by Doug Drabik, Fixed Income, Raymond James
The Bloomberg World Interest Rate Probability table reflects a rate hike during the June 14th meeting at 100% and has predicted this since last Monday, May 22nd. It is as certain as death and taxes according to industry experts. Of course these same industry experts were certain interest rates would be higher for the last several years. They were certain 2016 would have multiple hikes yet the year saw one and interest rates moved about 15 basis points (bp) on the year. 2017 was promised to be âthe yearâ of higher interest rates and so far, the short-end of the curve has been manipulated up but the 3-year Treasury is flat and the 5- to 30-year are down in yield roughly 15-20bp since the 1st of the year, this occurring after a December, 2016 and March, 2017 rate hike of 25bp. Inflation was going to continue to rise, global interest rates would come to parity, oil would work back to $80-$100/barrel and the economy would be humming along. Not, not, not and not. Letâs face it, we are terrible prognosticators of future rates.
To the expertsâ defense, there are hundreds of variables pushing and pulling such as technology and demographics. Some (like technology) can constantly change and others (like demographics) may have very little that can be done. The point is that uncertainty seems to be about the most certain prediction anyone should be making. Although the FOMC appears very focused on their agenda to push a second hike this year in June, they seem to be swimming upstream as inflation, growth, global rates and much economic data might raise some caution flags as to their wisdom in so doing.
To bring reality back into the discussion, this week the Raymond James Fixed Income Service Group (FISG) will be releasing its Fixed Income Quarterly with many common sense topics that get slighted by dramatic bullying headlines such as the upcoming âcertainâ rate hike. Despite the noise, the FIQ will highlight back-to-basics like Why Do I Own Bonds? It will take a little deeper dive into yield curve demonstrating that rates donât necessarily move in tandem across the curve and that although the curve has flattened, the current slope may still provide certain opportunities.
Rates in general are low, we hear it all the time; but how do real rates (rates less inflation) compare and should investment behaviors consider nominal and real rate variances? There is a reason that demand for US securities remains high.
Knowing what you own and why is an important message we continue deliver. Too often, the real purpose of owning individual bonds gets caught in the whirlwind notion that their objective is the same as growth assets when this is not typically the case. Asset allocation has real purpose and among important characteristics is the wealth protection afforded by individual bonds. Technically, the properties of the beta associated with growth assets and the duration of fixed income assets is discussed to highlight how best the two may or may not interact.
We urge you to turn to the Fixed Income Quarterly to help put in perspective what you can own based on where the curve is, the Fedâs actual influence and balancing asset allocation. There is plenty of uncertainty in the markets yet knowing the purpose of your portfolio, your advisor can help you to formulate a very confident and reliable allocation of your assets.
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