A key distinction between fixed income and other asset classes is that the yield curve and vast array of available instruments allow you to recreate scenario analysis precisely. We have assembled the following pieces of the fixed income puzzle. The interest rate hiking cycle is no longer a mystery. Therefore, we are ready to “fight the Fed” and make significant fixed income portfolio construction changes.

Many are confused about why the US fixed income market is pricing interest rate cuts in 2023, with inflation at a high level and the unemployment rate at a low level. The following commentary seeks to dispel the misconceptions surrounding why the pricing for these interest rate cuts exists.

We utilize this framework as a guidepost for a stock market correction’s potential depth and length. This is not a prediction or bold call for a bear market. Remaining open-minded about the downside possibilities helps us with risk management and when to transition away from defensive positioning.

THE MOST IMPORTANT OBSERVATION IN YOUR PORTFOLIO YOU PROBABLY AREN’T AWARE OF by Neil Azous, Chief Investment Officer THE 40% BOND ALLOCATION – NOW SECOND LARGEST DRAWDOWN IN HISTORY CAN IT GET WORSE? PORTFOLIO CONSTRUCTION IMPLICATIONS WHAT’S NEXT INTRODUCTION The size of the global bond market (i.e., total debt outstanding) is $119 trillion worldwide. The […]

MUNICIPAL BOND CLOSED-END FUNDS: MOST FEAR IN OVER A DECADE by Michael Sedacca, Portfolio Manager MUNICIPAL BOND CEF DISCOUNTS-TO-NAV DIVIDEND RATIO: MUNICIPAL BOND CEFS VS. CASH MUNICIPAL BONDS MUNICIPAL BOND CEF DISTRIBUTIONS BOTTOM LINE UP FRONT (BLUF) Quantitatively, there is the most fear priced into the municipal-bond closed-end fund sector in over a decade. If […]

by Michael Sedacca, Portfolio Manager   Seasonality is the tendency for securities to perform better during some periods and worse during others.   In the last quarter of the year, closed-end funds (“CEF’s”) tend to have seasonally weak performance. Specifically, between November 1st and December 15th, CEF performance on average is negative relative to the underlying assets. While we cannot quantify the precise reason, we believe the most […]

by Neil Azous, Chief Investment Officer   A Model Driven Approach To The Federal Reserve Probability Framework Unconditional Probabilities Four Quadrants The Qualitative Arguments Conclusion   A Model-Driven Approach To The Federal Reserve When evaluating the outlook for interest rates, it is essential to know what the market expects to happen in the future relative […]

by Neil Azous, Chief Investment Officer Case for Increasing “High-Grade” Fixed Income Case for Decreasing Treasury-Inflation Protected Securities (TIPS) Asset Allocation Changes   In our January 14th, 2021 investment commentary – Concerned About Inflation? U.S. Government Bonds Are Not The Only Asset Class At Risk – we highlighted that investors should have minimal weight in […]

by Neil Azous, Chief Investment Officer The Starting Point Observing The Trend Change Confirming an Intermediate-term Trend Change Linkage Between NASDAQ-100 & 30-Year US Treasury Yields How Much Time Is Left in Interest Rates Rising? Investment Implications   The world’s first and second most liquid and important stock indices are the S&P 500 (SPX) and […]

by Neil Azous, Chief Investment Officer The Next Sight Beyond Sight® Three Critical Signals Regime Shift Impact on Asset Classes: U.S. Equities, Gold, U.S. Dollar, Emerging Markets, TIPS A Final Warning   At Rareview Capital, we seek to bring a ‘rare view’ to investment challenges. We place value on being able to see across asset […]

by Neil Azous, Chief Investment Officer   The breakeven inflation rate is the difference between nominal yields and real yields. In early January, the entire U.S. Treasury breakeven inflation curve crossed above 2.0%. This has occurred less than 1% of the time in the past decade. This event’s ramifications stretch beyond U.S. government bonds and […]

by Neil Azous, Chief Investment Officer   Interest rates are at the Effective Lower Bound (ELB). The Federal Reserve is attempting to engineer inflation. Traditional core bond portfolios are yielding less than 1.00%. Income seekers are acutely aware of the predicament they are in – that is, traditional fixed income products will most likely not […]

by Neil Azous, Chief Investment Officer Timeline – When to Care The Two Opposing Views Investing in Practice   Timeline – When to Care The US Presidential Election is Tuesday, November 3, 2020 – 119 days from now. To date, the stock market has not discounted the significant rise of Vice-President Biden in most well-followed […]

by Neil Azous, Chief Investment Officer There are four potential ways to make money in municipal bond closed-end funds: Net-Asset-Value Appreciation High Income Distribution Broad discount-to-NAV tightening Discount-to-NAV capture (i.e., alpha generation) Periodically, there is an opportunity to harvest two or three of those return streams at the same time. However, it is extraordinarily rare […]

by Neil Azous, Chief Investment Officer Our Stock Market Correction Framework All Corrections Type 1 – Correction Type 2 – Correction Current Correction “A Different Strain” What Else You Need To Know Conclusion Other Frameworks   Here is what we published on February 18, 2020: Coronavirus To Trigger Fed To Declare Force Majeure On Rate Pause Our […]

by Neil Azous, Chief Investment Officer CEF Federal Reserve – Our Track Record Our Approach to the Federal Reserve is Model Driven What Is Our Super-Forecasting Model Saying Currently? FOMC Meetings: March and April Only FOMC Meetings: March, April, June, July Economic Data Already Starting to Deteriorate Force Majeure Causes Near-Term Interest Rate Cuts What […]

by Neil Azous, Chief Investment Officer   The Callan Periodic Table of Investment Returns depicts annual returns for 10 asset classes, ranked from best to worst performance for each calendar year. Each color represents an asset. The randomness of the year-on-year returns is known as the “quilt” effect. At Rareview Capital, we take it one […]

by Neil Azous, Chief Investment Officer   Summary Background Gold Is Not the Portfolio Diversifier You Are Looking For Conclusion   Background Let me be clear at the outset – I have no religion when it comes to contentious topics, especially gold. The yellow metal is just another commodity. Also, the last time I formally […]

by Neil Azous, Chief Investment Officer   Summary Taking Stock Mid-Cycle Adjustment a False Narrative The Next Evolution Where Does This End? What Does This Mean For Your Portfolio?   Taking Stock In our September 5, 2018, post “Yield Curve Inversion – What Does It Mean For Your Portfolio Right Now,” we said the Federal […]

by Neil Azous, Chief Investment Officer Summary The Starting Point – Discounts in the Municipal Bond CEF Universe Remain in the Top 10% of History Municipal Bond Closed-End Funds Outperform Municipal Bond Open-End Funds Municipal Bond Closed-End Funds Have a Higher Tax-Equivalent Yield than Other Public Income Asset Classes CEF Typically, once a decade, investors […]

by Neil Azous, Chief Investment Officer   Summary Taking Stock Eurodollars – The End of the Cutting Cycle Observed The Next Seven Months Multi-Asset Framework Supports What is Being Priced into the Yield Curve Asset Allocation – What Does This Mean For Your Portfolio?   Taking Stock In our September 5, 2018, post “Yield Curve […]

by Neil Azous, Chief Investment Officer   Consistent with the themes laid out in our recent post “The New Narrative For Lower Interest Rates,” we believe that including assets that have positive carry in a portfolio will benefit from the Federal Reserve’s hiking cycle being over, and profit from the downward bias in yields over […]

by Neil Azous, Chief Investment Officer   Summary Taking Stock A Model Driven Approach To The Federal Reserve What Does Rareview Capital Think? What Does This Mean For Your Portfolio? Where Are We Wrong?   Taking Stock In our September 5, 2018, post “Yield Curve Inversion – What Does It Mean For Your Portfolio Right […]

by Neil Azous, Chief Investment Officer   Last year, nearly every asset class fell, with many experiencing a bear market decline of more than 20%. The damage done to closed-end funds was significant, including, what we believe, was an extreme degree of tax loss selling in December. In 2018, the discount-to-NAV widened in ALL sectors. […]

by Neil Azous, Chief Investment Officer Taking Stock On Monday, March 12th, we wrote a blog post titled: “Why We Are Still Not Afraid of Higher Yields.” On Friday, March 9th, the 10-year US Treasury yield closed at 2.893%. Since that day, the average yield is 2.899%. Currently, it is 2.893%. Also, we wrote that […]

by Neil Azous, Chief Investment Officer   As a long-time derivative specialist, I believe that equity volatility is driven by two key variables, one technical and one fundamental. Technically, equity volatility follows correlation. Fundamentally, equity volatility is led by corporate earnings. When analyzing the record low equity volatility environment in 2017, we attribute this dynamic […]

by Neil Azous, Chief Investment Officer   Summary Potential Benefit of a Municipal Bond Closed-End Fund Discounted Yield Municipal Bond Closed-End Funds Discounts At Widest Levels Of This Cycle Risk-Adjusted Return Comparison Municipal Bond Market Update Overweight Municipal Bond Closed-End Funds   At Rareview Capital, we use closed-end funds as our primary investment vehicle to […]

by Neil Azous, Chief Investment Officer   Summary The Current Market Mind Map Where We Are At In The Interest Rate Hiking Cycle What Is Our Federal Reserve Model Saying? What Does Rareview Capital Think Yardstick #1 – Terminal Rate Yardstick #2 – Neutral Rate   The Current Market Mind Map A Mind Map is […]

by Neil Azous, Chief Investment Officer   Summary What Interest Rate Volatility Is Saying Where We Are At In The Interest Rate Hiking Cycle What Is Our Federal Reserve Model Saying? Potential Benefit of a Municipal Bond Closed-End Fund Discounted Yield Overweight Municipal Bond Closed-End Funds   At Rareview Capital, we use closed-end funds as […]

by Neil Azous, Chief Investment Officer   Summary Human emotion is a dominant factor when making investment decisions. This is especially true regarding military conflict, including the specter of war with North Korea. As stewards of capital, it is prudent to a have a framework in advance if military action materializes. To further contain emotion, […]

by Neil Azous, Chief Investment Officer   Summary US dollar weakness is #1 theme for investors ABC Interest rates to remain contained outside of fiscal success ABC Emerging over developed markets; bias to local currency debt closed-end funds ABC Municipal bond closed-end funds still offer the best value ABC High yield credit closed-end funds offering […]

by Neil Azous, Chief Investment Officer   Summary US bond market agnostic to whether Fed raises interest rates this year or doesn’t ABC Emerging over developed markets; bias to local currency debt closed-end funds ABC Municipal bond closed-end funds still offer the best value ABC Leveraged Loan closed-end funds offering more value on spread & […]

by Neil Azous, Chief Investment Officer Summary The response to the buildup of the Federal Reserve’s balance sheet – aka Quantitative Easing – provides a road map for the response to the unwind of it.ABC The pace and unwind of the balance sheet should keep interest rates lower and the yield curve flatter – or […]

by Neil Azous, Chief Investment Officer   Our outlook for the broad market and the closed-end fund universe is the most uneven it has been this year. Regarding the closed-end fund universe, because of this mixed outlook for the broad market, solely relying on opportunistic trading, or only focusing on how wide a fund’s discount is […]