Climbing the Ladder to Higher Yields

Climbing the Ladder to Higher Yields

Key Takeaways:

  • After nearly two and a half years of tightening, the Fed funds rate is 1.50-1.75%.
  • CD and money market rates are up; opportunities for bond buyers
  • Stocks have mostly priced in current rates, but trade and deficit concerns cloud the earnings outlook for the coming months, and politics are making investors wary

The Federal Reserve began tightening interest rates in December 2015, moving up the Fed Funds target to a range of 0% - 0.25%.  Then, a quarter point raise in December 2016 following the Presidential election. The pace quickened in 2017, with three increases bringing the target rate to 1.25% to 1.50%.  Finally, at the March 2018 meeting the Fed set the range to 1.50% to 1.75%.  Two rate increases are anticipated in 2018, with the possibility of a third in September or December.

Are rising interest rates weighing on the market?

Earnings growth and GDP growth have provided strong fundamental support to stock market values so far. However, this has been offset by deficit concerns, trade worries, and of course, rising rates, (although we believe the current Fed strategy has been priced into markets.) Political uncertainty continues to erode investor confidence, and has certainly contributed to the dramatic increase in market volatility this year.

If there’s a silver lining, it’s that CDs and money markets are finally producing meaningful returns. Bonds buyers have sensed opportunity as well; an equally-weighted Treasury ladder from three months to two years is now yielding 2.22%, compared to 1.06% a year ago!  Many short-term bond funds, dependent, of course on their underlying investments, are offering yields approaching 3%.  This new environment provides investors a chance to maintain liquidity and earn a more reasonable return on their short-term investments.

  • Six-Month Treasury Bill Yield – 2.09%
  • One-Year Treasury Bill Yield –   2.31%
  • Two-Year Treasury Note Yield – 2.50%
  • May 31st S&P 500 closing price:  2705.27 up 2.02% YTD

In June, key economic data points will be the ISM manufacturing index on June 1st, the non-manufacturing index on June 5th, and the FOMC two-day meeting announcement on June 13th. Later in the month we will see existing home sales (June 20th) new home sales (June 25th)) durable goods orders on June 27th and GDP on June 28th.  These data points will be closely watched for signs of continued economic growth, and their impact on interest rates.

Gene Balerna, Director, Investment Research
Steven Weber, Registered Investment Advisor
The Bedminster Group

TAGGED: Market Insights
No Comments