What were the key issues for pension funds in Q3 2024?
US pensionWatch
The EASING CYCLE BEGINS
Hope for the best, plan for the worst
DAVID STATHAIRN, PLAYING NOAH VOSEN
IN THE BOURNE ULTIMATUMTHE BOURNE ULTIMATUM
We believe investors need to be prepared for an extended period of higher rates as inflation makes its slow journey back to the Fed’s target. We see recession risks as still finely balanced, and believe credit investors need to be diligent, cautious and ready for volatility. In our last quarterly we discussed the topic of the Fed “tightening until something breaks”, and it increasingly appears that, from an international perspective at least, the US dollar may prove to be the catalyst for the “break”. Fed policy has helped drive the US dollar to levels unseen since the Volcker era, a significant problem for other global central banks.
After a four-decade trend of falling rates on a secular basis, the Fed Funds rate is back above the peak that occurred in the previous hiking cycle (in December 2018). This the first time this has happened since 2000 (where rates rose slightly more than they did in the mid-90s). However, it is clear the Fed is not done. Markets are priced for rates to continue rising to a peak of around 4.75% in mid-2023, before declining. Although markets are searching for a dovish pivot, in our view the pivot, when it comes, will simply be to a less hawkish tone, and that rates will plateau through 2023 rather than being cut.
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The Fed kicked off the easing cycle with a 50bp rate cut in September. Rates are now expected to decline into the end of 2024 and over 2025. Critically, the Fed pivoted from a focus on inflation to employment, citing a strong commitment to supporting maximum employment.
01. key macro view:
The new age of surplus management
02. pension news:
Many pension plans are now in surplus, and one option for plan sponsors is to grow this surplus over time via a self-managed strategy. We also provide an update on the latest developments for multiemployer plans receiving special financial assistance, with several new types of security becoming permissible for investment.
Time to look at taxable munis
03. credit:
We outline the potential benefits of taxable municipal bonds in a Q&A with Senior Portfolio Manager, Jeffrey Burger. Jeff outlines why he believes we are seeing some of the best opportunities in municipal bonds for decades, and which parts of the
municipal bond market we believe offer value.
Corporate credit in easing cycles
04. INVESTMENT outlook:
Credit markets continue to be caught between still-attractive absolute yields and credit spreads that have tightened back to long-term average levels. But easing cycles are generally positive
for bond markets and a combination of yield and capital gains can result in attractive gains.
Active mandates have the potential to further enhance returns by credit selection and strategies such as relative-value trades.
Economic and geopolitical risks abound
05. key risks:
Although not our base case, there is a risk that economies could tip into recession, requiring interest rates to be cut faster and further than we currently expect. The war in Europe continues to be a concern, and there is a risk that events escalate with unexpected consequences. Globally, geopolitical tensions are elevated, and the world appears increasingly polarized.
Tariffs and trade wars
06. education:
In the event of a second Trump presidency, we believe all countries that are currently in a trade surplus with the US will be negatively impacted by the imposition of tariffs. If countries respond to this with currency devaluation it could propel the US dollar higher in the short term. But we would expect any rally to be only temporary, with the US likely to respond, potentially even adopting an official weak dollar policy.
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