Short-term interest rates have been quite attractive to me for a while now. Back in January, I wrote up the short-term bond ETF, also known as the SPDR® Bloomberg 1-3 Month T-Bill ETF (BIL). I also included it in my top-5 of best ideas for 2024. I realize it is very dull position, but the current yield on the short end of the yield curve exceeds that on the long end. The potential reward is pretty sizeable in absolute terms (above 5%), and these treasuries are often referred to as the risk-free rate or similar terms.
My last article was written a little over one month ago. Yields have increased on the short end and increased on the long end. The curve remains inverted.
The curve shifted because Fed Chair Powell held another press conference and pushed back on market expectations that rate decreases were imminent. The Fed wants to see further confirmation inflation stays down and out:
That would mean the services sectors would have to contribute more. So in other words, what we care about is the aggregate number, not so much the composition. But we just need to see more. That’s where we are as a Committee. We need to see more evidence that sort of confirms what we think we’re seeing, and that gives us confidence that we’re on a path to, a sustainable path down to 2 percent inflation.
One piece of evidence Powell cited was he’d like to see inflation come out of services sector. He thinks goods inflation is down but
So, as you know, almost every participant on the committee does believe that it will be appropriate to reduce rates, and partly for the reasons that you say. We feel like inflation is coming down. Growth has been strong. The labor market is strong. What we’re trying to do is identify a place where we’re really confident about inflation getting back down to 2 percent so that we can then begin the process of dialing back the restrictive level. So, overall, I think people do believe, and as you know, the median participant wrote down three rate cuts this year. But I think to get to that place where we feel comfortable starting the process, we need some confirmation that inflation is, in fact, coming down sustainably to 2 percent
He also clarified that the labor market holding up well is giving the Fed a lot of leeway holding rates where they are. Given they have 2 mandates; full employment and stable prices, the juxtaposition of inflation rapidly falling and a strong labor market is everything the Fed wants. Why risk inflation coming back when labor isn’t suffering? Lots of commentators are arguing for one way or the other (usually faster rate cuts), but this usually accompanies a view that a slowdown is imminent. It could easily have happened, but it didn’t. So understandably, the Fed is comfortable hanging around where they are. At the same time, Powell appears ready to cut if labor weakens:
CHAIR POWELL. Yes. So let me say that we’re not looking for that. That’s not something we’re looking for. But yes, if you think about, you know, in the base case, the economy is performing well, the labor market remains strong. If we saw an unexpected weakening certainly in the labor market, that would certainly weigh on cutting sooner. Absolutely. And if we saw inflation being stickier or higher or those sorts of things, we would argue for moving later.
One of the important takeaways came when Powell point-blank stated he didn’t think it was likely they would cut rats in March:
Based on the meeting today, I would tell you that I don’t think it’s likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s to be seen. So I wouldn’t call — you know, when you ask me about in the near term, I’m hearing that as March. I would say that’s probably not the most likely case
To me, the current yield on short-term paper still looks amazing. There is not a lot of risk (credit or…
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