market

Blackstone is the largest alternative asset manager, with over $1 trillion in assets as of the end of last year. According to FactSet, Blackstone has a 19.7% revenue share of the diverse alternative investment market.

In total, it has stakes in 230 companies and around 12,500 real estate assets. While high interest rates and a significant slowing in IPOs and dealmaking have hurt many financial stocks, alternative asset managers are an exception, with a 45% gain in 2023, outpacing the S&P 500’s 24% increase. Blackstone climbed nearly 70%.

Blackstone is bullish in 2024 as it sees a bottom in real estate and an improved environment due to the Fed cutting rates. However, it doesn’t see a V-shaped recovery. Instead, the firm anticipates a longer period of bottoming out when there could be more dislocations. 

Weakness in real estate is reflected in Blackstone’s results, as 2023 earnings were down 23% from the previous year. Real estate revenue was down 51%. Its two major real estate funds were down 6% and 4% for the year, respectively. As a result, the firm only spent $15 billion on real estate investments, down from $47 billion the previous year. 


Finsum: Blackstone is the leading alternative investment manager in the world. Its stock was up nearly 70% in 2023, despite a double-digit drop in earnings. The company is bullish in 2024 due to the anticipation of a bottom in real estate and improved conditions with lower rates.  

Published in Alternatives

Diamond Consultants recently completed the 2023 version of its Advisor Transition Report to identify the most important trends in financial advisor recruiting. Overall, recruiting was up 7.5% compared to 2022 which was unexpected given several headwinds. Many advisors who switched reported being more focused on the long-term to find the best place to maximize the value of their practice on a 5 to 20 year horizon.

 

Another interesting finding is that each channel seems to have a big winner. LPL enjoyed the most success from independent firms, while Morgan Stanley was the winner from traditional wirehouses. Boutique and regional firms like Rockefeller, RBC, or Raymond James also notched some major wins as they offer many of the resources of the large wirehouses without the bureaucracy. 

One catalyst for the increase in recruiting activity has been the expected involvement of private equity bidders. Yet, this hasn’t materialized in terms of PE-backed RIAs poaching talent from legacy players. One factor is that PE offers come with some caveats that make it less appealing to advisors. 

Finally, the lure of the independent channel seems to be fading despite the number of options increasing. This is likely due to traditional firms offering more generous compensation packages while the initial cohort of recruitees who wanted an independent channel have already moved firms. 


 

Finsum: Diamond Consultants put together its 2023 report on advisor transitions. Major takeaways are that recruiting remained strong despite some major headwinds and that PE buyers haven’t been successful in luring advisors. 

Published in Wealth Management
Friday, 15 March 2024 04:07

Is Private Credit Losing Steam?

In 2023, private credit funds managed $550 billion in assets and generated 12% in average returns for investors. Private credit has been ascendant the last couple of years and helped private equity firms find a new source of revenue. 

 

As public market financing become less available, direct lenders extended credit to small businesses and buyout deals, replacing syndicated loans and the high yield bond market. It resulted in private credit growing from less than $100 billion in 2013 to its current size.

 

This year, investment banks are once again stepping into the fray. So far, $8.3 billion of private market debt has been refinanced via syndicated loans, indicating that the high yield bond market in the US is once again a viable option for companies. In leveraged buyouts, banks are also competing as evidenced by JPMorgan’s financing of KKR’s purchase of Cotiviti, a healthcare tech company.

 

Spreads for syndicated loans and high yield bonds have dropped to thier lowest levles in 3 years. Rates are now between 200 and 300 basis points below what private credit lenders were offering in December. 

 

Private equity firms are expected to pivot into higher quality, asset-backed financing such as credit card debt and accounts receivables to replace revenue from private credit. They would also benefit from an improvement in public market sentiment and liquidity as they are sitting on a backlog of unsold investments in portfolio companies. 


Finsum: The private credit market has boomed over the last couple of years due to anemic public markets and hesitant banks. Now, banks are once again competing for business and offering more favorable terms.

 

Published in Wealth Management
Friday, 15 March 2024 04:04

Bonds Weaken Following February CPI Data

Bond yields modestly rose following the February consumer price index (CPI) report which came in slightly hotter than expected. Overall, it confirms the status quo of the Fed continuing to hold rates ‘higher for longer’. Yields on the 10-year Treasury rose by 5.1 basis points to close at 4.16%, while the 2-Year note yield was up 5 basis points to close at 4.58%. 

 

The report showed that the CPI rose by 0.4% on a monthly basis and 3.2% annually. Economists were looking for a 0.4% monthly increase and 3.1% annual. While the headline figure was mostly in-line with expectations, Core CPI was hotter than expected at 3.8% vs 3.6% and 0.4% vs 0.3%. The largest contributors were energy which was up 2.6% and shelter at 0.4% which comprised 60% of the gain.

 

Based on recent comments by Chair Powell and other FOMC members, the Fed is unlikely to begin cutting unless inflation resumes dropping or there are signs of the labor market starting to crack. Current probabilities indicate that the Federal Reserve is likely to hold rates steady at the upcoming FOMC meeting, especially with no major economic data expected that could shift their thinking. 


 

Finsum: The February jobs report resulted in a slight rally for bonds as it increased the odds of a rate cut in June. Most strength was concentrated on the short-end of the curve.

 

Published in Bonds: Total Market
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