Andrew Szczurowski

Oil prices are likely to fall if the truce with Iran holds, easing the supply-driven inflation shock and reducing the need for Fed rate hikes. Lower energy prices would bring down headline inflation and support a bearish view on crude.

The speaker states, "going out the risk spectrum a little to agency mortgage and commercial mortgage backs is a is a great place to kind of hide out" and calls commercial mortgage backs "our kind of favorite credit space." Agency mortgages offer mid-5% yields with no credit risk, and commercial mortgage-backed securities offer high single-digit yields. The recent backup in spreads and Treasury yields has made these sectors attractive. These fixed-income sectors provide an attractive combination of yield and relative safety (agency) or compelling yield for credit risk (CMBS) in an uncertain macro environment where the Fed is on hold. A severe economic downturn leads to worse-than-expected defaults in commercial real estate, impacting CMBS. A sharp, unanticipated rise in Treasury yields could pressure prices.

The speaker states, "going out the risk spectrum a little to agency mortgage and commercial mortgage backs is a is a great place to kind of hide out" and calls commercial mortgage backs "our kind of favorite credit space." Agency mortgages offer mid-5% yields with no credit risk, and commercial mortgage-backed securities offer high single-digit yields. The recent backup in spreads and Treasury yields has made these sectors attractive. These fixed-income sectors provide an attractive combination of yield and relative safety (agency) or compelling yield for credit risk (CMBS) in an uncertain macro environment where the Fed is on hold. A severe economic downturn leads to worse-than-expected defaults in commercial real estate, impacting CMBS. A sharp, unanticipated rise in Treasury yields could pressure prices.

The speaker explicitly recommends investors "take advantage of the 50 basis point or so back up in Treasury yields we saw on the front end of the curve" and that buying the two-year Treasury around 3.70-3.75% is "a safe place to kind of hide out." This yield is pricing in no Fed cuts over the next two years, a scenario the speaker views as unlikely because the Fed is constrained by the oil shock and the underlying labor market is expected to weaken. It is a "free option" offering attractive yield with potential price appreciation if the macro view (weakening labor market leading to future Fed cuts) plays out. The Iran conflict escalates or protracts further, causing sustained high inflation that prevents the Fed from cutting rates as expected.