Short and concise analysis on concepts or recent events in the financial markets from the ASG Capital Team.
This podcast is focused on long-term interest rates and long-term bond Investments 10 years and above.
In our last podcast we talk about floating rate bonds indexed on a short-term variable index. As a reminder these instruments will readjust their coupon, coupon upwards as short-term interest rates increas.They could be viewed as an investment which could benefit from the monetary response to the current inflationary environment. As for long-term interest rates these account for the general forward-looking dynamics of an economy. Is the economic activity accelerating or slowing down? Are inflationary expectations increasing or decreasing? Long-term interest rates reflect the sum of future expected economic outcomes. If floating rate instruments increase in terms of yield as short-terms rates rise, the value in long-term bonds will be in their capital gain potential if long-term interest rates were to decrease.
These two opposing dynamics of rising short-term rates alongside decreasing long-term rates at the same time are currently reflected by the inverted interest rate curve we have in the US today. Fixed income markets seem to be sending the following signal. The expectation is for interest rates to rise over the next 12 months but to come down significantly sometime after this period.
If one takes a big picture perspective investors could look at to floating rate instruments as a hedge against an inflationary environment. Today’s world. Long-term bonds could be considered as a consequence of a restricted monetary policy leading to a slowing stagnant economic environment. At tomorrow’s world scenario in the coming months, all eyes will be on the data to see if these statistics confirm or not what fixed income markets are currently anticipating, ie. a weakening economic and inflationary environment for 2023-2024.
This podcast is for information only it should not be considered as investment advice. We would recommend seeking professional investment advice positioning for positioning on the fixed income investment curve and choosing floating rate or long term investment bonds instruments.