Yesterday the Federal Reserve Chair Janet Yellen said at a University of Michigan event that the Fed planned to raise short-term interest rates.
“I think we have a healthy economy now … but it’s been a long time coming,” Yellen said.
Yellen said the current unemployment rate of 4.5% is “even a little bit below” what Yellen and her other colleagues at the Fed would consider “full employment.” She said inflation is “reasonably close” to the Fed’s stated goal of two percent. Read more
In a previous post, we argued that rate hikes will increase volatility through hedging of prepayment options embedded in mortgage-backed securities.
Recently, Mark Robinson presented another argument:
Analysis from SocGen published during the fourth quarter of 2016 points to a 2.6 per cent return on 10-year notes (the equivalent rate for the UK was 1.7 per cent). This reflects the general view that US equity valuations are stretched based on underlying earnings. If we accept that once investments in riskier assets such as equities are deemed relatively expensive to government-backed debt, then stocks could be subject to bigger price swings with increased frequency. Read more
This means that when interest rate rises, equities will appear to be expensive relative to government-backed bonds, hence they will be susceptible to selling, thus causing an increase in volatility.
Regardless of the argument, with a rising rate, one might think that it’s risky to invest in fixed-income securities. However, Tim Mullaney recently reported that:
Gundlach, CEO of DoubleLine Capital, is betting that the best way to play the coming rate hikes is by holding lots of mortgages
But how about prepayment risk?
“Gundlach doesn’t see prepayment risk as particularly high right now, but if prepayments spike, there’s a risk of losses for the fund.” Read more
Good investment decision sometimes seems counterintuitive. And if this is true, then prepayment risk will not be a threat to market volatility. Let’s see how this plays out.
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum
WOODBRIDGE, N.J. (AP) — Residents of low-income communities in New Jersey that would get a second gas-fired power plant nearby are urging the governor to halt the project, which they said flies in the face of an environmental justice law he signed with great fanfare…
VANCOUVER, British Columbia & SAN JOSE, Calif. — Absolute Software™ (NASDAQ: ABST) (TSX: ABST), the only provider of self-healing, intelligent security solutions, today announced the company will present at the Raymond James 44th Annual Institutional Investors Conference on Wednesday, March 8, 2023 at 11:35 am…
WASHINGTON, March 1 (Reuters) – U.S. President Joe Biden’s pick to head the World Bank, ex-Mastercard CEO Ajay Banga, met on Wednesday with executive directors at the bank as he launched a “charm offensive” to win the post, sources familiar with the plans said. Biden…
Snowflake and AWS expand their successful partnership by boosting sales collaboration, industry solution alignment, and joint go-to-market strategies Over 6,000 joint customers1 including Goldman Sachs and other Fortune 500 enterprises, are using Snowflake and AWS to rapidly innovate Approximately 84% of Snowflake’s customers run their…
Improved grain industry collaboration leads to shipping record MONTREAL, March 01, 2023 (GLOBE NEWSWIRE) — CN (TSX: CNR) (NYSE: CNI) today announced that February 2023 was the best February ever for Western Canadian grain movement on CN’s network. The Company worked with its customers and…