THE BREW – JULY 2024
SAVE THE DATE
SEIA INVESTMENT ROUNDTABLE
DATE August 27, 2024
TIME 1:00pm – 2:00pm PDT
We invite you to join our upcoming quarterly Investment Roundtable webinar featuring distinguished speakers: Stephanie Aliaga, Global Market Strategist at J.P. Morgan Asset Management, Sam Miller, Vice President of Investment Strategy at SEIA, and Phillip Argue, Director of Investment Strategy at SEIA. In this session, we will explore the latest developments in artificial intelligence (AI) and their implications for investors.
Topics on the agenda include:
• Analysis of the latest advancements in AI and their impact on the market.
• Strategic positioning for investors in the current economic environment.
• What to anticipate for the rest of 2024 and beyond.
THE COMPLEXITY OF INTEREST RATES: BEYOND THE FED'S DECISIONS
Investors may see the current environment as a time to “lock in” a fixed income investment at current interest rates based on the belief that the Federal Reserve will soon lower interest rates. But it’s more complicated than that. When discussing interest rates, we must first define which interest rates we are referring to.
The Federal Reserve controls the very short-term rates that dictate the overnight interest rates for banks’ lending to each other. It is these short-term rates that are reflected in what investors receive in bank savings accounts and other short-term instruments, including some money market funds.
However, longer-term interest rates for securities with maturities from anywhere from a few months duration out to 30 years are determined by investors’ decisions to buy or sell bonds on the open market. These rates are not controlled by the Fed, but rather by supply and demand.
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The Fed lowering short-term rates doesn’t necessarily mean that longer-term rates will also fall. Instead, the federal government’s fiscal policies play a big role in determining the supply of bonds for sale. More supply of Treasury bonds with the same amount of demand for these bonds may cause longer-term interest rates to rise and prices of those bonds to fall.
If the president and members of Congress increase the size of the federal budget deficit through a combination of lower taxes and/or more government spending, then investors may demand higher interest rates (and lower bond prices) to absorb the supply of newly issued bonds. Consider the nearby graph that illustrates the growth of the federal budget deficit as a percentage of the U.S. economy (as measured by Gross Domestic Product, or GDP) over time.
Source: Federal Reserve Bank of St. Louis
Thus, the Fed can cut the rates for very short-term lending while longer-term interest rates can simultaneously increase. This is especially true if the market believes that the Fed is cutting rates prematurely, causing investors to demand a higher yield for holding longer-term bonds. The rates on Treasury bills, notes, and bonds affect a multitude of interest rates in the market, from auto loans to mortgage rates to corporate bond yields.
There is also the risk that inflation doesn’t meaningfully converge towards the Fed’s 2% target soon. If inflation remains elevated, the Fed may keep rates at their current levels for longer than investors currently anticipate.
When deciding how to “lock in” an interest rate on one’s investment, the direction of interest rates depends on much more than Federal Reserve policy. Interest rates on longer-term bonds are also determined by the actions of politicians as well as supply and demand factors in the bond market– not just by the actions of Fed officials. That is in addition to myriad market and economic indicators, such as relating to inflation and economic growth, as well as even currency fluctuations.
That being the case, it is not at all clear that longer term interest rates will necessarily head lower—even if the Fed cuts the short-term rates it controls. The topic of interest rates is far more complicated than simply a Fed decision, and your investment strategy needs to reflect careful, thoughtful consideration of all variables involved. Talk to your SEIA financial advisor to learn more about our fixed income portfolio management services and how they can benefit your objectives.
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Disclosures
SEIA is not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Signature Estate & Investment Advisors, LLC (SEIA) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Securities offered through Signature Estate Securities, LLC member FINRA/SIPC. Investment advisory services offered through SEIA, LLC, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323. The information provided in this article is for general informational purposes only and does not constitute professional advice. Individual results may vary, and it is important to consult with a qualified professional before making any financial or legal decisions. For details on the professional designations displayed herein, including descriptions, minimum requirements, and ongoing education requirements, please visit seia.com/disclosures. SEIA does not accept time-sensitive, action‐oriented messages or transaction orders, including orders to purchase or sell securities, via electronic mail.