Powell Stays On Message - And A Quick Bond Update
Keep an eye on bonds here . . .
This is a quick update to my most recent post, The Unequivocal Jay Powell.
Towards the end of the article, which sought to synthesize Powell’s official comments with earlier comments from Neel Kashkari at the Aspen Economic Strategy Group's 2022 annual meeting in Aspen, Colorado, I opined:
Given Kashkari’s comments, together with Powell’s reference to the effect that “another unusually large increase could be appropriate at our next meeting,” another increase of .75% seems, to me, to be more likely than not. Given how clear Powell was, certainly no one could legitimately say this would come as a surprise. Why would the Fed waste that opportunity? (Italics added)
Earlier today, Powell spoke publicly once again, this time at the Cato Institute’s monetary policy conference in Washington. As my title for this article reflects, Powell stayed on message. Repeating the warning he issued on August 26, at Jackson Hole, Wyoming, he said “The Fed has and accepts responsibility for price stability.” He went on to reiterate that history cautions against prematurely loosening policy.
Interestingly, Chicago Fed President Charles Evans, known for having a dovish bent, didn’t contradict this message while speaking at an event in Illinois later in the day. Said Evans:
“I think that we’ve got a good plan in place. We could very well do 75 in September . . . My mind is not made up. I do know that we need to be increasing interest rates up to a substantially higher level than where they are now.”
According to a report on CNBC, the probability of a .75% increase rose to 86% during Powell’s remarks, according to the CME Group’s FedWatch tracker of fed funds futures bets. Both Goldman Sachs and Bank of America told clients to expect that three-quarter point hike.
Keep An Eye On Bonds
Related to the above, I wanted to offer a reminder to keep your eyes on bonds, as this asset class is starting to look better in here.
Take a quick look at the below graphic, featuring the price action for BSV, BND, and TLT over the course of the past year, and then I will offer some commentary below.
In my most recent article for Seeking Alpha, I explained why Vanguard Short-Term Bond ETF (BSV) is the largest holding in my portfolio.
At the conclusion of the article, however, I offered this little teaser:
In many of my articles, I call this section "summary and conclusion." In this case, I decided to include the word "outlook" instead.
Here's why. At this very interesting time, I am watching very closely the direction of interest rates and the actions of the Fed.
You see, right now my personal weighting is roughly 15% in BSV, 10% in AGG, and 3% in iShares 20+ Year Treasury Bond ETF (TLT). As we get closer to a point where I believe the Fed is done with interest rate increases, I may consider lessening my weighting in BSV in favor of slightly heavier weightings in the other 2 ETFs.
Why? For two reasons. First, to potentially achieve a slightly higher level of income. Second, since the price of bonds moves inversely of interest rates, there might be a point where the potential for capital gains is greater in the longer-term ETFs.
In line with this, in recent days I have been nibbling at both AGG and TLT. As can be seen in the above graphic, over the past week TLT in particular has traded at its lowest price since 2013. The current yield is sitting at a little over 2.6%.
In the case of both AGG & TLT, it may be that we are in for at least a measure of additional price declines as the Fed continues with its interest rates increases. At the same time, as we get into the first part of 2023, we might be sitting at a point where these vehicles are generating a solid level of current income, as well as opportunities for capital gains if interest rates go the other way.
For now, just a heads up, that’s all.
Last thing before I leave you today. The major international ETFs (IXUS/VXUS/VEU) I follow are down roughly 25% from recent highs. While, as I have written, I don’t believe we are returning to “the world of 4,818” anytime soon, and Europe may be in for a very rough winter, it may pay to stay diversified in here.
Please feel free to share your observations, and even criticisms, in the comments section below.
As always, thanks for honoring me by reading my work.