Fourth Quarter 2021

Over the years Pugh Capital has managed its own growth to strive for a balance between assets under management, clients, and employees.  While pandemic disruptions caused imbalances throughout the US economy, we expect 2022 to be a year of realignment as economic growth is shaped by the normalization of monetary policy and domestic demand.  The recalibration should drive volatility across markets as investors and policy makers lean more heavily on data in an environment that is, in many respects, unchartered.

What might keep the economy off kilter?  Health risk remains a concern as we enter the third year of the pandemic.  We all have become more adept at managing this risk, yet we cannot rule out the possibility that Covid will linger on with social and economic implications.  Another source of uncertainty stems from inflation: how much of the genie has been let out of the bottle and will price pressures broaden, crimping future growth?  Another element of volatility will be monetary policy which is transitioning to a tighter regime.  Market participants are expressing a wide spectrum of views about the impact of less supportive financial conditions and possible policy missteps.

Against this unpredictable backdrop, corporate resilience has been high.  Signals for corporate health including revenue growth, profitability, and leverage suggest a stable foundation.  Meanwhile, the credit cycle has evolved from the recovery phase to the expansion phase, which is characterized by relatively modest positive or negative excess returns.  While corporate valuations have cheapened up modestly, spread widening still represents a risk.  So, we would not expect asset allocation to provide meaningful contributions to performance.

Bottom-up security selection will be an important driver of performance.  We will continue to focus on issuers with stable to improving credit profiles, that are invested in maintaining their investment grade ratings.  We will look to avoid industries and issuers that have idiosyncratic risks or that are likely to initiate shareholder friendly activities, as these risks are not priced into spreads.  We are maintaining a modest overweight to Credit but will look to trim our overweight to BBB-rated Corporate securities.

Mortgage spreads have widened as the Fed has begun to pare its purchases.  We expect widening to continue to be a risk into 2022 as uncertainty around the strategy for existing Fed MBS holdings creates an overhang in the space.  We are increasing exposure to ABS with employment gains supporting household incomes, in combination with modest cheapening of spreads which will create a tailwind for the sector.

With the Federal Reserve facing elevated inflation while labor market participation rates are still well below pre-pandemic levels, monetary policy will be data dependent, but perhaps less patient in this tightening cycle.  We expect rate volatility in the first half until we gain more clarity.  Based on our outlook discussed above, we expect 10-year Treasury yields to range from 1.15% – 2.15% in 2022.  Another consideration is yield curve shape.  We expect the curve to flatten driven by short maturity rates shifting higher.


Past performance is not a guarantee or a reliable indicator of future results. Investing involves risk; principal loss is possible. Fixed income market data provided is drawn from the Bloomberg Indices for informational use only and is not representative of account performance. It is not possible to invest directly in an index. Investors should carefully consider risk when investing in bonds or other securities, which include, but are not limited to, default, credit rating, interest rate, duration, prepayment, liquidity, and structural risks. Securities are also subject to general market risks due to factors that affect the overall market, which may include, but are not limited to, government actions, investor behavior, and economic conditions. Economic conditions may be influenced by liquidity risk, geopolitical risks, monetary and fiscal policy, interest rate risk, and inflation, among others. There is no guarantee that investment strategies presented will work under all market conditions. Risk management processes including diversification cannot eliminate the risk of losses nor assure the likelihood of a gain. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn or volatility in the market. Refer to the Legal & Disclosures section for additional disclaimers and disclosures regarding performance, risk, and investment process.

Information presented is for informational purposes only. It is not intended as investment advice nor an opinion or a recommendation as to the appropriateness of investing in any particular security, asset class, strategy, or product. Nothing in this publication is intended to be relied upon as a forecast or research; legal, tax, securities, or investment advice. Nothing in this publication is a solicitation of any type.

This commentary contains Pugh Capital’s opinions based on the information available at the time of the analysis. Opinions, outlook, and strategies are subject to change without notice. Statements concerning financial market trends are based on information available and current market conditions which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This report is intended for U.S. institutional investors only. No part of this material may be modified, distributed or duplicated without the explicit permission of Pugh Capital Management.

Source: Pugh Capital, Bloomberg, and Bloomberg Indices.

As of December 31, 2021.