By Natalie Regan
Recently, the Federal Reserve announced another 75bps increase in the overnight rate. The very next day, GDP came in negative once again. Now with back-to-back negative GDP reports, the textbook definition of a recession, other additional concerning factors remain. We see a few problems in our economy right now (inflation, supply chain, etc.) but also have positives that don’t pair with a traditional recession: low unemployment and positive payroll growth, steady consumer spending, and positive earnings reported the past two weeks. Inflation remains the center of attention with every move the Fed makes.
While the Fed thinks they have reached a neutral rate, they say they will continue to raise rates this year another 100bps as originally planned. On the other hand, markets seem to not believe Mr. Powell as the rally that started a few days before the press conference continued all week. The rally pushed bonds 15-25bps lower in yield across the belly of the curve. Quotes like, “The Fed is nowhere near done on curbing high inflation rate,” brought us back to pre-FOMC meeting yields for the moment. This presents an opportunity for banks that had been waiting to make a move and add to the portfolio while rates are still in upper 2s-3s.
Banks are often at the mercy of their deposit inflows and outflows, causing them at times to miss opportunities in the market. When rates are high, banks typically don’t have additional funds to invest. When rates are low, banks are typically swimming in cash. Bond swaps and taking losses are strategies to consider in markets like these. Rates are coming off their highs of the cycle, so now could be a good time to buy and extend.
A refresh of each sector can be helpful, especially when certain areas are presenting great opportunities for buying and selling.
Investing options to consider in this market are:
- Selling short-term municipals
- Buying longer, high-quality municipals
- Buying mid-term MBS pools and CDs
Call us for specific ideas for your portfolio.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
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