The Federal Reserve has made some big moves this year, and the market is watching closely. Everyone expects the Fed to soften its stance. But any surprise in their message could shake things up.
Another key point is the Treasury's borrowing plans. The US plans to borrow $240 billion from July to September. This is down from the earlier estimate of $847 billion. For October to December, the borrowing plan is $565 billion. These changes affect how the market sees interest rates.
The market has seen some steep rises last week. There is a lot of demand for short-term bonds. Money market funds now hold $6 trillion. This is a huge amount, and the Treasury knows it. They have used this demand to keep short-term rates steady.
Wednesday will be a big day. The market will watch where the new bonds will be issued. If there is high demand at the short end, rates may come down. But if the long-term bonds sell off, rates could rise.
Other important factors include the upcoming elections and rising deficits. These issues will affect the market in the long term. But for now, the focus is on slowing growth and the labor market. The Fed has room to ease rates, but not this year. Over the next 12 to 18 months, their actions will drive rates.
When it comes to deficits, some ask how to invest around them. Deficits can create chances in a volatile market. Last year, high rates gave long-term investors a buying chance. Now, fixed income offers some good spots.
For tax-paying investors, the municipal market is a strong option. Higher-yielding municipal bonds offer good returns. These bonds provide a tax-exempt yield of 5.45%, which is about 9% after taxes. This is much higher than what you can get in the corporate market. The spread between these bonds and investment-grade bonds is nearly 190 basis points.
Municipal bonds also have strong credit fundamentals. This makes them an attractive choice. Rate volatility matters, but these bonds offer good yields and solid credit. This makes them a good pick for long-term investors.