Rumblings in the bond ­market

On July 31 the Federal Open Market Committee cut the Federal Funds Rate range from 2.25%-2.5% by 25 basis points to 2%-2.25%. This marked the first cut in the face of nine rate hikes that started in December 2015, with the most recent seven months earlier in December 2018. The last time rates were cut was in December 2008 when they were cut to 0%-0.25%. Subsequently, they remained in this low range until December2015. The Federal Open Market Committee (FOMC) often uses the Fed Funds rate to help influence the economy, whether it is cutting rates to be accommodative and spur growth or whether through raising rates to help slow down a growing economy that has threatening inflation. This time, in the wake of Chinese tariffs, protest and unrest following the first cut, it appears the bond market is telling the FOMC that they expect there to be more rate cuts. To see how much sentiment has changed in just a short time, after the rate cut on July 31 the probability of another rate cut occurring in September was 62.7%; after the president tweeted about more tariffs the next day, that probability jumped up to 95.7% and then to 100% the next morning on Aug. 2 (Source: Bloomberg Finance, L.P.)! As of August 13, the current implied probabilities has 56.6% chance of at least three more rate cuts through 2019, after the rate cut on July 31 that number was just 8.1%. These drastic changes reflect a change in the markets confidence going forward. In my opinion, the short-lived attempt to return to a normal interest rate environment from 2016 through 2018 may be the last period we see for a while if there are three more cuts and the bond market re-enters into a period of low interest rates. The current interest rates around the world are already hinting that ultra-low rates may be the new normal, with the U.S. 30-year Treasury only yielding 2.06% (a new all-time low) and the fact that all of the way out to 30 years, every maturity of German bunds has a negative yield. The idea that an investor would pay an entity to borrow the investor's money goes in the face of investing common sense - and yet here we are. With the rising uncertainty with geo-political events and U.S. elections on the not-so-distant horizon, yields around the world threatening all-time lows and equity markets teetering just off of all-time highs, it's no surprise if investors are weary. Investors nearing retirement may especially be concerned since traditional wisdom states they should be moving out of equities and into fixed income to reduce risk. Yet if the markets are entering another period of ultra-low interest rate investors may have doubts about the ability of their portfolio being able to provide enough income for them to live on without eating into the principle of the portfolio. As an investor in a ultra-low interest environment, it becomes all that more important to find a fixed income manager who has the expertise to outperform without exposing the investors fixed income portfolio to additional risk. To learn more about topics such as those presented in this article, don't be shy in seeking advice and asking your investment professional for your best path forward. ----- Byron S. Sass, CFA is a Fixed Income Analyst/Account Manager for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully's Trail, Pittsford, NY 14534 (585-586-4680). Published: Fri, Aug 30, 2019