While low rates are helpful for corporates and as we've seen since the GFC that can help to drive investment away from Fixed Income.
But falling rates creates competition and opportunity cost for investors. With TLT sitting at 12 year lows despite seeing massive inflows, it becomes a waiting game for when the FOMC might eventually cut.
Investors buying bonds ahead of rate cuts have the opportunity to lock in higher rates while also getting a principal pop in the bond when rates do fall. And as rates start falling, investors begin to expect more cuts, that can create more demand for bonds, which leads to lower yields and this can become a hindrance for equities.
This chart has every rate move from the FOMC since 1994. This does not specify size of rate moves, but the darker bolded lines indicate multiple meetings in that month, which were for emergency purposes.
Notice how cutting cycles themselves do not always sync with stronger equity prices.
The big question now is what happens after the Fed finally signals that hikes are over and cuts are on the way? How long will investors let the 2 year sit at 5%, or even 4%?
But falling rates creates competition and opportunity cost for investors. With TLT sitting at 12 year lows despite seeing massive inflows, it becomes a waiting game for when the FOMC might eventually cut.
Investors buying bonds ahead of rate cuts have the opportunity to lock in higher rates while also getting a principal pop in the bond when rates do fall. And as rates start falling, investors begin to expect more cuts, that can create more demand for bonds, which leads to lower yields and this can become a hindrance for equities.
This chart has every rate move from the FOMC since 1994. This does not specify size of rate moves, but the darker bolded lines indicate multiple meetings in that month, which were for emergency purposes.
Notice how cutting cycles themselves do not always sync with stronger equity prices.
The big question now is what happens after the Fed finally signals that hikes are over and cuts are on the way? How long will investors let the 2 year sit at 5%, or even 4%?