As is well known, this week we had news from the U.S. Federal Reserve, which, although it is true, kept its monetary policy rate unchanged in the 5.25-5% range, an additional increase of 25 additional basis points by the end of the year is already being discounted with certainty. The entity was also optimistic about its growth expectations, both for the end of 2023 (from 1% to 2.1%) and for 2024 (from 1.1% to 1.5%). Also, the terminal rate forecast for 2026 was released for the first time, which came in at 2.9%, above the neutral rate for the U.S. economy of 2.5%.

All this led to a major sell-off in dollar rates, marking an important milestone for the 10-year treasury rate, which reached a high of 4.50%, a level not seen since 2007, meaning a negative return of -1.2% for the treasury index this year. It seems to be an exaggeration that for investors with exposure to this type of asset it is already the third consecutive year of losses, and one tends to think that for some minute there should be at least one year of respite..... However, it is clear that it will not be for this year, at least with the projections and aggressiveness in the tone of the FED these days.

The truth is that having exposure to investment grade corporate paper both IG and HY, has been an important cushion for these aggressive interest rate hikes, seeing how the rates of these instruments have tightened by 20-30 basis points when we look at spreads. Now, in absolute terms, entry points are going to continue to be presented for the remainder of the year, and we partly regret that those who have already entered these assets are suffering losses, but all is not lost, and it is clear that the opportunities for good long-term returns will remain latent.

Adolfo Erpel

Fixed Income Trader