Investment-grade bond yields at the end of the last 4 rate hike cycles

■Zhang Haochen

With U.S. inflation showing signs of peaking and receding in the third quarter, there is also a chance that the Fed's cycle of rate hikes will come to an end.

In the future, when the Fed's policy changes from hawk to dove, it is more likely to drive bond yields to peak and fall, bringing huge capital gains to investors.

Considering that the U.S. economy is also under the impact of the Fed's tightening monetary policy, there are fears of recession.

Facing the risk of economic recession and the strong US dollar, investors can lock in the "USA (US Dollar, Senior, A-Grade)" strategy and use the US dollar high-quality A-grade bonds to reduce the risk of the investment portfolio, and also obtain bond interest income.

Investing sweet spot looms as yields peak and retreat

Although the Federal Reserve's interest rate decision meeting in September, it still maintains a hawkish policy of raising interest rates by 3 yards.

However, after the inflation trend is established and the US economic growth is sluggish, the market generally believes that the Fed's current rate hike cycle is coming to an end.

Since the financial market usually reacts to the general economic situation in advance, in the past, the US dollar investment-grade bond yields often peaked at the end of the Fed’s rate hike. This time, the investment-grade bond yields are also expected to be the first to reflect the Fed’s interest rate endpoint. , there is a peak and a fall, bringing investors attractive capital gains.

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Taking the Bloomberg Dollar-denominated Global Investment Grade Corporate Bond Total Return Index as an example, as of October 5, the yield rate of the index has reached 5.57%, much higher than the average of 3.12% since the index was established in 2014, and also higher than the previous rise. The yield on the interest cycle was a high of 4.37%.

The yield rate, which is much higher than the historical average, increases the room for the subsequent yield rate to fall, and also increases the investment value of investment-grade bonds.

Historical experience shows that investment-grade bonds pay well at the end of interest rate hikes

If we look back at the data of the last four interest rate hike cycles of the Fed, we will find that the average return on US dollar investment-grade bonds was above 10% during the four periods from the last four rate hikes to the first rate cut.

Taking the data from 1994 as an example, the return rate of USD investment grade bonds reached 15.72% during the period from the fourth last rate hike to the first rate cut by the Federal Reserve.

Even in 2004, starting from the fourth last rate hike by the Federal Reserve at that time, until the first rate cut, the return on dollar investment-grade bonds was 6.78%.

Current Fed Watch data shows that the end of the Fed's path to raising interest rates will fall in February next year.

From February next year, the Fed will hold three more interest rate decision-making meetings, which means that there will be about three more interest rate hikes in the future.

At the end of the Fed's rate hike, investors can seize the opportunity to deploy dollar investment-grade bonds as soon as possible to reap the rewards of subsequent yield declines.

The economic recession and the strong dollar pattern USA strategy achieves a win-win situation of hedging and income

The Fed's tightening of monetary policy, although successful in suppressing soaring inflation, has also hit U.S. economic growth and further boosted the dollar.

Since the beginning of this year, the U.S. economic growth rate has been declining quarter by quarter, and the market expects that the probability that the United States will fall into recession in the future is also gradually rising.

For foreign investors, in addition to the fear of a recession, the strong dollar has gradually eroded the value of assets in their hands.

Under such double risks, you might as well use the "USA (US Dollar, Senior, A-Grade)" strategy to achieve a win-win situation between hedging and profit.

"U" stands for US Dollar, "S" is the abbreviation for the senior debt repayment order of bonds, and "A﹜ is A-Grade A-grade bonds. By deploying US dollar high-quality A-grade bonds, the risk of the investment portfolio is reduced at the same time. , and can also obtain bond interest income. These bonds are high-grade bonds after investment grade bonds (Investment Grade) were selected again, and their hedging effect is closer to that of U.S. government bonds than general investment grade bonds. Because they are investment grade bonds, the dollar is also high-quality. A-rated bonds can provide higher bond interest yields than public bonds, and are a high-quality investment tool that "has both."

The US dollar-denominated feature makes the US dollar high-quality A-grade bonds not afraid of the strong US dollar pattern, and even brings higher investment value to investors.

(The author is the fund manager of the unified US bond 10-year Aa-A ETF)

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