1. Newsroom
  2. Fed rate hikes ahead: our exposure confirmed
Menu
UBP in the press 16.07.2021

Fed rate hikes ahead: our exposure confirmed

Fed rate hikes ahead: our exposure confirmed

Institutional Money (16.07.2021) - Recent moves by the Fed confirm our fixed-income views of being defensive on interest rate exposure and constructive on credit exposure.


The US Federal Reserve surprised markets recently by making a hawkish pivot through its updated dot plot projections, which now indicate two hikes in 2023 compared with their prior dot plot which showed no hikes. In addition, 7 of the 18 board members already see a hike in 2022. Fed Chair Jerome Powell also confirmed that the committee have begun initial discussions on tapering off their large-scale bond purchases, which will probably advance as the year progresses.

This hawkish outcome was driven by the Fed’s increasing confidence in the economic outlook. The Fed is reacting to a strengthening consumer, where demand has been fuelled by unprecedented amounts of monetary and fiscal support.

Whilst labour market gains in recent months have been slower than anticipated, the Fed is confident that jobs growth will continue, as enhanced unemployment benefits that are beginning to expire in some states in June will be fully expired by September, thus forcing individuals to return to the labour market.

For several months now, we have been positioned with a structurally defensive interest rate exposure across our fixed-income portfolios and this positioning has benefitted from the recent Fed meeting. We see this meeting as the Fed looking to close the gap in pricing between themselves and the market, and from here we expect it to also limit the downside in US government bond yields, where the recent lows in rates should define the bottom of the range. Interest rates remain a risk, particularly for longer-dated maturities, and products that do not manage their interest rate exposures, such as ETFs and tracker funds, may see capital losses as rates continue to rise across the interest rate curve.

In terms of credit, we remain positive and continue to maintain an overweight position.

We see a Fed that is now no longer significantly behind the curve as reducing one of the major tail risks that investors have been concerned about, namely that of sustained inflation above their target which could potentially have led to violent moves on the rates markets and contagion into credit markets. Instead, this hawkish pivot by the Fed looks as though it will dampen fears of excessive inflation in the medium term, and the market has responded with forward-looking inflation instruments falling since the FOMC meeting. Given the global economic growth path is now expected to exceed the pre-Covid trend, in tandem with the significant and continuous monetary and fiscal stimulus measures, credit continues to be attractive, with the distinct possibility that those fixed-income credit markets where spreads have not returned to their pre-Covid lows will do so.

We take the recent moves by central banks – and the Fed in particular – as confirmation of our defensive bias on interest rates along with a constructive view on credit, in particular high yield and AT1s, and expect to continue to hold these positions in the medium term.


Graub_Philippe_150x150.jpg
Philippe Graüb
Head of Fixed Income
View his Linkedin profile

Bernard-McGrath_150x150.jpg
Bernard McGrath
Senior Investment Specialist
View his Linkedin profile

Expertise

Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

Most read

UBP in the press 29.01.2021

Fixed income outlook: Positive environment for credit

Institutional Money (27.01.2021) - Despite an accelerating Covid-19 spread into year-end, risk markets concluded 2020 on a strong note as investors took confidence from the commencement of the vaccine rollout in the US and UK. 

UBP in the press 03.02.2021

Compelling opportunities in Japanese small-cap techs

Funds Society (28.01.2021) - An improvement in corporate governance, a stable government and a leading edge in digitalisation and robotics are making the Japanese small-cap segment a rich source of attractive opportunities for selective investors, says UBP Senior Analyst Cédric Le Berre.

UBP in the press 01.03.2021

Compliance in the RegTech era

Le Temps (01.03.2021) - For two decades, Swiss private banks have been engaged in a new test of endurance as they have had to adapt to a raft of new regulations, tougher tax compliance requirements and the globalisation of their client bases.


Further reading

UBP in the press 21.07.2021

Japan’s corporate landscape enhanced by governance reform

Agefi Actifs (23.07.2021) - Significant improvements in corporate governance in Japan – as shown in particular by increasing female representation in companies' governing bodies – could drive stronger momentum in the Japanese market over the long term.

UBP in the press 12.07.2021

Assessing the impact intensity of companies

Allnews (12.07.2021) - Union Bancaire Privée is taking a unique approach to impact investing. Interview with Simon Pickard and Mathieu Nègre.

UBP in the press 05.07.2021

The evolution of Impact Investing in listed markets – and what happens next ?

A lot has changed in the last few years. Impact investing in listed equity is relatively new and, in recent years, there has been much debate about whether impact can even be achieved in secondary markets.