Inflation and Interest Rates
As a narrative emerges that inflation is beginning to slow, the bond market seems to be at a crossroads. Will interest rates continue to increase based on statements made by the Federal Reserve about persistent inflation? Or will interest rates fall based on the belief that the economy is slowing and moving towards a recession?
No one knows for certain. The Federal Reserve, analysts, and economists can only speculate about the direction of inflation. Because of this uncertainty, the bond market has bounced up and down based on the uncertainty of the direction of interest rates. We expect this to continue.
We believe that an inverted yield curve will remain in place. It is our view that the economy is slowing. We believe that the Federal Reserve will begin to pause its interest-rate activity. If any evidence emerges that inflation may be cooling, we believe the Fed will begin to change its language. Less warnings of more rate increases and more discussion around working to keep the economy out of recession.
On the investment front, challenges remain with chasing short-term money market rates; these are not locked-in yields. Yields fluctuate on money market accounts and these assets can yield significantly different returns based on interest-rate levels.
We believe it is not prudent to only invest in shorter-term instruments. We believe a diversified mix of bonds with a duration less than the aggregate bond average makes the most sense until we have a better understanding of where inflation is heading.
Our fixed income strategy is something that we analyze and consider carefully. We have been underweight duration for some time now and that has been a gratifying choice. We will continue to watch conditions in the economy and adjust as needed.