Rates on the Rise: Answers to Three Key Questions

By: Edward Jones
 
DEWITT, Mich. - March 29, 2022 - PRLog -- Stocks staged a modest rally this week with investor risk appetite returning as markets have continued to digest the progressing situation in Ukraine along with the Fed getting the first rate hike under its belt. While equities have emerged from correction territory, trimming year-to-date declines more than in half, it's been the move in interest rates that is particularly notable.

After two years of ultra-low interest rates, more than ten years of above-average bond returns and over a quarter century since the last time the bond market faced such an abrupt series of rate hikes from the Fed, the recent move in the bond market has raised questions about the impact rising rates may have on the path ahead.  Here are our answers to three key questions:

1. Why are interest rates rising and will they keep going higher?
  • High inflation is the primary driver - 10-year Treasury rates are up more than 60 basis points (0.60%) so far in March, rising more than 30 basis points last week, bringing the 10-year yield to its highest level since May 2019. This is the sharpest weekly rise since September 2019 and just the fifth weekly increase of 30 basis points or more over the last decade. With inflation running at 40-year highs and the Fed commencing last week what is likely to be a steadfast tightening campaign aimed at reining in consumer price increases, rising bond yields are responding to a new monetary policy regime.
2. Will higher rates cause a recession?
  • We're watching the red flags – While our assessment of the broad fundamental conditions supports our base case outlook for a mid-cycle slowdown but not a rising-rate driven recession, we do acknowledge that the risks of a downturn have increased.  A few signals we're watching closely include the flattening yield curve, rising mortgage rates and tighter financial conditions.
3. Rising rates have hurt bond performance. Does it still make sense to have an allocation to bonds? In other words, is the traditional 60/40 portfolio no longer relevant?

Yes, bonds still serve an important role in portfolios. And no, appropriately balanced portfolios are not a thing of the past. To the latter, we'd note that a 60% equity/40% fixed income portfolio is often used as the general representation of a portfolio for long-term investors that includes a larger allocation to equities for growth along with ample exposure to bonds for stability and income. While we believe a balance between equity and fixed income allocations is central to a well-designed portfolio, our approach involves a more tailored asset allocation strategy that is aligned your risk and return profile.

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Edward Jones - Mae Luchetti
***@edwardjones.com
517-669-8817
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