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Piton Podcast: Q2 2024 Highlights & Views on 2nd Half of 2024

Welcome to our Piton podcast - a review of Q2 2024 and views on what lies ahead in 2024.


Brian Lockwood

Mr. Lockwood serves as the Chief Investment Officer of Piton. He has over twenty years’ experience managing Fixed Income portfolios. Prior to joining Piton, Mr. Lockwood was a Senior Portfolio Manager and Head of the Fixed Income Division in the Private Bank Investment Group, Americas at HSBC. There, he served as the global head of discretionary fixed income management for the bank. Mr. Lockwood chaired the Fixed Income Strategy Committee for the US Curve for both local and global investment groups at HSBC, as well as managing commingled and segregated taxable and tax-exempt assets, including HSBC common funds and short and intermediate duration mandates (2.5+ Billion USD).


Prior to HSBC, Mr. Lockwood worked as the Fixed Income Manager at Ramius Capital Group and DLJ/Credit Suisse Asset Management. Mr. Lockwood has a BA from Villanova University and is a Chartered Financial Analyst. He is a member of the CFA Institute, the New York Society of Security Analysts (NYSSA) and is past Treasurer of the Treasury Securities Luncheon Club of New York.


We believe that owning individual bonds vs commingled funds is powerful. Given that interest rates are higher now, we think investors want to have the benefit of owning their own yield in a SMA.

Q1: How have fixed income markets performed in the first half of 2024?

Fixed income market broad indices are just treading water right now. That's interesting considering that (1) bond prices are down (2) interest rates are up 30 to 40 basis points across the curve (shorter-term bonds have done better), (3) we have seen some sectors do better than others, and (4) intermediate indices are up about a percent year to date. If you recall, we had really good performance at the end of 2023. We saw some reversal at the beginning of the year, but May and June to date, have been really strong months, and we continue to see that there is a good backdrop for fixed income given the level of interest rates right now.


Q1: How have fixed income markets performed in the first half of 2024?

Q2: Please provide context on performance across the different sectors?

High-grade bonds have done okay, with the stock market running up, we have seen high-yield bonds outperform.


But really what is important is some of the sub-sectors. We have seen corporate bonds spreads continue to be historically tight, yet they can be tight for a long time, and we have seen corporate bonds outperform government bonds. One interesting caveat has been the Muni bond sector, where we have seen a lot of supply over the last couple of months. We have seen historic supply, actually, with over $40 Billion in supply in the last two months. That has brought prices down in that sector of the market which was pretty expensive in the beginning of the year and now are probably at fair value. So interesting dynamics between the subsectors of fixed income.


Q2: Please provide context on performance across the different sectors?

Q3: How has cash as an asset class fared this year?

Cash is still king, and cash has beaten most fixed income sectors year to date. Given the fact that the Fed has brought down their expectations of how many rate cuts will occur, cash will have a good year in 2024. So, it is an important asset class to institutions and to families. It should be part of asset allocation. It is no longer at 0 percent where we were two years ago. It is a real asset class within portfolios. We are starting to see institutions focus on their cash management, segregate their cash out, and maybe push out duration a baby step longer to lock in some of the high rates that we have in the front end of the yield curve.


Q3: How has cash as an asset class fared this year?

Q4: What is the current state of the market, and what are the primary drivers?

The bond market has found some footing, and that is because the bar is still high for the Fed to continue to tighten. We just had the June Fed meeting. The tone was a little bit more hawkish than the market expected, but the data has been somewhat dovish over the last week or so. So, the bond market has finally found some footing. We have seen some positive movements in prices, and we think that will continue into the second half of the year.


Q4: What is the current state of the market, and what are the primary drivers?

Q5: The FOMC kept rates steady at their June meeting and dialed back their expectations to just one quarter-point rate cut by year-end 2024, about half of what markets are pricing in. How are you positioning portfolios in this environment?

I think there were a couple of things that came out of the Fed meeting. One obviously deals with inflation, which has started to come down over this past week. Despite a really strong employment number at the beginning of the month, we are starting to see the weekly numbers tick up, showing a softening of the economy. When we think about that, we think that eventually, there will be a Fed ease.


There are a couple of basic things we want to do in bond portfolios. We want to extend durations out. We want to lock in some of the good yields that are out there. We also want to increase our credit quality, whether it is in a municipal bond portfolio or a corporate government bond portfolio. We want to rotate sectors. We are upgrading our government sectors. We are bringing down our credit sectors and the riskier sectors in the portfolio in order to create a more conservative portfolio coming into an economic slowdown at some point in time.


Q5: The FOMC kept rates steady at their June meeting and dialed back their expectations to

Q6: July will mark the second anniversary of the longest yield curve inversion in U.S. history. How do you think about the path to normalization, and how are you positioning portfolios accordingly?

We have had a really long inversion of the yield curve. And as many people know, it's somewhat of an indicator of a future recession. You are going to start to see the Fed begin some sort of cycle of lowering rates. We will start to see the front end normalize, and the back end will take its cue from inflation. And to be honest with you, with the 10-year at a ~4.20% yield right now and inflation coming down somewhere into the two’s range, that's kind of a normal relationship for the long end of the curve. If we start to see inflation tick back up to 3%, we would expect the 10-year to go closer to 5%. So right now, there's sort of a good relationship between inflation and the longer end of the yield curve.


Q6: July will mark the second anniversary of the longest yield curve inversion in U

Q7: In your latest commentary, you mentioned that markets will remain sensitive to economic and inflation data. What economic indicators are you keeping a close eye on?

Not just sensitive, I think over the last few weeks, what we have seen is the bond market in particular, hypersensitive to each data point. And it is because there are a lot of catalysts coming up, but I think focusing on things that the Fed watch, PCE (Personal Consumption Expenditures Price Index) will be the most important inflation data point, and the jobs numbers. All of the jobs figures are really important going forward for the bond market. As they say, the consumer will keep spending until they lose their job. So It is a really important indicator. I think there are some other catalysts that we are going to see too related to the election and the supply within the treasury markets.


Q7: In your latest commentary, you mentioned that markets will remain sensitive to economi

Q8: You mentioned the upcoming November Presidential election will influence fiscal policy decisions, global relationships, and even the Federal Reserve’s composition. What should investors be watching for?

I think markets, less than the Fed, will be watching catalysts from the election. What will be important is the possibility of a run to safety. The idea of not knowing, the idea of a contentious election, may drive people into less risky assets or may drive people to liquidity. So, I think there will be a lot of back and forth starting from the debates this month, right up to the elections. Normally, we see September as the main time frame when markets start gauging the election, but I think given this election, we are going to start to see it earlier in the market.


Q8: You mentioned the upcoming November Presidential election will influence fiscal policy

Q9: Over the past month, what topics have you been speaking about that investors have shown the greatest interest?

Clearly the inflation data and data points on the economy have been big areas of focus. What is interesting is we have seen some of these start to lighten up and that is a benefit for the bond market because that will drive the Fed closer to an easing cycle. A few weeks ago, we put out a linkedIn on a data point on Chicago's manufacturing data. It's the lowest point since we've seen since COVID and the financial crisis. These are the kind of data points that are going to start to seep into the marketplace and get people to say, “I need to have some safety in my portfolio and I need to have some yield in my portfolio.”


Q9: Over the past month, what topics have you been speaking about that investors have sho

Q10: With growing uncertainties, why is Piton’s active management approach so important?

We think fixed income will be an important part of asset allocations for years to come. And what's more important, especially in fixed income markets, is having a macroeconomic approach or top-down approach to portfolios. One of the main things that drive performance in portfolios is duration management. Sector rotation is second to that. And those are our big focuses for managing portfolios for clients and doing what they want their fixed income allocation to do, which is keep assets safe.


Q10: With growing uncertainties, why is Piton’s active management approach so important?

Q11: What is the benefit of using Piton’s customized SMAs vs a commingled fund vehicle?

Piton believes people should own individual bonds. We feel that owning bonds as the asset is really powerful in a portfolio. Owning a commingled fund, ETFs or funds, is fine for many people, but we don't like to see bonds turn into equities within portfolios. Commingled funds can adjust the yield of your portfolio, for example, if you have a fund that has a high yield, you may see investors invest in that fund which drives the yield down for the portfolio manager. Whereas having your separate account, nobody can infiltrate your own yield. Given that interest rates are higher now, we think people want to have the benefit of owning their own yield.


Q11: What is the benefit of using Piton’s customized SMAs vs a commingled fund vehicle?

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