“The secret of getting ahead is getting started.” – Richard Branson
On the domestic front, it may sound unbelievable, but employment is essentially back to pre-COVID levels. Total employment for February: +88.7k from +29.5k; unemployment rate: 5.8% from 6.3%; participation rate is stable at 66.1%. In terms of the outlook for interest rates, there remains a long road to full employment, an essential component for any serious consideration to increase rates.
The RBA clearly remains committed to the 3-year yield target of 10 basis points but markets have dictated otherwise in the past 2 weeks, driving this to 17 bps. In this regard the RBA must also take into consideration international conditions particularly the policy stance of major central banks around the world.
Despite record levels of stimulus in the US, Chairman Powell has made it clear that while prospects for recovery are strong, the FOMC will maintain accommodative monetary policy for the foreseeable future. The median fed funds rate expectation of the Committee for the end of 2023 remains the lower bound of 0.125%.
It’s also worth mentioning just how volatile the longer end of the yield curve has been recently. Despite market talk that short term interest rates won’t move for some time; markets have however, already started to price in a change further down the road in anticipation of economic growth picking up and a much-needed increase in inflation.
The general view is that we are unlikely to see the US 10 Year bond below 1% for some time, if at all – see chart below. Could this signal the bottom of the interest rate cycle?
The major take–away from all this is that interest rates around the world aren’t going anywhere for the foreseeable future. If it hasn’t already, this will start to have a dramatic impact on those who rely on interest income to maintain their lifestyle. Without income people will start to eat into their capital and the vicious cycle of capital erosion begins. But there are options. The Corporate Bond market has been incredibly stable amongst all this volatility. We are still sourcing OTC corporate bonds with yields of between 4-5% and private debt securities with yields of 7.5%. Despite a different risk profile to cash we believe these higher yielding names are a worthy consideration for anyone seeking income.
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