First, a reminder for clients. Our new Compliance Company, Mariner Advisor Network, has been mailing forms to you for signatures. Your signature simply acknowledges that we have hired Mariner to be our Compliance entity for Legacy Wealth Planning. We used to do this in house, but our growth has made this a larger effort, so we have hired Mariner to monitor our business activities and keep us compliant with current securities rules and regulations.  Your investments, LPL Financial and your advisor all remain the same as before – no changes.

Most of you now know that interest rates have moved up sharply in the last year and a half. The Federal Reserve (Fed) is in control of interest rates in the United States. By raising rates, the Fed is putting its foot on the brake of our economic car, hoping to slow down business, and most importantly, bring down inflation. For the moment, they have partially succeeded. Inflation is lower than a year ago and the markets have responded positively. But it is not low enough yet, so the hope is that the Fed can slow its rate hikes and the momentum of slowing inflation will continue and reach the Fed’s target of 2% inflation per year. We will see.

When interest rates rise, bond prices decline, and they call this situation an interest rate Bull Market.  When interest rates are stable, investors benefit from stable fixed income prices, and they can enjoy the 4-6% coupon that the fixed income generates. And, by the way, we are now in the range of where interest rates have been, long term. From 1880 to 1970 interest rates traded between 2 and 5%. It would be good if we returned to that range for the foreseeable future.

Could interest rates go higher? It’s possible. With the Treasury Department expected to issue a lot of Treasury securities to fund budget deficits and with the potential for the Bank of Japan (BOJ) to finally end its aggressively loose monetary policies, we could continue to see upward pressure on yields. However, while supply/demand dynamics can influence prices in the near term, the long-term direction of yields is based on expected Fed policy. So, unless the Fed isn’t done raising rates due to a resurgence of inflationary pressures (we don’t think that is likely), the big move in yields has likely already taken place. Inflation is trending in the right direction and the Fed could be near (at?) the end of its rate hiking campaign. That doesn’t mean rates are going to fall dramatically from current levels though, and that is fine for the longer-term prospects for fixed income investors. They would benefit from stable prices.

LPL Research believes the fed funds rate is likely going to stay higher than it has over the past decade, which means the 10-year Treasury yield is also going to stay higher than it has over the last decade. If the new neutral fed funds rate is around 3.5%, then that means the 10-year Treasury is likely going to be around 4.0%, plus or minus. Now of course, that rate will fluctuate on a daily basis, but the 10-year yield could average around 4% over the next decade, which is what it generally averaged in the decade before the Global Financial Crisis (GFC). If rates stabilize, this could be a good environment for interest rate sensitive business-like real estate, banking, the stock market, etc.

Fall is upon us. Call Mark or Elise with any investment questions any time. Have a great month ahead!