Early McClintic & McMillan
Early McClintic & McMillan

Bond Market Commentary

Don’t Forget the Now

Doug Drabik
June 21, 2021

Last week, investors had their eyes glued to the FOMC meeting and ears tuned for any message indicating how Fed policy might shift given changing economic conditions. What investors heard was that the Fed might be moving short term rates up sooner than previously estimated. The evidence gathered pointed to what is called the Dot Plot.

The Dot Plot is an indicator poll of the FOMC members projecting when they believe conditions would be suitable for the Fed Funds target rate to be modified. Prior to the June 16th FOMC meeting, the dots in 2023 were between 0.00-0.50 and now several have inched up. As Fed Chair Powell stated, it is not, and should not be used as a predictor of interest rates. The Dot Plot does not represent Fed policy.

In a more practical manner, step back and think about what was revealed. It still appears that we are at least 1.5 years from any Fed Funds rate change and accompanying Fed comments suggest that it may still be 2023 or 2024 before rates are stepped up.

Maybe we need to stop listening to all the sensationalized and impending news/forecasts and reflect on our current reality. After all, seeing is believing … right?

So what is our current reality? First, the Fed just broke through the $8 trillion level of assets held on their balance sheet. That’s right. Despite the taper banter, the actuality is that the government continues to purchase $120 billion in Treasuries and mortgage debt every month. There is talk of talking about tapering but at the end of the day, actual tapering does not appear to be in the immediate future.

Stimulus programs are still in play. The government as well as the Fed remain in an accommodative mode. The markets have been feasting on trillions of dollars being injected.

To recap, we have stimulus programs in play, the government is still purchasing assets and the Fed appears 1.5 years (or more) away from adopting a new short term rate policy. It is not a stretch to suggest the markets may have gotten ahead of today’s reality.

At the end of the day, today’s investment decisions cannot ignore today’s market conditions. Planning should always include educated future forecasts but not at the expense of giving up current and realized returns. Quite often, forecasts are wrong and difficult at best. Staying true to appropriate asset allocation improves the possibility of participating in growth yet protecting already earned principal via an established fixed income base. Don’t allow headline noise to shatter long term planning and discipline. The current environment (now) will influence real earnings on today’s fixed income investment