Attractive income opportunities for uncertain markets

LOOKING back, the US Federal Reserve was behind the curve in starting to tackle inflation. However, once it did, it raised rates quite substantially from 0.25 per cent in March 2022 to 5.5 per cent in July 2023. Despite the significant rise in rates over the past year, we believe there are valid reasons for the current pause in hikes.

In March 2023, there was some concern that harked back to the global financial crisis as higher rates caused banking stresses, hitting US regional banks particularly hard. Concerns of contagion to the rest of the industry and the economy more broadly turned out to be unwarranted. The crisis was more idiosyncratic and affected regional banks with poor risk controls. At the time, the Fed expanded its balance sheet, while it tried to understand the ramifications of the few regional banks that collapsed.

With the US Treasury also injecting liquidity into the markets, the effect of the tightening was delayed. By summer, the Fed moved back into quantitative tightening in a meaningful way and into more restrictive territory.