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Inflation and Interest Rates Remain Front and Center: Market Commentary from Cabana’s CEO – April 6, 2022

3 years ago

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The inflation and interest rate story remains front and center on the minds of investors. The big question to me is how much pain has already been wrung out of the bond and fixed income markets. Fixed income investors just suffered their worst quarter in 40 years. As expectations increase for interest rates to rise in the coming months, bond prices fall. These past few months have seen interest rates jump in historic fashion on the back of pandemic-fueled inflation and our Federal Reserve becoming ever more hawkish by the day. Throw in the economic war with Russia and you have a perfect storm.  

The bond markets usually get things first (and right in my view) … so, let’s start there. We all love to talk about stocks. They are exciting and the subject of “fast money” in both the literal and metaphorical sense, but they are child’s play when compared to the fixed income markets. The global bond market is more than $100 trillion, while equities are $70 trillion. In addition to size, the bond markets are what drive investment in equities. It is the bonds that pay for a company’s ability to grow. The same can be said of government treasuries. Our government issues bonds to fund the growth of our country – or in the case of the pandemic, its survival. Let us also not forget that it is these bonds and other “safe” fixed income investments that are the foundation of most retirees’ portfolios.  

Now, back to the big question of how much more pain can be extracted from the bond markets. Do we now have most priced in as a result of the Fed telegraphing its course of action? Markets are now pricing the target rate to be 2.5-2.75 in the next year. Coming from 0, that is a huge shift. So, maybe the markets have already done indirectly what the Central Bankers will do directly over the ensuing months. Maybe bonds are now close to the floor. If the bond market has it right on rates and stocks are still hanging around and not collapsing, then maybe corporate earnings can push us through. We will know a lot more on that front next week when first quarter earnings start coming in. I may be overly optimistic and acknowledge I am in the minority. I do know that bonds and fixed income just came off the worst quarter in many of our lifetimes. I do know that everyday people are now talking about rising interest rates, an inverted yield curve and bond duration. I do also know that when your barber or your doctor starts talking about something in the investing world, it is likely way too late. 

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January 17, 2024

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