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FED speakers were highly active this week. On Monday they signaled that they see interest rates staying high and, if anything, going higher, given inflation that may be slow to improve and an economy showing only tentative signs of weakness.
Therefore, the message from the next FED meeting appears to be almost certain: either a pause or a final hike would be consistent with the comments. Furthermore, the Fed does not expect to cut any time soon, and certainly not as fast as the markets are expecting. Rates "around here for longer" appears to be the message. Better for the markets than "higher for longer" but not as good as the bulls were hoping for.
If you are in the "higher for longer" camp, which runs contrary to the forward rates currently priced in the market, a yield enhancement strategy could be the best strategy to go forward. For instance, such a product would is to pay a guaranteed coupon, while also protecting the invested principal as long as the 2-year rate does not fall by 50% over the next 12 months.
Why does this strategy make sense?
The product is an opportune complement for a fixed-income portfolio: if rates are to come down less quickly than what the market anticipates, bond portfolios will also take longer to claw back their mark-to-market returns – the proposed strategy is expected to offset this effect.
Knowledge is power.
