Rates Are Really Rising

I began my career in fixed income securities, working in CMOs at Kidder, Peabody in 1986. Before coming to New York from Chicago, I worked at the Chicago Board of Trade, where bond futures are traded, while attending classes in the afternoons or the evenings at Northwestern University, where I was in my last quarter. So, I really knew bonds and interest rates!

While I escaped the world of bonds, I understand how important interest rates can be. I wrote here about rates rising in early October, after the Federal Reserve had made its first rate cut in September. Last week, it made its third cut. So far, Fed Funds has come down 1% to a target range of 4.25-4.50%. While overnight rates of interest have plunged, longer-term interest rates have actually increased even more. Here is the yield curve posted at Bloomberg:

When I wrote in October, the 2-year was at 3.99%, and now it is at 4.35%. Even worse, the 10-year has increased from 4.05% to 4.61% despite the additional cuts by the Fed in November and in December.

The 30-year, which has increased 0.75% over the past year and 0.47% since early October, is testing its 5 year-high yield:

Perhaps the most important thing to many Americans is the rate for mortgages. On 10/3, it was 6.12%. Now, it is higher. The Freddie Mac rate as of 12/19 was 6.72%. The next weekly release will likely show a modestly higher rate. Here is the 10-year perspective for the 30-year fixed rate mortgage along with the 15-year term:

Are rates high or low? Well, they are much higher than they were after the pandemic hit in early 2020, and to many people they may appear to be high. For all of the 1980s, they were above 10%. While I don't currently expect that they will keep rising, I do not expect housing to be a strong market.

I am not surprised that Treasury yields have increased and don't consider them too high, though I do find the chance of potentially higher rates to be less of an issue than I did in October. In mid-November, I discussed how yield-curve inversion had gone away, and this remains the case. The world seems to be less optimistic that the Federal Reserve will keep cutting Fed Funds.

I am not so bearish on bonds, but I am not buying any. I have detailed the fixed-income investment that I really like right now: Treasury Inflation-Protected Securities (TIPS). Since I wrote last about them earlier this month, they have sold off similarly to regular Treasury securities. I have upped my exposure and feel very optimistic that TIPS can stand up to any potential inflation.