Insights
Market Insights
Synchronized Swimming
|
|
Market Insights
|
• |
December 15, 2024
|
Synchronized Swimming
|
December 15, 2024
|
Synchronized Swimming
Synchronized Swimming |
|
Federal Reserve Board1
In November, the Federal Open Market Committee (FOMC) lowered the federal funds target rate by 25 basis points to a targeted range of 4.50% to 4.75%. This is the second time in a row that the Federal Reserve (Fed) has reduced interest rates. The press release remained relatively unchanged, noting that “inflation has made progress” toward the 2% target while acknowledging that “labor market conditions have generally eased.” The committee highlighted that inflation and unemployment risks are roughly in balance.
European Central Bank1
The European Central Bank (ECB) Governing Council lowered the key deposit rate by 25 basis points at the conclusion of its policy meeting in October. The ECB credited the rate cut to the “disinflationary process” being “well on track”. The Governing Council noted that the inflationary impact of high wage growth was buffered by profits while financing conditions remain restrictive. Inflation forecasts were revised slightly lower considering a weaker contribution from domestic demand. The path ahead remains uncertain as the Governing Council reiterated that it is not committed to a particular rate path and will remain data dependent.
Bank of England1
The Bank of England (BoE) Monetary Policy Committee (MPC) voted 8-1 to reduce the Bank Rate by 25 basis points to 4.75% at the conclusion of its November meeting. The one dissenting member favored leaving the Bank Rate unchanged at 5%. The BoE has adopted a gradual approach to reducing policy restraint in the absence of material developments. The MPC forecasts inflation to rise to 2.5% by the end of the year as declines in energy prices last year fall out of the annual comparison. Despite progress toward the 2% target for inflation, the committee remains cautious in determining the appropriate degree of policy easing.
PORTFOLIO STRATEGY
Government/Treasury Strategy
We continued to lock in longer-term, fixed-rate securities where appropriate. Specifically, we added fixed-rate Treasury and repo securities in 6-month to 1-year terms. During the month, the Fed continued cutting interest rates with a 25 bp move, and generally view the policy rate as still in a restrictive posture. We believe that while the Fed may not necessarily proceed by cutting every meeting, the path of least resistance remains lower rates at a deliberate pace. We also added to longer-dated, floating-rate note exposure this month, notably topping off SOFR (secured overnight financing rate) exposure and reducing our underweight in Treasury floating-rate securities as we believe levels were attractive and added good ballast to the portfolios given the incoming new political regime.
As the FOMC has formally acknowledged that their mandates of labor and inflation are now closer in alignment, the focus has moved to reducing the outright level of restrictiveness their policy rate currently places on the economy. The Fed has now delivered 75 bps of rate cuts, and is eyeing one more for 2024 in December. We expect the Fed to become a bit more patient and deliberate with cuts in 2025, but still believe there is room to cut rates back closer to neutral.
Treasury and agency auctions have been orderly – especially considering the condensed schedule surrounding the Thanksgiving holiday. November likely represented a high point in Treasury bill supply, with some reductions to auction sizes coming in December. We have no concerns or issues to raise with respect to T-bill liquidity.
Looking ahead, the Fed has initiated its rate-cutting cycle, and the market continues to contend with the results of the recent presidential election and what future policies may look like. Funding markets perked up for month-end, providing attractive opportunities in the overnight markets for lending cash. We expect settlement dates and month/quarter-end dates to continue to be volatile in the funding space.
Prime Strategy3
Both the weighted average maturity (WAM) and weighted average life (WAL) of the portfolios extended throughout the month as we continue to opportunistically lock in 6-month and longer fixed-rate securities on the back of the recent sell-off. Following the repricing of expectations for monetary policy next year – with only three rate cuts priced in by the end of 2025 – we believe adding fixed-rate exposure further out the curve is an attractive proposition given the positive carry compared to overnight funding levels, which wasn’t the case only a few months ago.
As the FOMC has formally acknowledged that their mandates of labor and inflation are now closer in alignment, the focus has moved to reducing the outright level of restrictiveness their policy rate currently places on the economy. The Fed has now delivered 75 bps of rate cuts, and is eyeing one more for 2024 in December. We expect the Fed to become a bit more patient and deliberate with cuts in 2025, but still believe there is room to cut rates back closer to neutral.
With respect to credit, while spreads on the short end of the curve remain tight, secondary rolled-down corporate bonds continue to provide the most value and have been trading dislocated and cheap relative to their wholesale equivalents.
Looking ahead, dealer balance sheets remain mostly unconstrained heading into year-end, but we expect pressures to build next month. The Fed has initiated its rate-cutting cycle, and the market continues to contend with the results of the recent presidential election and what future policies may look like.