Of all the macro narratives circulating, we think markets are mispricing three:
- The likelihood of 5.0% U.S. nominal GDP (2% real + 3% inflation) appears priced into equities and credit but not rates. Theoretically, the 10-year UST should trade at the same level as nominal GDP. Several economic data points support the 5% nominal GDP thesis:
a. Real US consumption is growing at 3.0% annualized.
b. There are 1.4 job openings for every unemployed worker in the U.S., suggesting the U.S. labor market (and wages) remain good.
c. The U.S. and global manufacturing economy is expanding for the first time in two years.
d. Previously approved fiscal spending accelerates in 2025-26.
For these reasons, RiskBridge believes the next 50 basis point move in Treasury yields is higher, not lower.
2. This rate hike cycle by global central banks hasn’t really slowed down the global growth picture, AND the yield curve is still inverted. Maybe Fed policy and the yield curve are no longer relevant indicators. Balderdash! It is not different this time.
a. Monetary policies act with a long and variable lag. Our analysis suggests stress is bubbling up from beneath the surface following 525 bps of Fed Funds rate hikes that ended last July.
b. In our view, SVB and the mini crisis in regional banks in Mar 2023 was the first tremor.
c. Today, we are seeing material currency devaluations in Japan, Turkey, Egypt, Nigeria, Lebanon, and Chile.
d. U.S. CLO defaults are rapidly rising, and our sources suggest recovery rates have collapsed from 65% to 35%, which is problematic for CLO equity and B-tranche holders.
In our opinion, the commercial real estate story is priced (or is in the process of being priced) into the market. RiskBridge believes there are relatively attractive investment opportunities in CRE credit and equity.
3. We think the likelihood is rising that the Fed will not cut interest rates in 2024. After today’s U.S. CPI print, Fed fund futures are implied to be 4.75% (2 rate cuts) by December. We think 5.25% is more likely by December. If that is the case, an eventual unwinding of the inverted yield curve from -45bps to 0 bps supports the thesis that the next 50 basis point move in Treasury yields is higher.
Please reach out to your RiskBridge coverage team if you have questions or want to discuss.
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