Displaying items by tag: rates

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.

Energy stocks went through a long, rough period leading into 2021. Since 2014, the whole sector has been maligned by low prices and sluggish demand. Renewable energy had stolen a lot of attention and funding and the traditional energy sector languished. However, a unique set of economic circumstances means it may be the right time to get back into energy. Oil prices have been rising strongly (a good inflation hedge), which is a nice catalyst, but almost more importantly, higher interest rates—which are clearly on the horizon—are a big headwind for renewables. Renewable energy projects take a great deal of financing and a long time to set up, which means higher rates increase costs and slow down financings.

FINSUM: Energy seems to be getting back in vogue, that said, the rise of ESG standards in debt financing might mean traditional energy projects also suffer.

Direct and custom indexing are all the rage right now and many companies are racing to provide lower fees and smaller minimums. The most advantageous part of direct indexing is its goldilocks solution when it comes to fees, but particularly the active/passive debate mashup. The most talked-about advantage to custom indexing is tax-loss harvesting in the portfolio, but there could be a larger advantage: sectoral macro factors. The Fed is quickly planning on hiking rates which will adversely affect technology stocks, with a custom index you can add/drop targeted sectors that are facing financial headwinds due to policy changes.

FINSUM: This is a nice way to leverage the tailored portfolio that you can get from custom indexing.