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Investors hoping to ride the curve of falling interest rates as the Federal Reserve embarks on its easing cycle, may be in for a wake-up call, according to investment management giant Vanguard.
"We expect interest rates to remain relatively high compared to those since the 2008 global financial crisis, even if the Fed continues to cut the federal funds rate as expected" wrote Andrew Patterson, Head of Active and Alternatives Research and Ning Yan, Investment Strategy Analyst in a note titled: Rates, they are a-changin’. Is bond fund risk too?
From 2008 through 2022, when interest rates hovered near 0%, the firm notes that investors upped their "reach for yield." Then, from 2022 through 2023 "the interest rate on the 10-year Treasury saw the largest jump since 1981."
Now with rates expected to fall as low as 3.4% in 2025, the team is advising that investors review their "risk profiles."
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"Checking up on the risk profile of your funds is a good practice as market environments evolve," Patterson said. "Investors should be aware of the risks that portfolio managers take in different interest-rate environments and be sure to consider them as part of their regular investment review," he noted.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| VTI | VANGUARD TOTAL STOCK MARKET ETF - USD | 298.19 | -0.89 | -0.30% |
| BND | VANGUARD TOTAL BOND MARKET ETF - USD | 73.33 | +0.20 | +0.27% |
| BSV | VANGUARD SHORT-TERM BOND ETF - USD DIS | 77.63 | +0.10 | +0.13% |
| BIV | VANGUARD BOND INDEX FUNDS INTERMEDIATE TERM BOND | 76.20 | +0.26 | +0.34% |
| BLV | VANGUARD BOND INDEX FUNDS LONG-TERM BOND | 71.99 | +0.43 | +0.60% |
The firm oversees $7 trillion via funds and exchange-traded funds, including the biggest; the Vanguard Total Stock Market Index Fund, the largest in the world. As well as a series of multi-duration bond funds including Vanguard’s Total Bond Market Index Fund, short-term, intermediate-term and long-term.
SEPTEMBER'S SURPRISE JOBS REPORT
Handicapping the direction of rates may be choppy for the rest of the year. On Friday, the stronger-than-expected September employment report, with 254,000 non-farm jobs added, sent the yield on the 10-year Treasury back towards 4%, the highest since August.
American economist and Harvard University Professor Lawrence H Summers during the interview at Taj Place on September 30, 2024 in New Delhi, India. (Raj K Raj/Hindustan Times via Getty Images / Getty Images)
Following the report, former Treasury Secretary Larry Summers, said the Fed made a misstep.
"With the benefit of hindsight, the 50 basis point cut in September was a mistake, though not one of great consequence" he said.
Now, over 96% of market participants are pricing in a 25-basis point rate cut by the Fed at the November meeting, taking a 50-basis point reduction off the table, as tracked by the CME’s FedWatch Tool, which tracks the probability of interest rate moves.
Fresh inflation data due this week, the Consumer Price Index and the Producer Price Index, will give investors a fresh read on inflation.