Let’s start with the new administration in the White House. Volatility seems to be the name of the game. I wanted to get your thoughts on the trajectory of rates in the US market and some potential impacts that we’ve seen since the start of Trump 2.0.
From a Trump administration perspective, fast and furious is what we’ve dealt with so far. I’m not sure if anything is hugely impactful for where we are from a monetary policy standpoint with regard to the Fed. Our expectation at this point is for one to two rate cuts by the end of this year, and probably the first one coming around May and a second one, if there is one that’s needed, not coming until the latter half of the year. So, that’s drastically changed from where we were after the September meeting when the Fed cut 50 basis points and even November and into December. That’s reflective of, I think, what has been termed as ‘sticky inflation’ and a resilient consumer from an employment perspective.
Now, from a Trump policy standpoint, I don’t know that either one of those things are drastically changed in this environment, the policies that his administration is looking to achieve. When you look at immigration, tariffs and potential regulatory changes, all of those to some degree, at least on an initial blush basis, are more inflationary. This brings the Fed’s job from an easing perspective to a much lower threshold. When you look at the other aspect of it from a consumer and an employment perspective, which has been the driving force of US GDP over the last several years, they continue to be pretty resilient from a standpoint of opportunities. So ultimately, we believe we are looking at higher rates for a longer period of time.
There’s some talk about potential for a hike down the road? Are we in that camp?
We are not in that camp at all. There’s a broad array of outlooks, and it goes from those that think there will be maybe one or two hikes by the end of the year, to those who are still contemplating three or four lowering of interest rates before the end of the year. We think both of those are extreme positions where we stand from a yield curve perspective, which is reflective of one to two rate cuts. The remaining portion of this year is where we’re also standing at this point, which is good because we’re actually seeing value in the marketplace based on that.
We could talk a little bit more about that positioning based on that view, and what you’ve done with the portfolios that that you’re managing.
We have looked to extend our weighted average maturities. There was a period at the end of the year where that was difficult to do, simply because liquidity in the marketplace is not always that great. At the end of the year, you have offerings being pulled back, and you have less availability from a liquidity standpoint than you necessarily do for the other 11.5 months of the year. If you look at our weighted average maturities over time, they drifted shorter during the December timeframe but have lengthened out in January – this is reflective of our positioning, based on the thinking that rates will stay higher for a little bit longer, that we will continue to have the opportunity to roll over positions that have four handles on them, and that we’re not going to three handles at any point in the near term. By keeping our weighted average maturities in the 85th to 90th percentile of where their maximum of 60 days is, it gives us the ability to maintain those higher yields within the portfolios for a longer period.
