Mar 03, 2017 | Post by: Roman Chuyan, CFA Comments Off on The Fed Is Back In Play

The Fed Is Back In Play

Treasury yields jumped and bonds fell this week as investors bet that a Fed interest rate hike would come this month. New York Fed President William Dudley – one of the most influential U.S. central bankers, and usually considered a dove – said late Tuesday that the case for tightening monetary policy had become “a lot more compelling,” while San Francisco Fed President John Williams said he saw “no need to delay” raising rates. Market-based odds of a ¼ percent Fed rate hike in March jumped from 40% to 76% in two days (see chart).

Fed Hike Odds Mar-2017 - tactical investment management

Source: Bloomberg

A rate hike is “more compelling” because inflation is rising. Although the Fed’s preferred inflation measure, core personal consumption expenditure (PCE) deflator, is still below the Fed’s 2% target, overall inflation pressures are building:

  • CPI inflation rtes: core 2.27%, total 2.5%
  • PCE price deflator: core 1.74%, total 1.89%
  • University of Michigan survey’s 1-year inflation expectation: 2.7%

Inflation and 10y Treasury Mar-2017 - tactical investing

Longer-term Treasury yields remained range-bound this year, with the 10-year yield rebounding to the top of the range at 2.49% today. Longer-term Treasury yields typically exceed inflation over longer periods. As I outlined in our year-end 2017 outlook, we expect the 10-year yield to rise to around 2.8%, which would mean low to negative returns for long-term bonds.

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Disclosure: Roman Chuyan is the president and general partner of Model Capital Management LLC, a Registered Investment Advisor. This article is for informational purposes only. There are risks involved in investing, including loss of principal. Roman Chuyan makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Model Capital Management LLC. There is no guarantee that the goals of the strategies discussed in this article will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any security. asset allocation, tactical asset allocation, TAA, tactical investing, tactical management, ETF, tactical investment management, Financial planning tools, investment management, asset management companies, TD Ameritrade Adhesion, Adhesion Wealth, SEI Practice Management, Financial planning platform, Investor onboarding, Orion Advisor, AssetMark, Schwab Portfolio Services, Robo plus, Ameritrade Adhesion, Envestnet, Turnkey asset management platform, Robo advisors plus, Schwab Portfolio Center, Financial planning system, Schwab PortfolioCenter, Orion Advisor Solutions, SEI Advisor, SEI Advisor Network, SEI Advisor Center, SEI Asset Management, asset management firms, Best TAMPs, Schwab PortfolioServices, Investment management platform, Best TAMP, client onboarding wealth management, client onboarding for wealth firms

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