Fixed Income & Interest Rates Weekly Update

Philip G. Palumbo, CFP® | CEO & Chief Investment Officer | June 28, 2021 • Many interest rates have risen this year as the recovery continues and inflation fears grow. • The 10-year Treasury yield has jumped since the start of the year and many expect it could continue to increase. • Rising long-term interest rates are often a sign of the early phases of a business cycle. • The has steepened this year as the recovery continues, inflation returns and interest rates rise. • The Fed continues to keep policy rates near zero, pinning down the short end of the yield curve. • Steepening yield curves are often associated with the early phases of business cycles. • Just as all interest rates have been falling for decades, so have mortgage rates. The average mortgage rate since 1990 is around 6%. • However, mortgage rates today are low due to the recession and Fed stimulus. • has historically been an important interest rate for global banks. It has followed the fed funds rate closely. • However, they can diverge during times of economic stress, such as during the global financial crisis. • Due to scandals around LIBOR, financial institutions are expected to replace it soon, possibly with SOFR. • Corporate yields have been falling throughout the economic recovery. • Over the past decades, corporate bonds - especially high yield - was an attractive way to generate income. • Corporate bonds are still an important portfolio diversifier to stock market and holdings. • This chart shows yields by credit rating across credit cycles. • Yields spiked at the onset of the 2020 lockdowns but stabilized after stimulus measures were taken by the Fed and Congress. • Yields have now compressed significantly, making it difficult to find yield even in riskier parts of . • High yield spreads have compressed significantly since the economy began to recover. • While spreads are very tight, high yield also has lower duration risk which can be helpful when interest rates rise. • Spreads widened at the end of 2018 on global market concerns but recovered quickly then too. • This chart shows the price and total return indices for leveraged loans. • Leveraged loan prices have declined due to recent volatility. However, this also implies higher yields. • For some investors, leveraged loan yields can be an attractive part of a diversified portfolio. • The TED spread measures the difference between 3-month Treasury yields and LIBOR. • As such, it can be a measure of stress in the financial system. • In 2008, the TED spread widened significantly as the financial system began to fail. • This chart shows (OIS) rates at which banks use to borrow/lend. • These rates are based on the over different durations. • Similar to the federal funds rate on its own, these are watched as a sign of rising interest rates. • This chart shows the spread between LIBOR and OIS rates, both of which are used by banks. • Similar to the TED spread, this is an indicator of financial stress in the system. • Also like the TED spread, this indicator widened significantly in 2008 due to stress in the banking system. • This chart shows the spreads between benchmark rates in Europe. • Similar to TED and LIBOR-OIS spreads for the US/London, this highlights times of stress in the European financial system. • These spreads widened significantly during 2008 and the Eurozone crisis around 2011-2012.