Be sure to check the inflation and interest rate tide schedules update by Patrick Bowen, Maseco wealth manager, in the latest American in Britain magazine edition. Contact a Maseco financial advisor today to learn more about how we can help you achieve your financial goals. Click here to read the article.

1. S
A Turningof
the Tide
Check the inflation and interest rate tide
timetablesbeforeyouendupontherocks.
By Patrick Bowen, MASECO Private Wealth,
Wealth Manager
ince2008,fromacertainperspective,
we have been in a consistent macroeco-
nomicbackdrop,withthetidesheading in
one direction. This backdrop being, very low
interest rates, or ‘cheapmoney’.
Toexplainthisstatementfurther,from
January 2008 until December 2022, the US
Fed Funds Effective Rate1
was always below
4%.Morestrikingly,breakingthisdownto
monthly periods, interest rates were below
2% for 86.67% of these monthly periods
andbelow1%for72.78%ofthesemonthly
periods.Longstoryshort,thiswasasus-
tained period of very low interest rates which
translated to cheap borrowing conditions
andwhatisotherwiseknownbyKeynes-
ian economists as,expansionarymonetary
policy.
In2022,wesawastarkreversalofthese
conditions asthe USand global developed
markets looked to increase interest rates in
aneffort to combat rising inflation, otherwise
knownascontractionarymonetary policy.
Giventhesustainedperiodofverylow
interest rates, the counter action appears to
havebeenassevereintheother direction,
atleastcomparedtohistoricinterestrate
hikes. While I am surewe all awareof the
rateincreases,Ithinkitisimportanttoput
into context the rate of these rate increases.
The chart shows how this cycle compares to
previous historical rate hikes.
46 TheAmerican
The pace ofFed ratehikes in this cycle
has been rapid:
Asyou can see, the curve on the chart
shows how these recent interest rate hikes
have been steeper, therefore deemed more
aggressive, than any in the past forty years.
Itis important to bear in mind this graphis
alreadyoutofdate and mostlikely willbe
asyou arereadingthis, with data running
to the end of October 2022. In November
and December, there were further rate hikes
bringing the Fed Funds Rate to 4.5% as of
the end of 2022.
With such a drastic change in US interest
rates, it is hard not to consider this a turning
of the tide. The question is, what impact does
this have for us as investors?
Impact on investors
One area this is having a very significant
impactisinthebondmarket.Forthosewho
are not seasoned investors, the typical and
mostcommoninvestmentsonemakesare
in stocks and bonds. Stockholders are equity
owners in a company. Bondholders are lend-
erstoacompany.Withinvestmentsinboth
stocksandbonds,youexpectanadequate
returnforthetimehorizonandriskofthe
investment.
Given the macroeconomic backdrop of
historically low interest rates that we have
PHOTO ©CHRISMEADS
*

2. Count on us.
Wherever you are.
Serving the wealth management
needs of American families
since 2008
beenlivingwithsincetheGlobalFinancial
Crisis of 2008, fixed income investments fell
from popularity as bond yields were less
commensuratewiththeriskandreward
equation. As such, a mantraand acronym
calledTINA–ThereIsNoAlternative(to
stocks)–became popular withinthefinancial
worldformanyinvestors.Someinvestors
have turned solely to stocks to help earn
returnsthattheydeemcommensuratewith
the risk and return equation.
However, with the turning tide, it is being
moreimportantforTINAsouttheretopay
attentiontofixedincomegoingforward.
In an effort to illustrate this point, below is
oneexampleofhowthese rateincreases
are impacting the bond market, notably US
government bonds.
Inthelowinterestrateworldofjust18
months ago, One-Year US Government
Treasurieshadayieldofroughlyjust0.07%.
Afteranyapplicabletaxesandinvestment
charges, this was not an attractive return and
added fuel to the TINAs fire.Fast forward
tothe time ofwriting atthe end ofJanu-
ary2023,andasIlookatthingslivefrom
my computer, for the same investment of
One Year US Treasuries, yields are around
4.763%3
.For those less familiar with the
landscape,that isasignificant change inUS
government bond yields and is illustrative of
the turning tide.
For all the TINAs of the world, it looks like
this turning of the tide is providing the alter-
native theymay have alreadydismissed.
A famous anecdote by legendary investor
HowardMarksaboutthe economy andmar-
kets reminds us “we never know where we’re
going,butweoughttoknowwhereweare”4
.
It is impossible to know exactly when
inflationwilldampenorinterestratehikes
willstarttoslowdown,levelofforeven
reverse.What we do knowis that inflation
and interest rates are higher today than they
have been for 40 and 15 years, respectively,
and it is important that investors stop to take
note ofthis.
The bottom line for me is that, in many
ways,conditions atthis moment areover-
whelmingly different from those we became
used to after the Global Financial Crisis. As
mentioned,itfeelsliketherehasbeena
turningofthe tide.Whenthe tideisturning,
youneedtobefullyawareand carefuloryou
could end up on the rocks.
Forallthe diehardTINAsoftheworld,or
those with too narrow an investment ideol-
ogy, I would recommend checking the tide
timetables and following the words of wis-
dom fromHowardMarksinknowingwhere
we are, and adjusting course if necessary,
before ending up on the rocks. H
*Chart:FederalFundsTargetRate(FDTRIndex),Oct22.
31, 2022. Source: Bloomberg. This is the short-term
interestratetargetedbytheFederalReserve’sFederal
OpenMarket Committee(FOMC) as partof its monetary
policy.
1
https://fred.stlouisfed.org/series/FEDFUNDS
2
https://www.schwab.com/learn/story/fixed-income-
outlook
3
https://www.marketwatch.com/investing/bond/
tmubmusd01y?countrycode=bx
4
https://www.oaktreecapital.com/insights/memo/sea-
change
Patrick Bowen is a Wealth Manager at MASECO
Private Wealth.
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orrequirementsofanyparticularindividual.
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