CIO recently moved bonds to most preferred, and lowered equities and the US dollar to least preferred. (ddp)

Fed emergency lending levels, while still elevated, have come off their peak. But confidence remains delicate, and we think market volatility may remain high into the 1Q earnings season. We recently moved bonds to most preferred, and lowered equities and the US dollar to least preferred.

Market confidence took a hit in March on sudden financial sector stress.

  • Acute banking sector stress—punctuated by the failure of Silicon Valley Bank on 10 March—had sparked broader concerns over solvency, liquidity, and profitability.
  • At the time, US Treasury yields fell sharply and bond futures shifted to price fairly sharp Fed rate cuts on worst-case expectations a recession could be imminent.

But fears of a systemic crisis or credit crunch have since eased.

  • US and European policymakers have acted swiftly to contain risks in the global banking sector, with coordinated liquidity measures and quick bank rescue deals.
  • Recent Fed data on bank deposits and the use of its liquidity facilities suggest the worst is past.
  • Following the Fed's 25bps hike in March, policymakers have suggested less certainty on the need for incremental hikes.

But investors still should consider diverging outlooks for equities, bonds, and other asset classes.

  • With all-in yields still high, we recently raised bonds to most preferred, and suggest investors lock in attractive yields now in select high grade, investment grade, and EM bonds.
  • We downgraded equities to least preferred, with global stocks likely to deliver limited returns and high volatility over the remainder of the year.
  • We moved the USD to least preferred, and instead favor the Aussie dollar, Swiss franc, euro, British pound, Japanese yen, and gold.

Did you know?

  • In response to banking sector pressure, the Fed announced a new Bank Term Funding Program (BTFP), offering banks the possibility of taking loans of up to one year against Treasuries and other collateral.
  • Investors tempted to sit on the sidelines during periods of market volatility should know that this often results in being under-invested when a new sustainable bull market begins.
  • Following regulator-led talks, UBS on 19 March announced the acquisition of Credit Suisse for a total consideration of CHF 3 billion.

Investment view

We raised bonds to most preferred and lowered equities to least preferred. Investors should lock in yield in IG, HG, and EM bonds, and consider more selective equity exposure in EM (like China) or via sectors like consumer staples, industrials, and utilities. We expect dollar weakness and suggest investors consider real assets like commodities and infrastructure, or alternatives like hedge funds and private markets.

Main contributor - Jon Gordon

Content is a product of the Chief Investment Office (CIO).

Original report - How do I position amid tighter credit conditions?, 18 April 2023.