| Welcome to the Weekly Fix, the newsletter with good vibes and cheap hedges. I'm cross-asset reporter Katie Greifeld. In February, The Cut declared that a "vibe shift" was coming for modern culture. That ended up being a markets call, with investor psychology taking a hard pivot from chasing alpha to capital preservation. Look no further than the actively managed ETF leaderboard. Cathie Wood's Ark Innovation ETF (ticker ARKK) stole the crown of largest active fund from the JPMorgan Ultra-Short Income ETF (JPST) in late 2020, a bizarre year that saw Wood's flagship fund soar nearly 150% as the equity market's most speculative corner took flight, fueled by what felt like endless stimulus. Ultimately, ARKK's total assets peaked above $21 billion in February 2021. But the vibe has now shifted. Substantial amounts have been drained from ARKK's market cap over the past 15 months, with assets currently standing at about $9 billion. JPST eclipsed ARKK as the largest active fund in late 2021, with assets standing near a record at $19.6 billion. There's some poetry to the fact that the poster-child of the speculative fever that consumed markets for most of the past two years first displaced — and has now been displaced — by what's designed to be a fairly sleepy bond fund. JPST holds high-grade corporate bonds with a target duration of less than one year, with roughly 30% of the portfolio in bank debt. The beauty of the active ETF arena is that ARKKs can go head-to-head with the JPSTs of the world. "This is a space where, on one hand, maybe you have a portfolio manager that's high conviction on specific names," JPMorgan's Byron Lake told me on Bloomberg Television's " ETF IQ" last week. "When you're thinking about global liquidity or the ultra-short portfolio, you want to be safe and you want to make sure you've got a portfolio manager there that's thinking about what's going into the portfolios." In other words, it's all about the vibes. We talked about the standout volatility of the Treasury market a couple weeks ago, and the past couple days have been no exception. Benchmark 10-year yields sank to 2.80% on Tuesday, only to briefly break above 3% two days later. Amid the churn, one clear(ish) trend emerged: curve inversion. Yields on 10-year Treasuries are currently 4 basis points below 2-year yields, and ETf flows suggest that investors see room for a deeper inversion. Nearly $2.3 billion flooded into the $23 billion iShares 7-10 Year Treasury Bond ETF (ticker IEF) through last Friday — the biggest weekly inflow since 2014 — followed by another $818 million through Wednesday. On the other end of the curve, more than $202 million exited the $20 billion SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) through last week in the first weekly outflow since early June, followed by another $841 million outflow on Tuesday. The flows illustrate the current market consensus: the Federal Reserve's campaign to cool inflation is going to tip the US economy into a recession. That's a recipe for inversion. "The job market is still strong and inflation is high, so I think the Fed really cannot afford to stop," Priya Misra of TD Securities said in a Bloomberg Television interview. "Front-end rates rise, the long-end stays more anchored because of growth fears." If you're looking for a bright side, curve inversion in and of itself isn't necessarily bad news from the perspective of corporate issuers looking to go long. "I think people are going to be surprised by how much the curve inverts and that's okay," Brian Weinstein, Morgan Stanley Investment Management co-head of global fixed income, said on Bloomberg Television. "As far as being an issuer, you can issue out the yield curve. These are still historically low rates and companies are still going to grow faster than the rates they're issuing at." Most of what Bloomberg's Tracy Alloway writes ends up on my jealousy list, and this week she had a fun case study on the trip that Curo Group Holdings Corp. took in the junk bond market. The payday lender sold $750 million of junk debt roughly a year ago with a yield of 7.5%, followed by another $250 million offering in November slightly above face value. Fast forward to July 2022, and the CCC+ rated securities are trading at 62 cents on the dollar with a yield of 17.9%. Curo's travails reminded me a bit of Carvana Co.'s junk-bond saga in April. The online used-car retailer struggled to bring a $3.3 billion debt package to market, with investors demanding an 11% yield on the proposed $2.275 billion junk-bond and around 14% on a $1 billion preferred piece, Bloomberg's Davide Scigliuzzo reported. Apollo Global Management Inc. eventually threw a lifeline in exchange for a revamped deal structure. Months after the ordeal, Carvana's debt continues to struggles. The company's 5.625% notes due 2025 are currently trading near 77 cents on the dollar. Of course, Curo and Carvana have their idiosyncratic troubles, in addition to mounting recession fears. Curo investors are likely coming to grips with stricter rules around payday lending, while Carvana faces cooling industry demand. But both companies neatly underscore an obvious point: bond buyers are becoming choosier as interest rates rise and economic anxiety multiplies. Here's Morgan Stanley Investment Management's Weinstein again: The idea that we're going to get free money again, the idea that you can buy any bond and it's not going to default, that's going away, which is why I think you're seeing junk bonds struggle, which is why you're seeing loans struggle a bit. There's great value out there, but there's also great danger. So the idea that you can just buy any bond and you're going to be okay, to answer your question directly, cash flow is going to matter and it's going to matter a lot.
Meanwhile, a notable buyer in the Treasury market (other than the Fed) is conspicuously absent: Japanese investors. As chronicled by Bloomberg's Matthew Burgess and Daisuke Sakai, Japan-based investors still hold over $1.2 trillion worth of US sovereign debt, which is the largest hoard of Treasuries outside the US. Still, the sum has been shrinking: weekly data from the Ministry of Finance show just four weeks of net meaningful purchases this year. A big reason why is exorbitantly high currency-hedging costs. The extreme differential between rock-bottom Japanese interest rates and those in the US means that yen-based investors have to pay more than 2.6% to hedge out dollar exposure for three months, compared to just 0.3% or so at the beginning of 2022, Bloomberg data show. As a result, a relatively juicy 3% yield on 10-year Treasuries shrinks to just about 0.37% after factoring in the cost of protecting against currency swings. Hedged yields were as high as 1.7% in April, before the Fed's hiking campaign kicked into high gear. Meanwhile, yields on comparable Japanese government bonds clock in at about 0.25% -- so perhaps it's easier to just stay home. A key condition for enticing Japanese buyers back into the US bond market is stability in the yen, according to Ian Lyngen, head of US rates strategy at BMO Capital Markets. The dollar has dominated versus virtually every major currency this year thanks to a combination of higher US rates and haven appeal, with the yen hovering near a 24-year low against the greenback. Once the yen steadies, the dip-buying instinct abroad should kick in, Lyngen said. "Anytime 10-year yields move above 3%, we'd expect Japanese investors to become reengaged in US Treasuries," Lyngen said. "With a recession on the market's radar, dip-buying in Treasuries will define the second half of 2022." There's a Low-Risk Way for Investors to Earn 9.62% Returns Right Now Calpers Unloads Record $6 Billion of Private Equity at Discount Theranos Ex-President Balwani Found Guilty of Fraud | 
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