Check out this week’s MoneyShow chart below. Four interest rates are displayed: the prime rate in orange, the secured overnight financing rate (SOFR) in light blue, the average 30-year mortgage rate in purple, and the effective yield on 7-10 year corporate bonds in green.
chart
Data by YCharts
What jumps out at you right away? Borrowing costs for luxury companies that use the bond market to raise money and for U.S. home buyers who take out long-term mortgages peaked last October. We have already seen that corporate bond yields are down about 150 basis points from their peak, and long-term mortgage rates are down about 170 basis points.
At the same time, this is the only time we’ve seen SOFR reflect the Fed’s margins. That means only now will business loans, derivatives and other financial products linked to short-term interest rates be repriced. As soon as this chart is updated with one more day of data, the prime rate will also drop by 50 bps. That means the interest rates charged on variable rate credit cards and home equity lines of credit (HELOCs) are only now coming down.
What happens next? Depending on how fixed income investors think the Fed’s recent actions and what actions they take for the rest of 2024 and into 2025 will affect growth and inflation. It’s going to change a lot.
The current market consensus is that the Fed will seek a soft landing through rate cuts rather than stimulating further inflation. As long as this situation continues, long-term yields are likely to level off at this point while short-term interest rates continue to fall. That’s the ideal scenario.
But if investors start to worry about the Fed’s overreach, they will sell bonds. That way, even if short-term interest rates fall, long-term yields will rise. That’s not an ideal scenario.
myself? I remain in the “be bold/don’t worry too much” camp. I still like some of my previous recommendations, including the iShares 20-Year Treasuries ETF (NASDAQ:TLT), which is up more than 6% in the past 90 days, and the VanEck Gold Miners ETF (NYSE:GDX). , which increased by more than 18% during the same period.
original article
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