According To Nuveen Investors That Have Large Cash Reserves May Be Misleading Themselves
According To Nuveen Investors That Have Large Cash Reserves May Be Misleading Themselves: Saira Malik, chief investment officer at Nuveen, advises investors to go into longer-dated bonds as quickly as possible if they are currently holding cash or money-market funds.
When the Federal Reserve has raised rates in the past since the 1990s, the larger $55 trillion U.S. bond market has typically outperformed short-term Treasury securities.
In the previous four Fed rate hike cycles, the bond market generated an average 5.5% three-month rolling return, compared to a 2.1% return for short-term Treasury.
When comparing the performance of the Bloomberg U.S. Aggregate Bond Index to the Bloomberg U.S. Treasury 1-3 Year Index, it is noteworthy that the extent of the bond market’s outperformance diminished by 12 months compared to short-term positions.
According to Malik in a Monday client note, the broad market historically rallied strongly after the Fed pause and largely exceeded the following year. This supports our belief that investors may wish to start closing their duration underweights and that it may not be a good idea to allocate too much money to cash or short-term government debt.
Through linked exchange-traded funds, such as the iShares Core U.S. Composite Bond ETF and the SPDR Bloomberg 1-3 Year U.S. Treasuries Bond UCITS ETF for short-term Treasury exposure, individuals can acquire exposure to Wall Street bond indexes.
Speaking at the annual Jackson Hole conference in Wyoming on Friday, Fed Chairman Jerome Powell hinted that future rate increases might be required to maintain the U.S. cost of living in decline, despite the fact that rates are already at a 22-year high and inflation has substantially decreased in the previous year. He also reaffirmed his commitment to keeping rates at a low level for a while in order to restrain inflation.
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In terms of inflation, Malik cited a decline in housing inflation as encouraging. As the benchmark 30-year mortgage rate averaged 7.31%, it reached its highest levels since 2000 and caused a decline in home sales.
Additionally, she anticipates a “partial retracing” of the 10-year Treasury yield after its recent jump and a slowing of U.S. economic growth.
In the past, the 10-year yield peaked immediately after the final rate hike of a tightening cycle. We anticipate that this rate increase will take place either at the September or November Fed meeting and that the 10-year yield will fall until the end of the year. Prices of debt and yields move in the opposing directions.
According to FactSet, stocks rose on Tuesday, with the Dow Jones Industrial Average rising 0.3%, the S&P 500 index rising 0.9%, and the Nasdaq Composite Index rising 1.4%.
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