Does your portfolio align with your interest rate expectations?
Yesterday the RBA Board elected to keep the cash rate on hold at 4.35%, in contrast to the US Fed which delivered a super-sized 50 basis point cut last week, so its range is now 4.75 – 5.00%. That is still a significant rate differential. Our lower peak rate should see us sitting on the sidelines for months to come.
According to Chris Iggo from AXA Investment Managers, “Bond markets liked the Fed rate move. While yields did not move much after the news, they performed well into the decision. Across the US Treasury curve, yields are lower compared to the start of September.”
All these conversations about interest rates can get a bit boring but interest rates drive markets. Ask yourself, is this where you expected us to be heading into the last quarter of the calendar year? Have your views changed, and do you need to reconsider your portfolio allocations? Cash still looks appealing, but bond spreads are contracting, if you wait to move out of cash until we get our first cash rate cut in Australia, yields could be significantly lower.
Interestingly, US companies have issued billions in new corporate bonds since the Fed rate cut. Ten high grade issuers raised US$12.2 billion, including US$2.5 billion by T-Mobile (rated BBB by S&P), and it’s thought there could be another US$20 to US$25 billion in deals this week.
We have an article this week from Flavio Carpenzano, Haran Karunakaran, and Manusha Samaraweera of Capital Outcomes, who believe the stars are aligned – high starting yields and a supportive macro backdrop has them thinking the bond opportunity is just getting started. They show how the starting yield of a bond is highly correlated to its future total returns.
We bring you three articles on rate cuts:
- Harvey Bradley from Insight Investment, discusses the RBA meeting, noting their base case for a rate cut in six months’ time
- Did you know the Fed funds rate is currently at pre GFC levels? Sonal Desai from Franklin Templeton provides great insight into interest rates and the US Fed’s decision, and
- According to Tom Porcelli of PGIM, further US rate cuts will be all about payrolls and the labour market.
Just in case you missed it, tune into this fabulous conversation with Thomas Pollaouec from T. Rowe Price who gave fantastic global strategic insight. I could have talked to him for hours.
Have a good week!
