Adjusting Interest Rate Expectations

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We have been under the belief that the FED would up the FED FUNDS rate in September–not really because of pure economic reasons, but more just because Yellen wants to have dry powder that can be used in emergency situations in the future.

We are maintaining the belief that rates will still be raised in September. The economic numbers in the U.S. are just so-so and certainly on a worldwide basis they are worse–in most cases much worse.  Inflation is currently tame (at least so they say) so we see no urgent need to raise rates, but just the same we are maintaining our belief that they are heading higher.

Where we are adjusting our view is that the hiking of short term rates will simply flatten out the yield curve some more. While the curve has flattened some in the last year there is no reason for it to not flatten more. While our outlook for a Fed Funds hike of 1/4% remains we believe that the 10-30 year rates will move higher at a much slower rate than the short term rates. There is no reason with a current target range of 0 to 1/4% in the Fed Funds that it can’t be moved to 1/4 to 1/2% with very little effect on longer term rates.  It only makes sense that with global economic conditions generally soft that long rates should remain low, while short term rates move somewhat higher.

Our adjusted point of view was made after reviewing 16 years of interest rate history and yield curves with this ‘Dynamic Yield Curve‘ page.  You can run through the history and see that rising short term rates with long rates remaining relatively flat could well be a reaction to soft economic conditions (current and anticipated into the future).

With the above in mind we are less concerned with a pending ‘thrashing’ of perpetual preferred stocks–it could happen, but it certainly is no longer a certainty.

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