- The Fed and Bank of England held rates again at the start of November.
- Inflation prints in the UK and US both came in below expectations.
- Future supply of US government bonds is increasing, but by less than expected.
- So, have we hit peak interest rates? And where to invest if we have.
Hal Cook, senior investment analyst, Hargreaves Lansdown:
“We appear to have hit peak rates. At least, that’s what markets are telling us. The US 10-year Treasury yield peaked at around 5% in mid-October and has been on a bumpy-but-downward trajectory ever since. It was 4.48% on Friday. This is a big shift in sentiment. The 10-year UK gilt yield is also falling, having been at around 4.7% in October, it’s now at 4.28%.
Is this reasonable? Well, it feels like it is. Both the Fed and the Bank of England held interest rates again at the start of November. Inflation prints in both countries have come in lower than expected too, and not just at the overall level, with core and services inflation both falling in October. Add in the announcement from the US Treasury that their future bond auctions will see lower levels of government bond issuance than was expected and you have a happy bond market.
At the same time, we have seen stock markets go on a bit of a tear in November. All of the main developed market regions have posted meaningful gains in share prices this month. Even China has posted positive returns, having fallen dramatically over the three months to end of October. The FTSE 250 in particular is rallying hard, up 9.4% in the past month.
But, before investors pop the champagne, a word of caution. Markets may be getting ahead of themselves here. It wouldn’t take much for this ‘everything rally’ to reverse: higher than expected unemployment or sticky inflation could knock things for example. It would not be a surprise for there to be some data point over the next month or two which sends markets back down again and yields tick up. The consensus view, however, is that we’ve hit peak rates, and I broadly agree – even if there may be some more volatility from here.
The next question: where do you invest for this?
If yields do go down from here, and inflation remains under control, then most asset classes should benefit. That said, it’s hard to see the 10-year yields continuing to move lower in the near term given interest rates remain elevated and inflation is still above target. There remains the potential for recession in 2024, even if right now markets are accepting the soft or no landing narrative. Recession feels like it would be worse for equities as opposed to bonds, particularly if it makes central banks cut rates more quickly than expected. At least with bonds you’re being rewarded in with yield while you wait.
Predicting short-term moves is a fool’s game, so take a long-term view, as all investing should be. On a five-year horizon, bonds are attractive, and as are undervalued areas of the equity market such as emerging markets and the UK. Trying to time these things is hard so cue the oft cited and rarely wrong phrase: it’s time in the market, not timing the market.”
