The Federal Reserve’s constant mistakes on forward guidance have lost the confidence of some buy-side firms in its ability to predict outlooks.
Speaking at the Fixed Income Leaders’ Summit in Nashville, Art DeGaetano, founder and chief investment officer (CIO) of Bramshill Investments, said his firm was aligned with the Fed “in an uncomfortable way” in that rates are expected to be higher for longer. However he added, “I’m not sure where [the Fed[ gets the confidence in their forward guidance.” He noted a string of missteps historically leading into more recent guidance. “Just recently they told you don’t worry about ‘headline’, we’re focused on ‘core’, while last year, first quarter, they were saying let’s focus on headline.
When it comes from a macro standpoint, everyone’s focused on the Fed. We’re not really listening anymore. Our own internal view is that in Fed funds stayed between, 4-6% for the next three or four years.” Addressing investable parts of the market, he noted that certain sectors like residential real estate had parts which were looking attractive as is some preferred debt. “We do a lot of back testing and different analyses,” he said.”Preferreds are about one and a half standard deviations rich in front of high yield, but the area we’re very focused on are these preferreds that are fixed for the next couple of years, and then they all float with treasuries plus 400 to 500.”
He also noted several other bonds which are providing a good yield and trade below dollar value, with financial including some asset managers looking good. His firm is underweight high yield, he said, with less than 4% exposure, and he also noted that some areas which looked interesting – such as business development companies (BDCs) – the firm was not investing in currently. With the election coming up, DeGaetano noted that whoever got in would have to address social issues such as Medicare/Medicaid. “You might have a very malaise environment for risk assets over time,” he said.
“Shorter term our view is I don’t think President Biden will run again, even though right now they’re putting him forward and there is a chance he will not finish out his term. We’ve been talking about that, the transition, and we think it’s going to be DeSantis against Gavin Newsom.” The DESK
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