The U.S. economy is not headed for a recession, according to Arthur DeGaetano, chief investment officer at Bramshill Investments, a fixed-income specialist.
The high-yield spread — that is, the difference in the yield of high-yield bonds and 10-year Treasury notes — is now about 410 basis points, which is “normal” and does not signal a recession, he said in an interview.
“If the spread was at, say 800 or 1,000 basis points, then that might signal a recession.”
Mr. DeGaetano also cited that in the fourth-quarter earnings releases of the big banks, they reported very slim loan losses, while expenditures by consumers on their credit cards have risen by 5% over the past year. “And when you add in the fact that the job market is strong, we just don’t see a strong argument for a recession this year,” he noted.
Institutional investors, he added, are most concerned about avoiding principal losses this year — a scenario closely linked with high inflation and rising interest rates. “Last year was the first time in 40 years that both stocks and bonds incurred losses,” he said.
The current environment of high volatility makes it a good time to focus on bonds — for their yield, not their principal returns, Mr. DeGaetano said.
Yields have been rising sharply since early 2022 as a result of central banks hiking rates in an effort to tame inflation — as such, yields have become much coveted by hungry investors. “We are now seeing increased interest from institutional clients on raising their allocations to fixed income,” he said.
Mr. DeGaetano especially likes floating rate preferred — a kind of hybrid security that pays dividends with a rate that resets with the prevailing market interest rate.
The annualized inflation rate, he thinks, might come down to the 3% to 4% range by the end of the year, but that would still put it well above the Federal Reserve’s 2% target, suggesting the tough market environment will remain for all asset classes for at least the remainder of 2023.
Bramshill has about $4.4 billion in assets under management.