Interest Rates Remain the Topic on Everyone’s Mind: Market Commentary from Cabana’s CEO – March 17, 2021

3 years ago

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It is always something. Right now, that something is the precipitous rise in interest rates. The all-important 10-year Treasury bond has now broken above resistance at the 1.5% to 1.6% level and appears to be holding the breakout. As we have discussed many times over the past weeks and months, we believe the big jump in rates is due to expectations of inflation caused by demand side growth across the world. This is typically a good thing and is necessary for the domestic and world economies to return to normalcy after the pandemic. The short-term fallout includes a rotation out of technology stocks and into cyclical stocks with strong balance sheets. The thinking is that the technology sector relies on borrowed capital to grow and increasing borrowing costs dampen profitability. It also is important to note that technology was a big winner last year and some profit taking is justified anyway. Another takeaway is the pressure on fixed income and other “safe assets”. These bond and bond-like investments suffer when rates rise and benefit when they fall.

Investors have been anxiously awaiting comments from the Federal Reserve following meetings this week. The 10-year Treasury bond has major implications across our economy and is a large driver in mortgage rates. The fear is that if this benchmark rises too quickly, assets other than bonds will begin to suffer. The first such asset class at risk is real estate, and it can spread from there. Sure enough, the Federal Reserve released a statement this afternoon confirming a willingness to let rates run their course. As it stands now, 2% on the 10-year Treasury is staring us in the face.

It is our belief that much of the current turmoil is simply part of investing and is transient in nature. In the end things get resolved and markets march on in the never-ending chase for yield relative to risk. The bigger question is if we are seeing a secular shift in interest rates from a multi-decade period of falling rates to an extended period of rising rates. Interest rates have been trending down continuously since the mid-1980s, eventually hitting 0% last year. Common sense dictates they must go up from there, but how far and for how long? That is what really matters. We have an abundance of tools at our disposal to prevent major dislocations like what occurred in the 1970s and have weathered perhaps three of the four most difficult financial circumstances in history in just the past 20 years. As such, we are confident that we will adjust and move forward better and stronger as always.

Disclaimers

January 17, 2024

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