Note from CrossingBridge on recent market volatility:
Volatility has returned in full force, and while these recent moves may feel surprising, they shouldn’t be unexpected.
The Trump administration has clearly and repeatedly messaged the desire to impose tariffs on trading partners as a source of revenue, justified by their belief in longstanding trading inequality. More importantly, Scott Bessent has focused on the considerable amount of US debt maturities that will need refinancing over the next 12 months. As a result of prior Treasury policy that focused on the shorter end of the curve, approximately $7 trillion of debt needs refinancing in 2025 alone. Bessent is focused on terming out the debt as far as possible and at the lowest rate possible. If weakening the U.S. economy and the dollar is a consequence, he is clearly taking the attitude of ‘so be it.’
As seen over the past few years, investors have been whipsawed in their fixed income portfolios, experiencing drawdowns and volatility typically seen in the equity markets. Should inflation remain sticky (as illustrated by today's payroll numbers), it could put the Fed in a difficult position. Specifically, Danielle DiMartino Booth of QI Research highlighted from Powell’s Special Briefing today that he mentioned “tension” between soft & hard data, and that the word “persistent” replaced “transitory”. Furthermore, we should point out that aggressive U.S. policy may lead to a buyer strike among foreign investors. Alternatively, countries make Trump a phenomenal deal. One might speculate such a deal as tariff-relief in exchange for purchasing 100-year, zero-coupon U.S. Treasuries.
After decades of duration being your friend, we don’t look at duration as a return driver, but rather as an additional risk in the portfolio. We believe it’s essential not to bet on the direction of interest rates, which is completely out of investors' control — but rather focus on what you can analyze. As bottom-up, fixed income value investors, we concentrate on fundamentals such as:
• Cash flow quality and sustainability
• Balance sheet strength
• Liquidity buffers and access to capital
• Sector and issuer-specific risks
• Relative value across the capital structure
For some time, we’ve cautioned that credit spreads were tight and that markets were underpricing both liquidity risk and uncertainty. With corporate profits at historically high levels, and productivity gains increasingly reliant on technological advances, we’ve maintained a defensive posture — overweighting ‘dry powder’ in our portfolios, which aims to serve a dual-purpose: 1) helping protect on the downside and 2) preparing to deploy capital when opportunities emerge.
As spreads have started to widen, we are seeing some buying opportunities, but remaining highly cautious in deploying capital due to the high level of uncertainty.
Please don't hesitate in reaching out to John Conner (
[email protected]) if you have any questions/comments.
Comments