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OCTOBER 5, 2023

MIXED MARKET

The crypto market has witnessed a blend of performances lately, with digital currencies showcasing divergent price movements. Bitcoin has managed to maintain its stability above the $27,600 threshold, while ether has experienced a slight decline. Moreover, tokens such as XRP has seen a significant value uptick, and this positive surge can be attributed to positive developments for Ripple, including obtaining a license in Singapore and prevailing in a legal battle against the SEC. Likewise, AVAX has also increased, and this was likely due by the increasing demand and effective social media promotion. These recent events underscore the growing importance of clear regulations and compliance in the cryptocurrency industry, further instilling confidence in the broader market.

CLEAR GUIDANCE NEEDED

The recent surge in long-term interest rates, the highest since 2007, has raised concerns about the Federal Reserve’s decision to accept this increase without resistance. This acceptance, aimed at combating inflation, may inadvertently jeopardize the economy’s soft landing and potentially lead to a financial blowup. With borrowing costs on the rise, there are multiple challenges ahead. Budget deficits, reduced demand from foreign investors, and shifts in monetary policies are contributing to the current upward trend in rates. These challenges have left investors perplexed due to conflicting communications and uncertainty from the Fed, and in order to promote stability and ensure a smooth economic trajectory, experts assert that the Fed needs to provide clearer guidance on its stance regarding interest rates.

BOND STRATEGY

In the midst of the largest bond rout in history, William Eigen, the manager of the JPMorgan Strategic Income Opportunities Fund, has adopted a strategy that has proven successful. The majority of the fund’s $8.8 billion portfolio is held in cash-like instruments, specifically commercial paper. In addition, Eigen has invested in short-term, floating-rate investment-grade debt. These choices have allowed the fund to prosper, with a 4.1% gain this year while the overall U.S. bond market has experienced a loss of 2.7%. Eigen’s view on the economy, influenced by his ownership of a Rhode Island athletic facility, suggests that further challenges lie ahead for bond investors. He anticipates the Federal Reserve raising interest rates at least once more and keeping them elevated for up to 18 months to control inflation. As a result, Eigen predicts that 10-year yields, which recently reached a 16-year high, may even reach 6%. This stance aligns him with the CEO of JPMorgan Chase, Jamie Dimon, who shares concerns about inflation. However, it contrasts with other bond market counterparts, such as Bob Michele, Chief Investment Officer for fixed income at J.P. Morgan Asset Management, who anticipates a bond rally due to recession risks. Eigen believes that his competitors have been caught off guard due to their reliance on declining rates over the past four decades, hindering their ability to adapt to changing market conditions. Eigen’s all-or-nothing strategy involves parking money in cash during expensive credit markets and seizing opportunities by investing in distressed assets during market turmoil. For instance, he acquired high-yield bonds during the oil slump in 2015, which paid off when markets recovered. Since the fund’s establishment in 2008, it has achieved an annual average return of 4%, surpassing the broader bond market’s average of around 2.5%.

STILL STRONG

The U.S. labor market remained robust as September came to a close, based on the latest report from the Labor Department. Weekly jobless claims continued to hover around recent lows, with initial filings for unemployment benefits rising only by 2,000 to reach 207,000—still below the estimated 210,000. The number of continuing claims, which lags by a week, showed little change at 1.664 million, coming in below the estimated 1.68 million. Additionally, the four-week moving average of claims, which helps neutralize volatility, dropped to 208,750, representing a decline of 2,500.This report holds significant importance for the economy at a time when the Federal Reserve is deliberating on monetary policy decisions. Central bank officials express concerns that the persistent tightness in the labor market could potentially raise inflationary pressures and necessitate additional interest rate hikes. Moreover, following the release of this report, lond-duration Treasury yields returned to their upward trend as the yield on the 10-year and 30-year Treasuries increased by 3 and 7 basis points, respectively.

INTERNATIONAL NEWS

The streak of positive returns for euro high-yield company bonds is at risk as challenges mount for Europe’s riskiest borrowers. After six months of positive returns, the gains have been decreasing and are now at a loss of 0.6% this month. This could lead to the asset class experiencing its first monthly loss since March. Moreover, volatility in global markets, including the surge in credit risk and rising yield on U.S.Treasuries, adds to concerns about tough times ahead for credit markets. In addition, expectations of rising defaults and lackluster issuance also contribute to the uncertainty. Nonetheless, despite this, there are still some advantages to holding these securities, such as lower average duration compared to dollar equivalents, and optimistic expectations remain for the performance of euro high-yield notes in the fourth quarter, with resilience and attractive total return profiles offering some reassurance for investors.

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