Displaying items by tag: rates

The Fed hiked rates at the latest FOMC meeting but they were partially forced to with just about every measure of inflation hitting 30-year highs. However, more importantly they project that the federal funds rate will hit 2.75% by the end of 2023. This may have been the first hike in years but it will be one of eleven if they want to hit that mark. The bond market is pessimistic as they not only are projecting less hikes, but slower growth as well. The yield curve is indicating inflation will be under control but it might be costly. Typically this means that the Fed won’t mean to hike as frequently as they are indicating. There has been a lot of action in the TIPS market and it is indicating they expect inflation to average just shy of 2.8% in the next decade.

Finsum: Markets are most likely right in this scenario and that fewer rate hikes will get inflation under control; hopefully the economy can take the hit.

Fixed-income investors are in the doldrums when it comes to today’s ultra low yield environment. Guaranteed income from CDs is just not high enough, and while bonds may be secure their value is at a valley. Laddering annuities is maybe the best strategy, but the questions are under duration. In a flat yield curve going for a short duration makes sense, and as the yield curve steepens moving to long-term contracts is more attractive. In today’s interest rate market, the goldilocks spot is around 5-years, it is a much higher return than shorter-term annuities and longer-term contracts tie your money up without much more of a return boost. The best part is you can integrate this annuity laddering strategy into IRAs and take advantage of all the tax solutions they bring to the table.

Finsum: It's critical to ladder the right duration depending on the current rate environment and given how much interest rate risk there is today it's more important than ever to be precise.

Inflation surged to a nearly 40-year record high as the CPI index annual inflation pushed to 7.5%. This number was well above expectations and even core inflations 6% posting came in higher than consensus. In response, the Fed is going to tighten and do so significantly as regional Fed Presidents are expecting a 1% rise in the Fed Funds rate. This is a seriously hawkish turn and given there are only 3 more FOMC meetings with projections that would imply a 50-basis point rate hike possibility. The fed hasn’t hiked rates that quickly since the turn of the century. Investors are saying the Fed will want to hike by 50-basis points to keep its credibility.

Finsum: Hikes that steep could destroy the record recovery the US has had, it could lead to major windfalls in equities markets.

More so than inflation, interest rate risk is the biggest factor in bond markets. If the Fed hikes and Yields rise then that will only lower the value of many bond ETFs. In response, many investors have turned to shorter-duration fixed income. However, the latest surge is off the charts. Lots of money is flowing into ultra-short cash like ETFs with the lowest duration treasuries. Investors are offloading even medium-duration treasuries in the five-three year window. PIMCO’s MINT saw almost $900 million in inflows setting a record week for the fund. Investors are just looking to store capital in the midst of all the interest rate risk in the economy right now.

FINSUM: It's unclear if one rate hike or two will send yields surging high enough, now might be the time to hold medium duration debt as a lot of the risk could be priced in.

Quantitative easing was the process of flooding the market with money in exchange for buying up long-term government debt and MBS; quantitative tightening was coined by Citigroup in order to describe the unwinding of this process. Goldman Sachs says this is causing increased volatility and sapping liquidity out of the treasury market. This QT could come with an abundance of arbitrage opportunities particularly in U.S. interest rate markets. Additionally, Goldman says QT will widen the gaps in new and old securities and narrow treasury yields and swap rates. F

INSUM: The treasury market is ripe for turmoil with the upcoming rate hike in March.