Expert Perspectives on Rates and the “Hawkish” Fed | Lord Abbett
Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Economic Insights

Lord Abbett investment leaders offer their thoughts in the wake of the September 21-22 U.S. Federal Reserve policy meeting

Read time: 2 minutes

Is the interest-rate “liftoff” happening at last? U.S. Treasury yields climbed after the conclusion of the September 21-22 meeting of the Federal Open Market Committee, the policy-setting arm of the U.S. Federal Reserve (Fed). A Bloomberg report characterized the meeting as “hawkish” after Fed Chair Jerome Powell said the central bank could begin slowing the pace of asset purchases in November and complete the process by mid-2022.1

Powell’s view was reflected in the new “dot plot” projections issued by FOMC members, with nine of 18 officials now seeing a rate hike next year, up from seven in June. Median projections call for the federal funds rate to rise to 1% in 2023, and to 1.75% in 2024.

What might this mean for investors? We asked three Lord Abbett investment leaders to provide some brief insights.

Giulio Martini

Partner, Director of Strategic Asset Allocation

In my view, whenever the Fed signals that it is becoming more aggressive about removing accommodation, as it did on September 22 by advancing the potential date for terminating asset purchases to mid-2022, it will tend to flatten the curve. This is because tightening actions accelerate the timetable for rate increases while suppressing the risk of higher inflation.

I only expect inflation risk to worsen if changes in fiscal policy take place that suggest either more persistent stimulus or income redistribution that would stimulate aggregate demand. The political consensus for those changes doesn’t exist at the moment, and it’s unclear whether it will any time soon. The 2022 U.S. midterm elections could provide some hints about that.

Joseph M. Graham, CFA

Managing Director, Investment Strategist

It’s important to point out that yield curve flattening over time doesn’t mean what many investors will think it means: get out of short duration and into long duration. Some other observations:

The Fed’s more hawkish stance got impounded pretty immediately into rates--the yield on the two-year Treasury note was up 3 basis points on September 22. Even if short rates see a sustained rise, it won’t be for a while (most likely in mid- to late 2022).  Existing two-year bonds will have very little interest rate risk by then.  A short-maturity portfolio turns over relatively quickly to adjust to prevailing short term rates. That explains the size of move in the two-year Treasury after the Fed announcement.

Finally, as Giulio points out, there are other factors at work here outside of the Fed.  On the margin, this says the Fed is more on top of inflation than the market thought a few days ago.  But inflationary forces remain, including possible fiscal drivers, and uncertainty around inflation remains, which could counterbalance the Fed’s intentions in the near term.

Timothy Paulson

Investment Strategist

The September 22 FOMC statement indicating early and faster tapering means reduced demand from the Fed, the world’s largest buyer of U.S. Treasuries.

What about the impact on short-term rates? The Fed went to great lengths to clarify that the timing of rate hikes would not be linked to tapering.  As long as market expectations of the timing of rate hikes do not change meaningfully, we should see little reaction from short-maturity U.S. Treasuries.

 

1Ye Xie and Edward Bolingbroke, “Treasury Yields Leap as Traders Accelerate Fed Rate Liftoff Bets,” Bloomberg, September 23, 2021.

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

Fixed-Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price.

The credit quality of fixed-income securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

 

Glossary Definitions

 

Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.

basis point is one one-hundredth of a percentage point.

 

This material is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved.  

Important Information for U.S. Investors

Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.

FOR MORE INFORMATION ON ANY LORD ABBETT FUNDS, CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT DISTRIBUTOR LLC AT 888-522-2388, OR VISIT US AT LORDABBETT.COM FOR A PROSPECTUS, WHICH CONTAINS IMPORTANT INFORMATION ABOUT A FUND'S INVESTMENT GOALS, SALES CHARGES, EXPENSES, AND RISKS THAT AN INVESTOR SHOULD CONSIDER AND READ CAREFULLY BEFORE INVESTING.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Important Information for non-U.S. Investors

Note to Switzerland Investors: This is an advertising document.

Note to European Investors: This communication is issued in the United Kingdom and distributed throughout Europe by Lord Abbett UK Ltd., a Private Limited Company registered in England and Wales under company number 10804287 with its registered office at Tallis House, 2 Tallis Street, Temple, London, United Kingdom, EC4Y 0AB. Lord Abbett UK Ltd (FRN 783356) is an Appointed Representative of Duff & Phelps Securities Ltd. (FRN 466588) which is authorised and regulated by the Financial Conduct Authority.

FEATURED CONTRIBUTORS

image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field