But probably not this week.And just what does that have to do with the price of rice in China. Or the price of oil at Rotterdam?
Katie Nixon is the chief investment officer of Northern Trust Wealth Management, the Chicago-based private bank ranked 9th on our Top 40 Wealth Management Firms list, with $197 billion in assets for accounts over $5 million. Nixon says the markets are unprepared for what she believes are going to be two more interest-rate rises this year—in June and December—that the Federal Reserve will start telegraphing at its next board meeting beginning March 15.
Regardless of the Fed’s signaling, the rate rises are going to create market dislocations. Going up another 0.25 or 0.5 point from the current 0.5% fed-funds target rate is a big move, much more than moving from, say, 1.75% to 2%, as we have commonly seen in the past. But it’s got to be done, says Nixon, 51. The U.S. economy is essentially healthy, and the Fed is returning to more historically “normal” rates for all the right reasons. Of course, all the other central banks are watching the Fed’s moves with bated breath. “No one likes to eat the first oyster,” she says.
Nixon, as it happens, has a pretty good track record making such calls. In late January, when markets were tanking, she steadfastly argued that the markets were overreacting to China’s malaise, the Fed’s December 0.25-point rate increase, and oil’s rapid decline. None of those issues were serious roadblocks for slow and steady growth in the U.S. and the globe, argued Nixon, who used her down-home way of explaining complex economic issues to talk clients out of cutting and running to safety.
Quite the opposite. Instead, Nixon urged them to use the rout to buy riskier assets. One Northern Trust client with more than $15 million did just that. After initially getting rattled when his portfolio fell hard in the first six weeks of 2016, he took advantage of the overreaction by investing 30% of his cash reserves in a number of risk assets, including high-yield investments, which have jumped 7.1% since Feb. 11. He’s feeling pretty good at the moment. Northern Trust’s “strategic risk asset model” overall is up 8.4% from February lows.......MORE
And from Penta's confrere's at Barron's Income Investing:
An ETF Designed to Hedge the Risk of More Fed Rate Hikes
In last week’s “Current Yield” column, “3 Remedies for Volatile Rates,” I covered some ways investors can reduce interest rate risk in their bond portfolios now that economic numbers have improved, markets stabilized and it seems a lot more likely the Federal Reserve will hike interest rates this year.
Ideas included shortening up on duration, diversifying into global bonds and venturing into high yield debt.
I didn’t mention a crop of funds designed to help investors hedge interest rate risk. I spoke this week with Bryce Doty, portfolio manager at Sit Investment Associates, who told me about the exchange-traded fund he manages that was set up to specifically help investors hedge the risk of Fed rate hikes, the Sit Rising Rate ETF (RISE).
RISE is designed so that investors benefit when the Federal Reserve raises rates. It’s different from funds that have negative durations because it primarily shorts the shorter end of the yield curve (2-5 years), which is the spot most directly affected by a rate hike. Since Treasuries have climbed and rates fallen in the past year, the fund is down more than 5% in that time.
RISE’s website that includes a calculator to figure how much you need to invest to get a meaningful hedge. For example, if your total portfolio yields 4% and has a 5 year duration, you can put 15% in RISE. You’ll give up about one percentage point of yield, but cut your interest rate risk nearly in half — to a duration of 2.75 years.
“You’re better off giving up a little income and gaining downside protection to preserve what you have,” says Doty....MORE