Are Interest Rates Peaking?

U.S. interest rates have been on a one-way street higher since the Federal Reserve began its hawkish monetary policy path in March 2022. The short-term Fed increased the short-term rate from zero percent to 5.375%. Quantitative tightening, reducing the Fed’s swollen balance sheet, pushed rates higher further out on the yield curve.

At the latest November 1 FOMC meeting, the central bank left the Fed Funds Rate unchanged for the second consecutive meeting. However, selling in the bond market pushed the long-term 30-year Treasury bond futures to the lowest level in over a decade and a half.

The Fed controls short-term rates but has influenced longer-term rates with its QT policies. Meanwhile, the decline in the medium and long-term bond markets means the market is doing the Fed’s tightening, which has battled the highest inflation in years.

Interest rates have skyrocketed over the past months. The bear market in bonds is intact in early November 2023. However, even the most aggressive bear markets rarely move in straight lines, and significant relief rallies can occur.

Moreover, rates may have risen to unsustainable levels, setting the stage for a bond market rally that will take rates lower over the coming months.

Bonds fall on the Fed and aggressive selling

• Hawkish monetary policy has pressured the bond market.

• The 30-year Treasury bond futures fell to 107-04 in October, the lowest level since 2007.

• The 10-year Treasury yield rose above the 5% level.

• 30-year fixed-rate mortgage rates, below 3% in late 2021, rose to over 8%.

• China and Japan have been aggressive sellers of U.S. government debt securities.

The reasons a rally could be on the horizon

• Geopolitical turmoil tends to attract capital to safe assets.

• War in the Middle East is a significant geopolitical event.

• The U.S. bond market has a long history as a haven for capital.

• The bond market is oversold after falling to a sixteen-year low.

The housing sector could rally- ETFs to consider

• A bond market recovery leading to lower mortgage rates could cause an increase in new home demand.

• The residential housing market remains tight due to low supplies of existing homes. Many owners are locked into low, sub-4% mortgages.

• The home construction ETFs with over $100 million in assets under management are the iShares U.S. Home Construction ETF (ITB), the SPDR S&P Homebuilder ETF (XHB), the Invesco Building & Construction ETF (PKB), and the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL).

• ITB, XHB, and PKB are unleveraged ETF products. NAIL is a leveraged product with an additional time decay risk.

Bond ETFs that are overdue for a rebound

• TLT is the 20+ Year Treasury Bond ETF with over $41 billion in assets under management.

• BND is the Vanguard Total Bond Market ETF with over $94.4 billion in assets under management.

• BNDX is the Vanguard Total International Bond ETF product with over $51 billion in assets under management.

• International bonds will likely follow the U.S. bond market.

Commodities prices could surge if rates decline

• Falling interest rates support commodity prices as they decrease the cost of carrying inventories.

• Gold, a leading bellwether commodity, put in a bullish key reversal on the monthly chart in October. Gold’s recovery could signal a rise in bond prices over the coming weeks and months.

• Metals prices have suffered under the weight of rising rates and could lead the way higher if rates begin to decline.
  
  

Bear markets tend to take prices to irrational levels on the downside. Time will tell if the decline to the 2007 low in U.S. bonds is unsustainable or if more selling is on the horizon.

Remember, it is virtually impossible to pick highs or lows in bull or bear markets. The trend is always your friend until it bends. Bonds remain in a bearish trend in early November 2023, but the potential for recovery increases the lower they fall.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!