Latest / The Issue at Hand by Madison Investments / Market Brief: Warsh’s Fed Delivers Rate Hike
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- speaker-0: Welcome back to the issue at hand, market brief. I'm Chris Alamod and I'm joined by head of fixed income Mike Sanders. It's September sixteenth, and the Federal Reserve meeting just concluded. Rates are on the rise, volatility's back, and the Fed has decided to move the Fed funds rate up a quarter of a point. And Fed Reserve Chair just stated, let me read this to you. Inflation remains elevated. We must be confident that underlying inflation is moving to our objective clearly. And at sufficient speed. Today the FOMC decided that this standard has not been satisfied. So with all that said, so Mike, what does all this mean? What's the market reaction right now telling you? speaker-1: Yeah, well the market reaction is kind of pricing in ⁓ hawk, right? I mean, the front end is rising, ⁓ twos are off, you know, five, six, seven basis points, depending on when you want to look at it. And the back end's doing okay, right? Thirties are off a little bit from, you know, the lows in yield, high in price ⁓ earlier today, but it's still massively outperforming, you know, twos through fives, which is really was gonna be most impacted by a more hawkish Fed. And so the markets kind of taking what Warsh said and extrapolating it into more into more hikes down the road. speaker-0: Yeah, I think one of the things that I thought was interesting, ⁓ what impacted I think the move today. So was there something in the inflation print last week that kind of forced the Fed to move? Was it the latest import price inflation data, or was it simply the economy's overheating and we need to step in? speaker-1: know if the economy's over hitting heating per se. I think it's just more the totality of where inflation is and there's really no concern on the labor side. And you know, Warsh even stated it's hard to even it's hard to look at what's going on in the economy, ⁓ growth, labor, and say that we're even in slightly restrictive territory. So I I don't know if it came down to the specific CPI number or the PPI number or what they've kind of modeled for PCE, but I think it's just the totality of where inflation has has been consistently above target, what he talked about in Jackson Hole and and the speech he gave about PCE components being above three percent. And now there's all these diffusion indices about that that kind of statement. And so I think it's just a little bit of everything. I don't know if it was a credibility hike, if you will, but I I I do think it it would have been very disappointing to the market if the hawkish talk was not backed up when the data didn't improve really that much. ⁓ with with a hike. speaker-0: I think it was a little bit of a credibility thing. And I think after this we're gonna need an acronym definitions in the back of this, ⁓ and and disclosures after this. So ⁓ was there anything I guess in Walsh's statement that stood out? So one of the things that when I was looking at all the data was that I thought was interesting was the majority of Fed officials expect further tightening. But did anything catch you off guard or was it it kinda like what you're saying is it was to be expected? speaker-1: I I think clearly the front end of the market and and of Fed funds pricing and what's getting it most impacted by changing it in policy is was kind of caught a little off guard with how hawkish it seemed, right? ⁓ you know, and the market's now pricing in at least one more hike through year end, ⁓ maybe and then some more down the road. So I don't know if everything if anything was really shocking, but it was I I definitely think the market was leaning maybe a little bit. different in terms of hike may made me be less hawkish and see we'd see how it kind of worked out. But clearly given the ⁓ the movement in the two year treasury and how that's kind of reverberated out the curve, it was definitely not expected in terms of how hawkish he was and the statements that he kind of made. speaker-0: Well let me s let me stop you on that one. So one of the things you just focused on the two year. So how much of an impact I guess will this have on rates further out the curve? I don't know if we want to focus three to five, ten, thirty, et cetera. speaker-1: Yeah, mean fives and in's the biggest ⁓ impact for Fed policy, obviously, right? If you just think about, you know, one month at a time and how that impacts a two year much more than it was a 30 year. So kind of what we discussed before, the back end of the curve is doing better. Tens are essentially unchanged, more or less from yesterday, and 30s are a little bit lower, you know, day over day. And so I think any sort of credibility from the Fed that they're willing to be more aggressive and and hike rates should help stabilize the back end of the curve a little bit. Now it's not to say everybody should be running out and buying 30 year bonds because the ⁓ everything is clear. I think there are some some issues out there. If you if you you if you read what or listen to what he had said in terms of the drivers of rates, because he was directly asked it was it was AI spending. So some sort of a crowding out effect the competing for c capital. It was geopolitical. So that's the direct ⁓ Middle East issues. And then it was economic, it was kind of economic growth. And it's just interesting to me that the first or the two of the three, you know, the move's not gonna really change. Not really gonna impact. And basic points are not gonna change, you know, what's going on in the Strait of Hormuz and everywhere else. And it's not gonna change at the margin capex spending for AI. So, yeah. You're gonna have to really hurt the demand side to offset some of these inflation pressures. And I think that's maybe why risk assets are also kinda taken on the chin. Hawkish Fed, they have to hit the demand side of the economy. They can't fix the supply side shocks and you know, that's kind of what we get. speaker-0: Got it. Well, I want to switch gears a little bit because I want to mention a different department that's kind of have an impact on all of this. So the Treasury Department's announcement last week, Secretary Besson stated that the department would begin buying back six billion dollars worth of government debt. Does that have anything, any impact on borrowing costs as well, or is it more kind of it's just some outside noise? speaker-1: Clearly didn't work. ⁓ rates are a lot higher than where where he that was first announced and first implemented, I guess. It was announced a while back. Yeah, I mean in terms of if we want to use analogies, you know, the brewers just clinch the central for baseball. You have to bring a much bigger bat now, I think, if they want to use the impact of treasury buybacks out the curve. They have the ability to. ⁓ speaker-0: I didn't want to say that. I hope you did. Okay. speaker-1: To possibly impact the curve. But look, reducing spending, ⁓ being a slightly more hawkish at the margin, ⁓ in terms of raising rates or telling the market you're gonna apply rates will do much more from my perspective to impact tens to thirties than the Treasury trying to get involved in that. It's It clearly hasn't worked 'cause if if it mattered a lot, you wouldn't have rates a good amount above than when it was first announced ⁓ and implemented, if you will. speaker-0: Got it. Well then let me ⁓ it sounds like what you're saying before I forget, go braves. ⁓ but this announcement is a sign that it again, from what I'm reading from you, is that the Fed is taking the latest inflation data seriously, that the quarter point hike may not be the only move this year, right? So let's end on this. What should fixed income investors be paying attention to over the next few months? speaker-1: Yeah, I I I think the the biggest I think the biggest thing that investors should really focus on is where all in yields are today. ⁓ I mean it's if you think about where the yield on a five year bond or a ten year bond, maybe not so much out the curve, but anything inside of ten years is it's been it's as high levels as we've seen in, you know, twenty years. in in a lot of cases, ⁓ especially ⁓ out you know, out the curve, if you will. But ⁓ I think just from an investor standpoint, I think don't be concerned about a little bit of volatility in the yield curve inside of ten years, because at the margin it's not gonna it's not gonna matter a lot. I mean you have to have such a massive rise in interest rates in the front end of the curves to it really have impact on pricing. over the over a extended periods of time because of those yields. And so, ⁓ yeah, there'll be a lot of s Fed speak ⁓ over the coming weeks. We'll get more data. ⁓ I just think that, you know, don't be a be c as concerned with the daily movements. I think just thinking about it in the longer term, where real yields are, you know, Feds fighting inflation. Those are the kind of themes that you should think about as an investor on the bound side and just kind of take that in consideration when you know, decide what to do with with your own fixed income speaker-0: Well, let me stop you stop you right there because one of the things I got asked this the other day. I'm defending fixed income right now and wanna I think we have a number of clients who would just be interested in do I keep my money on the sidelines and not go into bonds yet because I have a feeling that rates are gonna continue to rise, or is it more to exactly your point that you could have to have a much larger rise to truly have a negative impact? Is that kind of what you're saying? speaker-1: Yeah, I mean there's very few investors and if they do it once and they just got lucky that will pick the top in yields and know when to go in, right? You know, I I think ⁓ a longer term approach has to be in here. And if you bought a little if you bought earlier and rates are higher, you know, in reality it just keeps provides opportunities for, you know, yourself or whoever's doing it to to shift and and and gain ⁓ some more ⁓ yield and a portfolio. So, you know, I I again it's just You know, I think I longer term approach, like people look at it on on the equity side, it's a longer term timeframe. We're gonna be a long-term investor. Don't get caught up in small moves and rates, not small moves, but you know, five basis points here or there. It's not gonna really matter in the long run. You're gonna have you know just the backing of where yields are that's really gonna kind of balance out a portfolio. It's there's a lot of income back in you know the fixed income outline, and I think that's that's the better. approach to take. ⁓ now it's not the same for everything. You know, thirties aren't for everybody to own. There's special situations that you should own that. But just fixed income in general is is relative to cash and and everything else is just an attractive asset class. speaker-0: Well, I think one of the key words you said there was income, and I think people sometimes forget what the income levels are versus what they were a few years ago that you have that built-in buffer. So Mike, I appreciate your thoughts as always. Thank you for joining us on the Mike Market Brief. Thank you everyone for joining. You can access additional information and disclosures at Madison Investments dot com. And if you like our conversations, please remember to subscribe. Take care.