Where will investors find income? Seven Fed rate hikes since 2015 have had only a small impact on yields.
September 7, 2018 | 1 minute read
Initial unemployment claims this week hit a low not seen since 1969.1 Friday’s jobs report provided further confirmation of a strong U.S. employment picture as the unemployment rate remained unchanged at just 3.9%.2
Against the backdrop of labor market strength and solid economic growth, the Fed has raised rates seven times since 2015, including two times this year.3 The market is currently pricing in a third rate hike when the Fed meets in September, and investors increasingly expect a fourth hike in December.4
In the first quarter of 2018, market volatility spiked based largely on the idea that a rapid rise in interest rates might derail the long-running bull market. Despite analysts’ predictions, however, such a rise has not materialized.
As the chart shows, yields on 10-year U.S. Treasuries, investment grade corporate bonds and high yield bonds today sit only slightly above their lows of approximately two years ago.5 And looking at a longer time frame, yields across each of these assets remain far below their highs of the past decade.
As headlines increasingly focus on the number of Fed rate hikes expected both in this year and the next, we believe it is wise to keep the bigger picture in mind – that is, even following seven Fed rate hikes, finding competitive levels of income appears to remain challenging.
Private credit has increasingly become the preferred source of financing for PE sponsors, with direct lending volume jumping 60% over last year’s level.
