Insights
Market Insights
Policy Paddling
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Market Insights
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February 15, 2025
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Policy Paddling
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February 15, 2025
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Policy Paddling
Policy Paddling |
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Federal Reserve Board
In January, the Federal Open Market Committee (FOMC) decided to maintain the federal funds target rate at 4.25% to 4.50%. The press release remained relatively unchanged, reflecting less downside risk to the economy. The release noted that “inflation has made progress” toward the 2% target while acknowledging that “labor market conditions have stabilized at a low level.” The committee highlighted that inflation and unemployment risks are roughly in balance. The path ahead remains uncertain as the Federal Reserve (Fed) remains data dependent in considering further policy decisions.
European Central Bank
The European Central Bank (ECB) Governing Council lowered the key deposit rate by 25 basis points at the conclusion of its policy meeting in January to 2.75%. The ECB credited the cut to the “disinflation process” being “well on track.” Inflation and wage growth were elevated as prices in certain sectors continue to adjust on a delayed basis due to inflation spikes. Most measures of underlying inflation suggest that inflation will likely settle around the Governing Council’s 2% medium-term target on a sustained basis. The path ahead remains uncertain as the Governing Council is not pre-committing to a particular rate path and remains data dependent.
Bank of England
The Bank of England (BoE) Monetary Policy Committee (MPC) voted 7-2 to cut the Bank Rate to 4.50% at the conclusion of its February meeting. The two dissenting members preferred to reduce Bank Rate by 0.50 percentage points, to 4.25%. The BoE has adopted a gradual approach in removing policy restraint in the absence of material developments. Consumer price index inflation in the fourth quarter of 2024 was 2.5%. Domestic inflationary pressures are moderating, but remain somewhat elevated with some indicators easing more slowly than expected. The committee remains cautious in determining the appropriate degree of monetary policy easing.
PORTFOLIO STRATEGY
Government/Treasury Strategy
We continued to opportunistically lock in both fixed- and floating-rate securities as the money market curve remained very flat. Adding fixed-rate exposure further out the yield curve remains an attractive proposition, in our view, given the minimal concession to overnight funding levels. In the floating-rate space, a slower pace of expected rate cuts in 2025 caused us to increase our exposure to Treasury floating-rate notes, while tailwinds for SOFR (secured overnight financing rate) continue.
In the January FOMC meeting, the theme was patience – with the Fed signaling that they are still in a restrictive posture but are in no rush to change that. Specifically, the Fed would like to see further progress on inflation without weakness popping up in the labor market while they wait. Given the ever-changing political and geopolitical landscape, the market is understandably confused about what to price and on what timeline to do so. Currently the market is pricing in approximately one and a half rate cuts in 2025. But the path of outcomes feels wider across the board, with some expectations still focused on cuts while others believe the rate-cutting cycle may be on hold for the year.
Looking ahead in 2025, the path of the debt ceiling is paramount. Specifically, should the debt ceiling issue not be resolved promptly by the new administration, there is a likely need for Treasury bill supply to be cut substantially heading toward the middle of the year, before quickly ramping back up after any resolution/changes are made. Currently we have no concerns to note about T-bill liquidity.
Prime Strategy
Both the weighted average maturity (WAM) and weighed average life (WAL) of the portfolios organically rolled down as we remain patient in deploying capital given material spread tightening following the year-end turn.
With credit spreads returning to a more normalized level following the year-end turn, we believe secondary market rolled-down corporate bonds continue to provide the most value and are trading dislocated, priced cheaply relative to their wholesale equivalents. We looked to add exposure mostly around month-end during index selling.
From a liquidity standpoint, we note that dealer balance sheets appear unconstrained, which is one of the main reasons for the spread tightening experienced over the past month.
One basis point = 0.01%
The Bloomberg U.S. Municipal Bond Index is an index that covers the USD-denominated long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. It is composed of approximately 1,100 bonds.
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FLOATING NAV FUNDS
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