October 22, 2024
Dear Investors and Friends,
As we reflect on the Federal Reserve’s latest decision, which saw a 50-basis point cut to the Fed Funds rate, it is clear the market largely anticipated this move. However, while many have assumed this means interest rates have broadly declined, the reality tells a different story. As the chart below shows, since the September meeting, yields on 2-year Treasuries have increased nearly 50 basis points, and yields further out the curve have risen nearly 60 basis points.
What Happened Post-Fed Meeting?
In our September letter, we discussed how the market was pricing in a significant 2.5% decline in the Fed Funds rate over the next year. That projection remains a critical element of current market pricing. However, subsequent to the Fed's September meeting, the labor market showed unexpected strength, with unemployment figures reported on October 4th coming in stronger than expected. At the same time, inflation data has been higher than anticipated, adding uncertainty to how far rates may actually fall.
This is a reminder that while the Fed can influence short-term rates, long-term rates are driven by a variety of factors, including inflation expectations and economic data. As we’ve emphasized in prior letters, the market often prices in expectations well before decisions are made, and when reality doesn’t align with those expectations, the yield curve adjusts accordingly.
The Consensus Versus Reality: A Familiar Herd Mentality
We’ve seen this before - markets react to a popular narrative, and investors rush to lock in rates based on consensus opinions. Recently, that opinion has been, “Rates are falling, so buy long-term bonds to lock in yields.” But, as we discussed in our August 2024 Letter - The Dangers of Following the Herd in Fixed Income Investing, following the crowd can be risky. Those who rushed to buy longer term bonds are down significantly.
Our clients, however, have experienced nothing of the sort. By sticking to our disciplined approach of avoiding interest rate speculation and focusing on shorter-duration bonds, we’ve been able to sidestep these losses while maintaining flexibility and earning the highest yields on the short end of the curve.
How RCM Is Positioned & Navigating Market Uncertainty
At RCM, we continue to believe that betting on interest rates is an exercise fraught with risk. Our experience has shown that it is impossible to consistently and accurately predict rate movements, even in the short term. Instead of making directional bets, we diversify risk across the curve when investing beyond the short end, while staying primarily focused on short-duration bonds.
The current environment remains unpredictable. Factors such as stronger-than-expected employment figures, persistent inflation, and evolving geopolitical risks all contribute to an uncertain outlook. While we cannot predict every turn the market may take, we can control how we manage risk. At RCM, our focus on short-duration bonds, diversification, and maintaining flexibility gives us the tools to respond to whatever may come next, ensuring we are well-positioned to protect your capital while capturing opportunities when they arise.
As always, we remain committed to navigating these uncertain markets with caution, patience, and a focus on your long-term financial success. Please don’t hesitate to reach out with any questions or comments.
Warm Regards,
David and Mike
Disclaimer
Roosevelt Capital Management LLC is a registered investment adviser. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Past performance is not indicative of future performance. Principal value and investment return will fluctuate. No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.
While all the values used in this report were obtained from sources believed to be reliable, all calculations that underly numbers shown in this report believed to be accurate, and all assumptions made in this report believed to be reasonable, Roosevelt Capital Management LLC neither represents nor warrants the values, calculations or assumptions and encourages each prospective investor to conduct their own review of the audits, values, calculations and assumptions.