By Tom Burnett CFA
Federal Reserve Chairman Jerome Powell has made it clear, in many public statements, that the current Fed policy is based on accommodation. In fact, since the Fed responded to the Covid-19 outbreak in early 2020, the Federal Reserve balance sheet has grown from $4.3 trillion in total assets to over $7.5 trillion. The most recent Fed statements reinforce its policy stance with the goal of purchasing $120 billion per month of Treasury and mortgage-backed securities. These purchases are designed to put liquidity into the financial markets and to maintain a low interest rate environment.
In spite of these efforts, interest rates have risen sharply from their 2020 low levels. For example, the Ten-year Treasury bond is now yielding 1.77%, up from 0.91% at the end of last year. Over the past 52-week period, the rate was as low as 0.52% and last October it was 0.65%. Similarly, the rate on the 30-year Treasury bond has risen from 1.65% at year end 2020 to 2.45% today. The 52- week low yield for the long bond was 1.12% offered during the early stages of the lockdowns instituted in response to Covid-19.
Investors were warned of the bond market risks arising from low rates, and this year the risks became real. According to the March 30, 2021 Wall Street Journal, the Index of Treasury bonds longer than 20 years is down nearly 12% this year. In fact that Index is the worst performing category of the more than 100 currency, commodity, and stock/bond indexes followed by the WSJ summary.
Predicting interest rate movements is a “fool’s errand”, but there is no question that rates have moved higher over the past year and prudent investors must watch these trends carefully.
Tom Burnett CFA is Director of Research
Despite the Easy Federal Reserve Policy—Rates Are Moving Higher
By Tom Burnett CFA