Equity and fixed income markets were battered following the September FOMC meeting where the committee left rates unchanged but the committee members’ dot plots for the future trajectory of monetary policy and Chair Powell’s press conference had a decidedly hawkish tilt.
The message was that another rate hike is likely before year end and that rates are likely to stay elevated for longer. Thus, Fed futures markets reduced the odds of rate cuts in 2024, leading to pain for the long-end of the fixed income complex. In contrast, the short-end of the curve saw major inflows as investors look to shield their portfolio from volatility and take advantage of high rates.
Following the Fed meeting, there was $25.3 million of inflows into the iShares Treasury Floating Rate Bond ETF which was about 40% of the total inflows in the previous month. This marks an acceleration of a trend which began last quarter of outflows from longer-term Treasury ETFs and inflows into short-duration Treasury ETFs.
Supporting this notion is the uncertainty over the economy and monetary policy as this tends to lead to volatility for long-duration assets. Additionally, the flatness of the yield curve means that there isn’t sufficient compensation for the additional duration risk.
Finsum: Most of the fixed income complex suffered losses following the hawkish FOMC meeting, but one exception was short-duration Treasury ETFs.