EMBRACE THE PAUSE

In last month’s newsletter, we explored various exposures that investors can turn to depending on whether the Fed cuts or hikes rates.

This month, we consider a scenario – since market pricing has moderated from seven, back in the heady days of January, to under two cuts by year end – what if the Fed simply keeps rates unchanged for longer?

Where to hit pause? In short, at the short end.

While fixed income yields across the board remain near decades-high levels, front-end bonds in most fixed income sectors continue to yield more than their longer maturities counterparts. The yield curve has been continuously inverted for the longest time ever since inverting in July 2022, exceeding a previous record: the 624-day inversion in 1978.¹

With the market continuing to debate the Fed’s next move, investors can embrace the policy pause as yields stay attractive across the quality spectrum. Those especially wary of taking on too much duration risk can consider three types of strategies that extend their time in the sun under this pause scenario.

Source: BlackRock, Bloomberg, Federal Reserve, as of 31 May 2024. Reference to FDTR index. Forward path of Fed Funds Rate implied by Fed Funds futures. There is no guarantee that any forecasts made will come to pass. Source for estimated number of cuts in 2024: Bloomberg, as of 31 May 2024, based on World Interest Rate Probability - estimated number of hikes/cuts.