‘Loose’ financial conditions may slow Fed rate cut: Strategist

As interest rates remain elevated and new economic data is set to be released next week, Brandywine Global High Yield and Corporate Credit Strategies Co-Portfolio Manager Bill Zox joins Market Domination to provide insights into the Federal Reserve’s outlook on rate cuts and the bond yield market in this environment.

Zox suggests that while inflation prints are important, his primary focus lies elsewhere. He questions whether the Fed “will need financial conditions to tighten further to bring inflation down to 2%.” As for the bond yield market, Zox emphasizes its dependence on potential rate cuts.

However, Zox advises investors to consider the financials and cable sectors within the yield market, stating, “There are some real opportunities being created there.”

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Angel Smith

Video Transcript

Stock closing the day mix as investors get set for a big week of econ data ahead that could help push the fed in their final mile back to 2% inflation.

Join us now and sue to discuss all this.

And the path ahead is Bill ZX, Brandy Wine Global Portfolio Manager Bill.

Good to have you on set.

Glad to be here.

So maybe let’s just start there bill.

So economic calendar next week you got uh CP I on deck, Jared was just talking about it.

How, how important is that uh for the market bill?

And what are you expecting?

I mean, it is very important and uh uh I’m not so much focused on that particular print, but uh what I’m focused on is will the fed need tighter financial conditions to get inflation down to 2%?

They don’t seem to be too concerned about loose financial conditions right now and it used to be sell in May and go away.

That’s not looking so good this year.

So uh my, my big question is uh whatever the inflation print is next week, are they going to need tighter financial conditions to get inflation down to 2%.

Well, and I think what Jared was just bringing up about the bond market was quite interesting that this perception that maybe what, what is seen as a confirmation that there’s not going to be another raise in rates, you saw that influx into the bond market but not having another raise and having a cut.

There’s like a lot of space in between those two things.

So do does what we’re seeing in the bond market make sense.

I guess I would ask.

Well, I think uh for the treasury market uh that you really on the longer end of the treasury curve, you need the cuts to justify moving out of cash in other parts of the bond market, which are also seeing very strong inflows like the high yield market that I’m involved in.

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It’s much less sensitive to the rate cuts actually materializing you’re getting substantial yield in the high yield market, for example, compared to inflation compared to cash yields.

And as long as you can avoid the defaults, that’s pretty compelling right now.

I’m so if I look at the yield on the 10 year here bill, we’re at uh back to four or five, what, what’s your view of where that heads near intermediate term?

I mean, I think that’s very dependent on rate cuts.

If, if uh we need tighter financial conditions, that might mean that those yields have to go even higher to get inflation back down to 2%.

So on the high yield front, have we seen an uptick in defaults at all or is that something that is a concern as we had throughout the year?

I mean, the, the view of the economy and therefore of earnings as well has been pretty sanguine.

But some of the more recent data really seems to be rolling over a little bit.

Yeah, the economic data has been a little bit softer of late, but earnings are really in a goldilocks scenario for high yield, not too hot, not too cold and defaults are in the 2 to 2.5% range, they’ve leveled out for the last six months or so and that’s well below historic averages.

So, uh the, you know, the, the idea that that there is a lot of stress in the high yield market is just not borne out by the data.

What about building just core investment grade fixed income attractive?

Uh I think it’s tough.

I think it, it you really do need the rate cuts to materialize to justify that.

Otherwise, why come out of cash at 5.3% to go into core fixed income where you’re in the mid fours?

And if you’re in the aggregate index, you’re talking about a duration of six to under yield cash.

So I I think that that’s still a tough spot to be from here within high yield.

Where do you see the most opportunity?

Right.

Now.

Yeah, I think uh, financials in the high yield market, that’s um, you know, not a big part of the high yield market, but it’s uh very attractive, facing much less competition from banks as a result of what happened in the spring of 2023.

And then cable is getting very interesting.

It’s been under severe pressure in both the equity market and the high yield bond market.

But I think there’s some real opportunities being created there.

Interesting.

All right.

Thanks Phil.

Thanks for coming into the studio.

Good to see you.