Cumberland Advisors Market Commentary – 2Q2019 Review: Total Return Taxable Fixed Income

Treasury yields dropped precipitously throughout the second quarter of 2019, with the biggest decline seen in the short to intermediate maturities. As of 6/20/19 the most sizable decline was in the 2-year Treasury, which dropped 54 bps to 1.724%, while the 30-year Treasury lagged this drop in yield but still declined 28.2 bps to 2.533%. The drop in yield across the Treasury curve was propelled by an increase in bets that the Fed is done hiking short-term interest rates and will instead start cutting as we approach year end.

Cumberland Advisors - Dan Himelberger - Portfolio Manager & Fixed Income Analyst

Market participants all turned their attention to the 6/19/19 FOMC meeting for clues as to what we should expect for the rest of the year. While the FOMC left the target range for the fed funds rate unchanged at 2.25–2.50%, they did indicate a dovish bias. The dovish tone was accompanied by eight participants projecting rate cuts in 2019, as seen in the FOMC’s dot plot. The most significant change to the Committee’s statement appeared in the policy guidance section, which stressed increased “uncertainties” in the economic outlook and shifted the language from taking a “patient” approach to focusing on “taking the appropriate action to sustain the expansion.” We expect the Fed to remain “data-dependent” moving forward, and  not allow market participants to force their hand in either direction.

Cumberland Advisors’ taxable strategy remains conservative in the face of uncertainty in the markets. We continue to be defensive, with a focus on capital preservation, while choosing opportunities to extend durations.

Daniel Himelberger
Portfolio Manager & Fixed Income Analyst
Email | Bio


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1Q2019 Review: Taxable Fixed Income

Short to intermediate Treasury yields declined throughout the first quarter as of March 19th, as the 30-year Treasury was flat at roughly 3.00%. The Treasury yield curve remains slightly inverted out to 5-years. This has benefited the Agency multi-step securities that we hold in portfolios, as we have witnessed an increase in calls as coupon steps are not justified by the inversion of the yield curve.

Cumberland Advisors Market Commentary

By the time this overview is received, the Fed will have made a decision to hold rates steady or hike the fed funds target rate. We expect the Fed Funds rate to remain unchanged at 2.25-2.50. In fact, the odds are higher that the next move will be a rate cut as opposed to a hike. The current rate-cut probability by the end 2019 is 25.1% versus a 0.5% chance of a hike, showing that market participants have major doubts on future rate hikes. We should receive additional clarity as to the direction of interest rates at upcoming Fed meetings.

With the uncertainty centered on the interest-rate environment, our portfolios have benefited from the inclusion of callable Build America Bonds, as they have provided a higher level of yield per unit of duration than shorter non-callable securities. Our taxable portfolios have also benefited from the inclusion of long tax-free municipals, as we have seen outperformance in that space. We will continue to manage portfolios defensively until more clarity on interest rates is revealed, and we will take advantage of opportunities as they become available.

Daniel Himelberger
Portfolio Manager & Fixed Income Analyst
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Total Return Taxable Fixed Income: 4Q 2018 Review

CA-Dan-Himelberger

After a poor start to the quarter, the Treasury market rebounded nicely over the month of December, providing positive performance across the Treasury curve as the equity market suffered from negative sentiment pertaining to geopolitical risk and concerns over the Fed’s path towards raising short-term interest rates. Political bickering over building “the wall” and threats of a government shutdown intensified the negativity, leaving equity investors bearish and running for safe-haven assets such as gold and Treasury securities.

The bearish outlook in the equity market created a nice opportunity in the fixed-income space, as a “flight to quality” sent yields across the Treasury curve lower. After the high on the 30-year Treasury, at 3.455%, on November 2, the yield dropped 49.5 basis points to 2.96% on December 20. The 30-year yield has since settled in around 3.04%. The drop in yield was even more pronounced for the 10-year Treasury, which dropped 51.8 basis points, from 3.238% to 2.72%, and has settled in around 2.78% currently. This December rally in the Treasury market has added a nice boost to the performance of the long end of our barbell strategy and is a testament as to why we continue to manage portfolios using this approach. Below is a graph of the Treasury actives curve, showing monthly dates within the fourth quarter of 2018.

Source: Bloomberg

Not all taxable fixed-income asset classes benefited from the flight to quality. One that suffered during the fourth quarter was the corporate bond market (both investment-grade and high-yield). Corporate bonds tend to be more correlated than other taxable fixed-income sectors to the equity market, and as negative sentiment grew, spreads widened, causing underperformance versus the other sectors. The Bloomberg Barclays US AGG Corporate OAS Index widened 45 basis points from +105 to +150. Allocating only a small portion of our assets to the corporate space helped our taxable fixed-income strategy, as taxable municipal spreads did not suffer widening to the extent that the corporate space did. The lower historical default rate and higher overall credit quality of the municipal space helped limit the spread widening in comparison with corporate issues.

At the December 19th FOMC meeting, the Fed raised the fed funds target rate 25 basis points to a target range of 2.25–2.50%. This marks the ninth hike in the cycle and puts the fed funds rate at the highest level since October 2008. The Summary of Economic Projections seen in the Fed’s “dot plot” provided a dovish surprise as the baseline for rate hikes in 2019 dropped from 3-1 in September to 2-1. The post-meeting statement continued to point out “strong” growth and job gains, with the inflation projection unchanged at near 2%. The upper-bound drop in rate hikes from three to two is in line with our projection for 2019. There is the risk that an inverted yield curve could threaten economic growth, and the Fed will need to be cautious and data-dependent in its approach to raising short-term interest rates in order to avoid putting too much pressure on the market.

As for Cumberland’s Taxable Total Return portfolios, we will continue to implement our barbell strategy and look to take advantage of opportunities on the long end of the yield curve when they are available. We are still in a rising-interest-rate environment, but we no longer expect the Fed to hike rates at the pace that it did in 2018. While we continue to navigate this rate environment, the story remains the same. Our goal is to remain defensive in our approach to investing while making our investment decisions conservatively and extending durations to pick up additional yield as opportunities in the market become available.

Daniel Himelberger
Portfolio Manager & Fixed Income Analyst
Email | Bio

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.