This week the Treasury bond market saw unprecedented volatility and confusion as Federal Reserve Chairman, Jay Powell, announced there would be no rate hikes until 2025. This comes after reiterating that the Fed had no interest rate increase built into its forecast before 2024. But in spite of his calming tone, the bond experts signaled the opposite. They said that yields are going up, which drove down the prices of Treasury bonds.
This tug of war is very unusual and has created uncertainty and a decline in both government bond values and some of the higher growth technology companies that depend on borrowing for their expansion.
Conventional wisdom says that the Fed has the tools to dictate the pace of the economy. However, this would seem to indicate that the economy might be expanding at an accelerated rate as the nation emerges from the year-long slump and that inflation may be around the corner.
Both the Federal Reserve and the U.S. Treasury Department have made statements that inflation is under control and yet there have been analysts who predict an economic expansion for the second half of this year at 5.5%-6%- double or triple the normal average. So here we are faced with a confusing forecast of a booming economy and declining values for Treasury bonds.
That leads us to the conclusion that we will see a market rotation and many of the forgotten parts of the economy to emerge over the next six months. In light of this confusion here are some things investors should consider:
- It’s best not to make investments that fight federal policies.
- Avoid buying long-term Treasuries as interest rates rise.
- Look for dividend paying sectors such as banking and travel related industries to have a steady recovery in the second half of 2021.
- Municipal bonds might defy the markets and continue to increase in value as threats of tax increases are on the horizon for wealthy investors.
- Those who sit on the sidelines in short term bonds might be left behind as the market roars on news of the advancing recovery.