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Questions Taking into account recent economic shifts, bond market activity and action by the Federal Reserve, it’s understandable that there are questions. A flurry of changes over the past couple months in all three of these areas has forced us to view things in a different context. We all had a fairly good idea that rates were going to come down eventually after the aggressive hiking cycle, but now that the cutting cycle has begun, where does that leave us?
The Fed is expected to cut rates significantly over the next year or so. In fact, in addition to the 50 basis point cut at the September meeting, there are 200 basis points of more cuts predicted between now and June 2026 according to Bloomberg’s World Interest Rate Probability (WIRP). This would bring the target rate to 3.00%. A measure we like to use is regression analysis. In a normally distributed data set (Treasury rates), we typically see reversion to the statistical mean. Treasury rates remain above their respective statistical means over the past 10 years across all major tenors (2, 5, 10, 30-year Treasuries).
We just experienced the longest yield curve inversion in history, which lasted over two years (793 days to be exact). While inverted yield curves are typically associated with recessions, it’s actually the return to a positive sloping yield curve that has preceded the past four recessions.
The Sahm Rule is a recession indicator that signals the start of a recession when the unemployment rate rises by 0.5% or more relative to the previous 12 month low. This indicator has accurately predicted every recession since 1970, or the past eight recessions.
At the time of this writing, the 10-year Treasury rate was 3.79%. Before this most recent hiking cycle, the last time the 10-year Treasury was this high was 2010. Yes, it has almost been 15 years since we’ve seen these rates. At this time, locking in rates and extending portfolio duration could provide much needed yield and the potential for appreciation (portfolio gains) if an economic downturn does materialize. We still believe in the effectiveness of highly rated municipal bonds and Agency mortgage-backed pools. The challenge is to do this even when there isn’t “extra” liquidity. By earmarking a percentage or fixed amount of cash flow to the bond portfolio, you properly diversify the balance sheet for all scenarios, and eliminate the risk of missing out.
Hopefully this has covered some of the more prescient questions, but if you have questions of your own or would like clarification on any of the topics discussed above, please reach out to your Country Club Bank representative.  |
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