While financial markets stabilized this week after several weeks of volatility, performances since the end of the 1st quarter continue to be disappointing. The main culprit impacting most asset classes is “Interest Rate Anguish” and calls to mind similar feelings as those evoked by the image above.
Despite good news from companies posting a solid season of earnings growth for the 1st quarter, investors are fretting because of announcements made by the U.S. Federal Reserve to raise short-term interest rates throughout this year. The impact of these moves pushed the interest rate charged on debt such as mortgages higher very quickly. For example, a 30-year mortgage rate has moved from approximately 3% to 5% and the intended impact is to slow the housing market.
The pressure of rising interest rates has impacted financial markets in many negative ways, however, a positive impact for clients who are “savers” is they will now be rewarded with higher yields earned on their money market balances.
Because of this expected benefit, our research team reviewed money market funds available at various custodians to enhance the potential return on a risk/return basis versus the current funds we use.
When interest rates fell to 0% in March 2020, we swapped out of municipal and prime money market funds and placed balances into money market funds that carried lesser risk and were invested only in U.S. Treasury-backed securities. This strategy was successful as interest rates remained at 0%.
As appropriate, we are now recommending a switch back into the non-U.S. Treasury-backed funds to take advantage of higher yields in other short-term investments. If clients receive notices of trades in their accounts over the next few weeks from their custodians, the confirmations will reflect this decision.
While “Interest Rate Anguish” is a headline topper, clients can actually benefit from interest rates moving higher.