By Bryce Doty
Expectations are for the Fed to raise short-term rates by 0.50% and announce an aggressive path for reducing its $9 trillion war chest of Treasury and mortgage bonds.
While the Fed will likely not disappoint on either front, investors will need to contend with how to build in what comes next. Despite the record carnage incurred by bond investors so far this year, there is more pain to come as yields continue to move higher.
While the worst may be over in terms of bond market losses with the Bloomberg Aggregate Bond Index down 9.5% in the first four months of the year, inflation is still a problem.
Labor and supply shortages causing rampant inflation will not improve due to higher rates nor from a lower Fed balance sheet. Likewise, the Fed is not the driver of energy prices either.
But a direct result of higher rates is higher inflation initially. As though homes weren’t already too expensive, monthly payments on new mortgages are jumping dramatically as 30-year mortgage rates have spiked to more than 5%.
Making everything even more expensive by raising everyone’s borrowing costs could destroy enough demand to reduce economic activity to a level that can be supported by a diminished labor force, but is that really the best idea?
Of course not, but here we are and some ideas to weather the storm include buying TIPs, energy sector bonds, and rental real estate for inflation protection and floating rate bonds and cash while the Fed raises short-term rates. Our ETF, VALT, is two-thirds invested in floaters. (We can’t wait for the Fed to raise rates!)
The 428,000 jobs created last month were slightly better than expected and a decent number of jobs considering 200,000 a month would have been considered a strong number pre-pandemic.
However, it’s not nearly enough to satisfy the incredible demand for workers. As a result, shortages will continue and resulting inflationary pressures remain high.
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