NEAM Insights

Healthy Appetite for Risk in 2024 Risk appetite across the U.S. capital markets was strong in 2024. The U.S. economy was supported by low unemployment, resilient consumer spending, and optimism over the promise of large language models and AI. The Federal Reserve moved to a monetary easing stance, reducing both its policy rate and balance sheet. The final kick came from the sweeping election result, setting off expectations for a growth tailwind from easing regulations and tax cuts. Fixed income markets underwent their own transition. Treasury yields fluctuated over the period but ended the year both steeper and higher as shown in the chart below. Credit spreads narrowed significantly, leaving most sectors on the rich side of historical valuations. Read More

Deficits Don’t Matter…Until They Do The topic of deficit spending has long been debated. Rooted in Keynesian economics, the theory holds that governments should stimulate the economy by borrowing and spending during an economic downturn, and then reverse once the crisis has passed. But contrary to Keynes' theory, deficits in the U.S. have persisted even during thriving economies. Following the 1981-1982 downturn, the Reagan administration experimented with “trickle down” economics, a supply side approach suggesting lower taxes on higher income earners would encourage more economic growth and investment that would benefit the entire nation. Indeed, U.S. GDP took off as the highest marginal income tax rate was cut from 70% to 30% alongside other tax cuts. The economy went on to grow at an impressive 26% over the 8 years of Reagan’s presidency, along with ballooning deficits that continued throughout the decade. Read More

2022 in Review The past year is one for the history books. Beyond the unprovoked invasion of Ukraine by Russia, a 40-year high in inflation, the collapse of high-flying crypto concerns, and the passing of an iconic queen, it was a historically disastrous year for asset returns. Read More

Having rebounded from the depths of the pandemic crisis, the global economy faces a critical juncture as it battles to overcome stubborn inflation and revert to more normalized monetary conditions. The commodities complex has been thrown into flux with the war in Ukraine, imperiling regions in close proximity. The challenges are well known, even if the outcomes are uncertain. As we broaden our view to emerging economies, vulnerabilities are surfacing because of inflation and currency depreciation made worse by a strong U.S. dollar. Meanwhile, China faces a financial crisis brought on by a highly leveraged, multi-decade, real estate and infrastructure-fueled growth agenda. The potential for spillover to the broader global economy depends on the extent and breadth of the pain. Read More

Secular Decline in Inflation Driven by Globalization and Related Factors How many tentacles does an octopus have? (Hint: it’s a trick question.) Answer: none. Rather, an octopus has six “arms” and two “legs”, which might be an apt metaphor to begin to frame the discussion of the highly complex ecosystem of global trade (which surely has more than eight limbs). Read More

Observed trends in leveraged loans and their securitized counterpart (Collateralized Loan Obligation or “CLO”) have garnered the attention of the financial press, politicians and rating agencies. While leveraged loan terms and quality have weakened, references to a potential repeat of the Great Financial Crisis (GFC) exaggerate the risk of contagion to the broader financial markets and underestimate the protections afforded to investors in senior CLO debt tranches. Read More

A historic change will soon be coming to the mortgage-backed securities market. On June 3, 2019, the Federal Housing Finance Authority (FHFA) plans to launch the “uniform mortgage-backed security” (UMBS), a single mortgage-backed security that will be issued by either Fannie Mae or Freddie Mac. The UMBS and the platform supporting it are intended to introduce greater efficiency, improve market liquidity and potentially pave the way for more substantive reforms to U.S. housing finance. Read More

In a word association game, what comes to mind in response to the word “hybrid”? Your first thought might be a new breed, species or perhaps a Toyota Prius. The connotation is likely positive, as the concept suggests a combination of desirable characteristics from its contributors. Would your impression change if the term was a hybrid of two financial instruments? Before you answer, consider the following. Read More

Financial theory has drawn from various scientific concepts including statistical and probability analysis, general equilibrium theory and, unfortunately, the Law of Gravity. Indeed, one might strike an analogy between securitization and Darwinism, considering the expansive application of structured technology since Lewis Ranieri created the first collateralized mortgage obligation in 1983. The evolution has been fitful, and securitization continues to suffer a bad reputation for its role (causation) in the 2008 financial crisis. Nonetheless, past experience has refocused attention on asset quality, bolstered credit support and other structural protections which, together with their currently attractive yield, diversification benefit, and shelter from corporate event risk, render structured products an appealing alternative in today’s market. Read More

Regulatory Development In November of 2012, the Treasury Market Practices Group (“TMPG”), an industry group sponsored by the New York Fed, announced “best practices” guidance for forward-settling agency mortgage backed securities (MBS). In keeping with the growing regulatory concern surrounding systemic risk, TMPG now recommends that parties post collateral, or margin, to mitigate counterparty risk owing to market value changes. The new regulation applies to the primary dealers (the twenty one trading counterparties of the New York Fed) and, by extension, to entities that trade with the primary dealers. The new guidance will apply to all trades with a contractual settlement greater than one business day (three business days for CMOs), with implementation targeted for January 1, 2014. Read More