The Federal Reserve raised interest rates again in June, marking the seventh rate hike since the Fed began its tightening campaign in late 2015. The Federal Funds rate now stands at 1.75-2.0%, with the Fed indicating they intend to raise rates two more times in 2018. Notably, Fed Chairman Jerome Powell stated that, beginning in January 2019, the Fed would begin to hold monthly press conferences following each of its meetings, rather than its previous quarterly updates. This news was welcomed by investors as it should provide even greater transparency about the course of future Fed actions going forward. It also provides the Fed more flexibility in adjusting their economic outlook and interest rate policy without adding greater uncertainty overall to credit markets.
For the quarter, bond market averages continued to fall, with the steepest price drops in the corporate bond market. There has been a lot of press focused on how indebted corporate America has become during the past nine years of historically low interest rate policy. As we’ve discussed over the past several years, with interest rates at all-time lows, one of the most common practices in corporate America has been to borrow at very low rates, using the proceeds to buy back stock (therefore helping to drive earnings-per-share growth). The concern is that as rates continue to move higher and those loans come due, companies will need to issue new debt at higher rates, potentially crimping corporate profits. It remains to be seen to what magnitude this may impact corporate America, although it’s something that has been widely discussed over the past few years. Regardless, we still believe a cautious stance is the prudent approach in the fixed income arena at this time. As a result, we continue to target high-quality bonds with maturities in the 3-6 year range.
