It could be a momentous week for U.S. monetary policy and the Treasury yield curve.
The Federal Reserve (Fed) is expected to cut its policy interest rate for the first time in 10 years July 31. As shown in the LPL Chart of the Day, Investors Brace for a July Rate Cut, fed fund futures are pricing in an 80% chance of a 25 basis point (0.25%) cut and a 20% chance of a 50 basis point (0.50%) cut.
“Fixed income markets have priced in an especially accommodative Fed going forward, a signal that monetary policy may be too tight for a slowing economy hampered by a drawn-out trade dispute,” said LPL Research Chief Investment Strategist John Lynch.
Gauging the impact of a rate cut on the fixed income market could be difficult. On one hand, lower rates lead to loosened financial conditions, which could boost sentiment and increase appetite for riskier assets, as we highlighted in our Weekly Market Commentary: Riding the Wave…For Now. Lower rates should also help stoke inflation, which has steadily declined this year. All of these dynamics point to the potential for higher long-term Treasury yields.
Still, the global rate environment is pressuring U.S. yields. Sovereign debt yields around the world have dropped into negative territory, and even lower rates could be ahead as the European Central Bank eyes more accommodation. Even if the Fed opts for more rate cuts down the road, global central banks may counter with even looser policy, potentially pushing more yield-hungry investors into U.S. Treasuries.
In the near term, a rate cut and appropriate Fed messaging could provide a nice pop for the 10-year Treasury yield and a path out of yield curve inversion (or long-term rates below short-term rates). We also believe the 10-year yield could push higher over the next 12 months as solid economic fundamentals prevail over global uncertainty. This forecast hinges on a U.S.-China trade resolution, though, and the jury is still out there.
For more of our thoughts on the upcoming Fed meeting, check out our latest Weekly Economic Commentary: The Inaugural Rate Cut.
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Fed Funds Futures are a product offered by the Chicago Board of Trade which allows investors to speculate on what the Federal Reserve will do with interest rates.
Active management involves risk as it attempts to outperform a benchmark index by predicting market activity, and assumes considerable risk should managers incorrectly anticipate changing conditions.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (Member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.
If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:
|Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit|
For Public Use | Tracking # 1-877569
All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.
Financial Planning offered through Lexco Wealth Management, a registered investment advisor and a separate entity from LPL Financial.
Our Retirement and Advisory Services Advisors are available to meet at our Commerce Street (Poughkeepsie) or Route 9 (Wappingers Falls) locations.