The best opportunity to lock in the best fixed income for the next five or maybe 10 years will occur in the next 12-18 months. I will explain why.
The economic cycle we have been in the past 10 years has been great – maybe the greatest of our lifetimes. Stock markets have been quadrupled or more since their lows in 2009. But this cycle has been different. It has been a debt-fueled rally that has relied on lower-than-normal interest rates for a long period and money printing.
We got used to very low interest rates in all areas, such as consumer credits or mortgage rates. Even Trump is criticising the FED for tightening the screws on the economy by raising rates. But this is all very bad news for natural economic cycles. When the bond markets see inflation on the horizon as a long-term issue, rates on long-term bonds rise in tandem with short-term rates. When this doesn’t happen, the bond market is signaling that any inflation is a short-term issue and slow growth is a long-term fact.
Interest rates will top out sooner than later, the bond market is signalling us. The Fed might increase rates further in 2019 and may be a bit more, but markets tell us that this will be it.
The rates on short-term money have moved between 2% and 3%, for 2 to 10 years deposits. But the amount for 30 years is still just more than 3%. The very small spread between short-term money and long-term money is an ominous sign: Investors do not have faith that inflation will cause interest rates to rise.
So, use the next 6-18 months to enhance and position your bond portfolio and try to secure any higher rates resulting from further FED hikes to lock in higher bond yields for the long term. Use any rally in the bond market to dig into the long term fixed income market.
I believe, interest rates will move up over the next 12, may be even 18 months. Then they will likely hit a wall – maybe even sooner. If you don’t you might miss the opportunity to lock in some higher rates for the next five to 10 years. Rates could start coming down again, especially if the US will enter a recession or another debt ridden crisis is on the agenda.
Get prepared what bonds and maturities to buy. You may have only a short window to act.
Sven Franssen