Mar 2023 - It's All About That Rate

Lotus Asset Management |

March 2023 Update

It's all about that Rate

The market's expectation of interest rates is anything but's all just noise right now

The January  rally came to a halt in February, as inflation and economic data  continued to come in better than expected and investors (finally?) began  to appreciate that the Fed isn't in a hurry to cut interest rates. I  know, I know - it makes no sense that a stubbornly good economy is  somehow increasingly worrisome. But that's the fundamental driver of all  the short-term market volatility of late - that, and how the Fed will  react to it - and it's showing no signs of stopping. 

Mar 2023 About That Rate | Lotus Asset Management Tennessee

 In the  meantime, bond yields are reaching their highest levels in years. The  increase in the Federal Funds rate has raised bond yields generally, but  the specific concerns over a potential recession and slowing earnings  growth have specifically pushed shorter-term bonds to even more  attractive levels, relatively. The now heavily inverted US Treasury  curve makes 6-month bond investments seem like a no-brainer for anyone  with a short time horizon, but locking in longer term bond returns at  this point is a lot less compelling.

Mar 2023 About That Rate | Lotus Asset Management Tennessee

This  broad rise in interest rates has also led to higher mortgage rates,  especially as the chances of a 2023 Fed rate cut continue to wane. In  February alone, the 30yr fixed mortgage spiked up from ~6% to over 7%.

Everything else:

  • The Biden-Harris student debt relief program may be losing steam; all we can do is wait (and prepare to continue making payments soon).
  • ESG investing hit a pothole in the Senate, making it harder to consider non-financial factors in making investment decisions
  • Corporate earnings growth is beginning to slow - is this a sign of more pain?
  • Can housing demand recover with rates back up near 7%?
Mar 2023 About That Rate | Lotus Asset Management Tennessee

The  chart above is an interesting look at subprime delinquency rates by  credit score...the trend since 2021 does not bode well for the lower end  of the housing market.