Is the Federal Reserve done hiking rates? Why are so many people putting money into the iShares 20+ Year Treasury Bond ETF (TLT)? Those are some of the questions that Karen Verra, head of iShares US Fixed Income Strategy, answers in this episode of Exchange Traded Fridays.
Verra sits down with etf.com Senior Analyst Sumit Roy to discuss everything you need to know about the current fixed income investing environment.
Episode link: …(read more)

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iShares’ Verra, a prominent investment management firm, is predicting that interest rates will remain in the “higher for longer” zone on October 6, 2023. This projection has significant implications for the global economy, financial markets, and various stakeholders involved.

The term “higher for longer” typically refers to a prolonged period of elevated interest rates. Historically, central banks increase interest rates to combat inflation, stabilize the economy, or regulate credit expansion. However, iShares’ Verra suggests that the current economic landscape will necessitate a longer period of higher interest rates.

One of the key factors driving this forecast is the lingering effects of the COVID-19 pandemic. The global economy has been grappling with the aftermath of the pandemic, which has disrupted supply chains, constrained labor markets, and inflated commodity prices. These factors have contributed to inflationary pressures, prompting central banks to take action.

The United States Federal Reserve, for instance, has already signaled its intent to raise interest rates to curb inflation. This move reflects their belief that inflation is not merely transitory and requires a more sustained response. iShares’ Verra aligns with this view, anticipating that other central banks will follow suit and keep interest rates elevated.

The “higher for longer” interest rate environment has several implications across different sectors. Firstly, it impacts the cost of borrowing for businesses and individuals. Higher interest rates increase the cost of borrowing, making it more expensive for companies to invest, expand, and hire. Similarly, individuals will face higher mortgage rates, making homeownership more costly.

Moreover, the performance of financial markets can be influenced by this interest rate projection. In a higher interest rate environment, investors tend to reallocate their portfolios, favoring assets like bonds over stocks. This shift can result in increased volatility in equity markets as investors adjust their strategies accordingly.

The housing market is also likely to be impacted. With higher borrowing costs, potential homebuyers may be discouraged from entering the market, causing a slowdown in the real estate sector. Additionally, existing homeowners with adjustable-rate mortgages may experience higher monthly payments, potentially straining their finances.

While the “higher for longer” interest rate projection poses challenges, it also presents opportunities. Savers and fixed-income investors stand to benefit from increased returns on savings accounts, certificates of deposit, and bonds. These investments can offer a more attractive yield as interest rates rise.

In summary, iShares’ Verra’s projection of interest rates remaining in the “higher for longer” zone on October 6, 2023, reflects the current economic landscape and its challenges. The aftermath of the pandemic, inflationary pressures, and central bank reactions have all contributed to this forecast. Stakeholders across various sectors need to prepare for the potential ramifications of elevated interest rates, ensuring they adapt their strategies accordingly.