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Hello, everyone, welcome. I'll be going through my global financial markets and Investing Insights, specifically focusing on the fixed income or bond side of markets and including interest rates. Before I dig in a few words for compliance purposes. Statements made during this recording are for informational purposes and are my opinions. They are subject to risk and uncertainty, some of which are significant in scope and by their very nature, beyond the control of myself. Well factor and farther, there can be no assurance that such statements will prove to be accurate, and actual results and future events could differ in material way from said statements. Historical results are not necessarily indicative of future performance. So I'll go through a quick overview of markets and perform from a performance perspective. I will look at the Fed and and how they influence rates and expectations, put together by JP Morgan, primarily, I believe, in regards to expectations for fed activity, we'll look at the yield curve, which is just the amount of yield you get relative to how long the maturity is for a fixed income instrument and seen visually. And then lastly, just a little bit of long run history for interest rates, for for for perspective, so I intentionally just show less data and less and specifically less time periods when I'm talking about and looking at markets. However, we did see rates fall dramatically as the expectation for the Fed to be more accommodative shifted, and expectation across the yield curve, yield curve across the board, really fell in the quarter, and so we saw a strong performance for bonds across the board in the quarter, which I'm not showing in my year to date number but our current or current total return for bonds is exceeding that of the annual yield that one can expect on or current yield, and that's a function of rates being lower today than they were when they started the year. And so we've had two sources of positive return for bonds, one the income that we're receiving, and to the appreciation in bond prices as yields, market yields have fallen so going transitioning to the Fed and and their impact on rates, you know, it's worth reiterating and emphasizing that the Fed cannot and and maybe that's over overly strong way to say it. But even when post financial crisis, the Fed was actively out participating by buying bonds beyond the short end of the curve, even then, they had very limited impact to their ability to influence market yields the Fed and the next page, when we look at the yield curve, it's important to to understand that when the Fed acts, that's at the Very short end of the curve, and so they have complete control over interest rates at zero to 30 to 90 days, and perhaps a bit longer. But as time as the maturity links grow, the Fed's influence becomes less and less, and market forces are what drive interest rates, and when we look at the inversion of the yield curve, meaning yields further out in maturity are less than short dated maturities, that's an example of why, how markets Drive longer term maturities while the Fed controls short. So it's also worth highlighting an element of that and the point I would draw on this page. So this is a graph of the fed, the gray line is the federal funds rate up until now. And then after that, it goes to dotted lines that are all various different expectations. And then I really like this graph in that the gray is showing the range of expectations over since, since it looks like December or so of 2023, so we've now have, you know, a range expectation for future fed activity is a moving target. You know, the Fed will make changes, and the market is constantly trying to anticipate that. And by the very nature of markets, it's becoming a price mechanism for bonds that that the Fed, that have maturities where the Fed can't. Control that. So the market expectation for fed activity goes one way or the other, and then this and recently. And as you can see, the current expectation for which is the markets, is the green and the blue is the Fed's communicated year end estimates. And so what you can see is these projected estimates are at the lower end of the expectation over a sense that December of 2023, time horizon, and that's the element that's driving interest rates lower more so than, say, the Fed just lowered interest rates by 50 basis points. This here, so market expectation is what drives pricing in most bonds and most loans, too, whereas, and it's not so much what the Fed just did or what the Fed might do next, because when it comes to projecting into the future with forecasting, we're going to be most accurate with what the Fed's going to do next. But as we go further out into 2025, and 2026 and it's like reading tea leaves, in my opinion. And the expectation isn't so useful for predictive purposes, but we, but I'll re emphasize that, that it's that expectation that's driving current bond prices and what we might be buying or selling when it comes to our portfolios. Okay, so this is a graph of the yield curve, and this will be common for me, where I share a graph, but I don't really speak to 100% of its detail, and so feel free to pause this presentation, or I'll include slides in our blog posts, and so you can spend more time with it. But this is a visual representation of the amount of yield one gets. And we're using, I believe, treasuries here at various different points on the curve. So a maturity, a point on a curve is, you know, the far left is three months and the far right is 30 years. And historically, there is a positive slope to the curve, which is, you can loosely see that the very bottom gray one August of 2022 is a curve that, at least isn't materially inverted, actually, technically, is between one and two years and maybe three. But generally it's not inverted, where as you go further out maturity, you're getting less yield, whereas the other three date periods, October 19 of 2023 which was the peak for the 10 year treasury yield. And if we went back to the prior slide and looked at market expectation, that was probably the point where, when we looked at expectation, there was the least expectation for the Fed to lower interest rates. That was also probably the peak expectation and, or maybe fear might be the right word for what's going to happen with inflation, so market interest rates. So another concept that's worth highlighting here when it comes to managing interest rate risk, which is what a bond investor is effectively doing, is just because we the Fed has now acted, and we think we might know what the Fed's about to do. None of that's useful when it comes to managing interest rate risk, because the market is pricing that in faster than we're thinking about it's the same thing. It's the same exact dynamic when it comes to trying to tickle time stocks or the stock market in general. So we're what we're seeing. So I'll leave this slide there and allow you to if you'd like to spend more time with the potential complexity and takeaways here, and as always, welcome any questions and happy to schedule time to dig in on these topics more fully. So lastly, is just to offer some long term perspective relative to the history of interest rates. And I guess this slide also includes inflation. I'm probably not going to spend a lot of time talking about inflation, because that dynamic adds a kind of a multiplier effect to the amount of complexity and what are already very complex topics. So what I would highlight here is we had interest rates go into around 2020, to, you know, near zero, which was an abnormal phenomena, at least from a US based perspective and largely driven by a. A robust economic environment and a return of inflation. For the first time in decades, we saw interest rates spike, and that process was unpleasant for those that owned bonds, especially out any significant amount of maturity. And so that's happened, and as the Fed has become comfortable, I suppose it's probably the best way to think about it, with their battle against inflation. And we've seen the amounts of inflation have the and the rate of change or increase of inflation has slowed. Maybe that's most important.
We've seen interest rates stop going up, and, you know, so far, maybe come back down a little bit. But realistically, if you look at it in a long term perspective, the last year or two is really just noise. It's been just generally flat and and so I don't find it so easy to get sucked into the short term with stocks and any financial element, such as interest rates or inflation, and then with that, try to draw conclusions, and in my experience, specifically on interest rate anticipation as a concept. In my opinion, there's very little evidence to suggest that people should be trying to predict where interest rates are going to go from here. It's especially true and that statement becomes more and more true as you go further out in terms of the length of maturity. So this graph is 10 years of maturity. And so just because the Fed has dropped the interest rates 50 basis points, in my opinion, has little to no potential benefit to us to try to determine whether the 10 year interest rate, Treasury interest rate, or anything that's correlated to 10 year treasuries, such as mortgages, will go up or down from here. It's unpredictable, and it will be largely random because of our inability to predict that. And so just to add one last thought as to why I believe that based on my time in the industry, is the driver to market interest rates. The two primary drivers, I should say, are the and there's probably a third that's at least nearly primary. So first two is the strength of the domestic economy. So in our case, the United States economy, that's going to be a major driver to the direction of interest rates. The second is the level of inflation. So you know, if you I would encourage everybody to sort of pause and say, can I predict what's going to happen to either of those two things? What are the two major drivers to what are going to happen to rates? And we can't predict those two underlying primary drivers. Why would we then be able to predict interest rates? It doesn't make any sense to me and and so if I'm going to you know, if you're in the, in the in the business of creating media, you're going to want to create something that somebody wants to read, and it's easy to to, you're going to want to want to attach on to rates are going to go up, or rates are going to go down, or, if you're an economist, you're in the business of forecasting, so you're going to have to forecast very often, and you have to formulate a view. Neither of those two practitioners, in my opinion, provide anything useful to somebody managing their interest rate risk or taking or being exposed to bonds in general, and as from an evidence based investor's perspective, which is how I approach all this, I ignore all of those inputs in managing Fixed Income Based exposure, and then, then I referenced the third data point that influences our interest rates, but really, currency and fluctuations of global currency does have an impact on our rates, as well as global interest rates. And so it's worth highlighting that one, or mentioning that one as well. I would put that as a secondary, not a primary to the first two. But anyways, it's that only adds to the practical reality that the actual what will happen with interest rates, and the fact that you one cannot predict where they will go and shouldn't try, is based on this, the the reality that there are substantial and complex influences to What will end up happening to market interest rates. So hopefully you found this helpful, and if it prompts questions or an interest in additional discussion, please feel free to to use my calendar link and schedule time or shoot me an email.