Fed rate hikes may have less impact than most expect
THIS should be a very exciting time in debt markets. The Federal Reserve looks like it might finally raise interest rates next month after leaving them near zero since 2008. That should mean turmoil, with bond yields rising and their values falling, right? Apparently not. After Friday’s jobs report showed the labour market is chugging ahead – giving credibility to the view that the Fed will raise rates – yields on 10-year and 30-year Treasuries actually dropped.
“Apathy rules,” Standard Chartered credit strategists wrote in a report published this week.
Why? For one, it’s getting harder for traders to quickly buy and sell large amounts of bonds as banks withdraw from market-making in the face of stricter capital rules.
So, absent a clear and obvious catalyst – like massive investor withdrawals, which have not really happened, or a complete meltdown in China or Greece – there isn’t a strong reason for fund managers to rapidly change course right now.
Second, even if the Fed does raise rates by a mere 0.25 percentage point next month, as a growing proportion of traders expect, that may not translate into materially higher longer-term borrowing costs.
Raising rates
The last time the Fed was in a hiking cycle, between 2004 and 2006, central bankers boosted rates from 1 percent to 5.25 percent in the face of rapid economic growth, but yields on all types of bonds maturing in more than five years only rose 0.9 percentage points in the period.
Furthermore, a rate increase this time around may hurt a US economy that is not exactly going gangbusters, as the latest earnings reports from media companies such as Walt Disney and Viacom suggest.
“I don’t care if they raise rates in September or December,” Bob Andres, the founder and chief investment officer of Andres Capital Management, said in a telephone interview last week. “I don’t think the Fed raising rates means anything. It doesn’t predict anything about the future because the future is data dependent.”
While Friday’s jobs report was generally in line with forecasts, worker pay did not increase by as much as economists were expecting.
For now, investors are just waiting. First for the Fed to finally take some action. And then to find out whether it means anything for them.
I don’t care if they raise rates in September or December. I don’t think the Fed raising rates means anything. It doesn’t predict anything about the future.