SGOV: Fed On Hold

seekingalpha04-30

The iShares 0-3 month Treasury Bond ETF invests in treasury bills.With inflation stubbornly high, the prospect for Fed rate cuts have dimmed considerably, which is a positive for SGOV as investors can...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSGOV: Fed On Hold\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-30 10:39 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4687353-sgov-etf-fed-on-hold-tua-usfr><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The iShares 0-3 month Treasury Bond ETF invests in treasury bills.With inflation stubbornly high, the prospect for Fed rate cuts have dimmed considerably, which is a positive for SGOV as investors can...</p>\n\n<a href=\"https://seekingalpha.com/article/4687353-sgov-etf-fed-on-hold-tua-usfr\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4112","symbol_name":"金融交易所和数据","start_time":0,"source_url":"https://seekingalpha.com/article/4687353-sgov-etf-fed-on-hold-tua-usfr","article_id":"2431567381","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/169941304/image_169941304.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2431567381","pubTimestamp":1714444753,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Furthermore, will the Federal Reserve restart raising interest rates again, as some predict?In my opinion, although inflation is higher than expected, the Fed is unlikely to restart raising policy rates at the current level of inflation. Simply put, recent rhetoric suggests the Fed still believes cutting interest rates is the correct monetary policy, and unless inflation reaccelerates to an unacceptable level, say above 5%, the most likely scenario is a Fed on hold as it tries to wait out inflation. This means the distribution yield on SGOV and similar short-duration funds will likely stay above 5% into 2025 and remain the be","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4112":"金融交易所和数据","BK4550":"红杉资本持仓","BK4588":"碎股","LU2089284900.SGD":"Allianz Global Sustainability Cl AM Dis H2-SGD","TUA":"SIMPLIFY SHORT TERM TREASURY FUTURES STRATEGY ETF","LU2237438978.USD":"Amundi Funds US Pioneer A2 (C) USD","BK4561":"索罗斯持仓","CME":"芝加哥商品交易所","LU0158827948.USD":"ALLIANZ GLOBAL SUSTAINABILITY \"A\" (USD) INC","LU2089283258.USD":"安联环球可持续基金Cl AM Dis","BK7042":"综合电信业务","LU1718418525.SGD":"JPMorgan Investment Funds - Global Select Equity A (acc) SGD","LU2133065610.SGD":"JPMorgan Investment Funds - Global Dividend A (mth) SGD","LU0731783394.SGD":"Fidelity Global Dividend A-MINCOME(G)-SGD","SGOV":"iShares 0-3 Month Treasury Bond ETF","LU1599440770.SGD":"FIDELITY GLOBAL DIVIDEND \"A\" (SGDHDG) INC","BK4585":"ETF&股票定投概念","TUA.AU":"TUAS LTD","FDN":"First Trust Dow Jones Internet I","BK4566":"资本集团","LU2023251221.USD":"ALLIANZ GLOBAL SUSTAINABILITY \"AM\" (USD) INC","USFR":"WisdomTree Bloomberg Floating Rate Treasury Fund"},"translate_title":"SGOV：美联储保持不变","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TUA":1,"USFR":1,"US7Y.BOND":1,"US6M.BOND":1,"US5Y.BOND":1,"US3Y.BOND":1,"US30Y.BOND":1,"US2Y.BOND":1,"US12M.BOND":1,"US10Y.BOND":1,"TUA.AU":1,"SGOV":1,"CME":1,"FDN":0.9,"US912797HH31.BOND":0.6,"US912797HG57.BOND":0.6,"US912797HE00.BOND":0.6,"US912797GW17.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GB79.BOND":0.6,"US912797FS14.BOND":0.6,"US912797FH58.BOND":0.6},"content_text":"The iShares 0-3 month Treasury Bond ETF invests in treasury bills.With inflation stubbornly high, the prospect for Fed rate cuts have dimmed considerably, which is a positive for SGOV as investors can earn high treasury bill yields for longer.I am raising SGOV back to a buy and believe it remains the best 'cash' asset to hold until further notice.   NoDerog For new readers who are not familiar with my story, writing for Seeking Alpha is my retirement hobby. While other ex-professionals like to debate their views on social media platforms like X, I prefer to document my daily investment thoughts through articles on Seeking Alpha. I cannot promise to be always right (even the best investors only get 60% of their calls right), but I promise to be honest and will own up to my mistakes. As investors, I believe it is important be honest with ourselves and admit mistakes as early as possible, rather than let them fester and cause a loss in both capital and opportunity. In January, I penned an article, \"Skate To Where The Puck Is\", in which I advised investors holding very short duration investments like the iShares 0-3 Month Treasury Bond ETF (NYSEARCA:SGOV) and the WisdomTree Floating Rate Treasury Fund ETF (USFR) to consider lengthening their duration, as the Federal Reserve telegraphed three or more policy rate cuts in 2024. Since treasury bill yields closely follow Fed Funds rate, if the Fed were to cut the policy rate 3 or more times this year, then investors holding treasury bills-linked investments will likely see their incomes decline (Figure 1). Figure 1 - Treasury bill yields closely follow Fed Funds rates (St. Louis Fed) In anticipation of the Fed cutting interest rates, I personally reallocated some of my 'cash' holdings out of SGOV and USFR and into longer duration treasury bond funds like the Simplify Short Term Treasury Futures Strategy ETF (TUA). Unfortunately, inflation data since the start of the year January have not been favourable to the rate cut thesis, and in retrospect, my advice to lengthen duration now appears misguided. Although I have since downgraded my thesis on the TUA, the damage has been done and some of my 'cash' is sitting on unrealized losses. The question I ponder now is what to do about my unrealized losses. Should I realize losses on the TUA and move my 'cash' capital back into USFR and SGOV? Furthermore, will the Federal Reserve restart raising interest rates again, as some predict? In my opinion, although inflation is higher than expected, the Fed is unlikely to restart raising policy rates at the current level of inflation. Simply put, recent rhetoric suggests the Fed still believes cutting interest rates is the correct monetary policy, and unless inflation reaccelerates to an unacceptable level, say above 5%, the most likely scenario is a Fed on hold as it tries to wait out inflation. This means the distribution yield on SGOV and similar short-duration funds will likely stay above 5% into 2025 and remain the best 'risk free' asset until further notice. Brief Fund Overviews For those not familiar, the iShares 0-3 month Treasury Bond ETF (and similar funds like TBIL and USFR) provide investment results that correspond to the performance of owning short-term treasury bills (\"T-Bills\") and are effectively 'risk free', as they do not have credit or duration risk. Depending on your brokerage account, the SGOV ETF is an effective way for investors to earn some real income from idle cash, instead of letting your broker reap the benefits at your expense (Figure 2).   Figure 2 - Investing cash in treasury bill funds is better than keeping it idle in most brokerage accounts (interactivebrokers.com) Readers interested in learning more the mechanics of these products can refer to my initiation articles. Monetary Rollercoaster Leading To Reacceleration In Inflation Having been a Federal Reserve watcher for many cycles, I have to say the current Federal Reserve has to be one of the worst managed committees in recent memory. First, Jerome Powell et al. were caught completely behind the curve in 2021 with their 'inflation is transitory' comments even as CPI inflation was already well over 5% and heading even higher. Then, as the Fed addressed the inflation threat, they raised policy rates at the fastest pace in history, causing a mini-market crash in multiple assets in the process (Figure 3). Figure 3 - Fed raised interest rates at the fastest pace in history (Visual Capitalist) However, just when it appears that tighter monetary policies were bringing inflation under control, the Fed inexplicably pushed the idea of a dovish pivot and 'insurance rate cuts' in late 2023, reigniting animal spirits. In the span of a few short months, the Fed have completely reversed tighter financial conditions, leaving financial conditions looser than when they started raising interest rates in early 2022 (Figure 4)! Figure 4 - Financial conditions are now looser than in early 2022 (Chicago Fed) With animal spirits and speculation returning to asset prices, is it any wonder that core CPI inflation (excluding volatile energy and food prices) have inflected higher to a 3.8% YoY rate as of March (Figure 5)? Figure 5 - CPI inflation has inflected higher in recent months (BLS) Now, with inflation stubbornly stuck above their 2% target, Fed officials have walked back all talk of near-term rate cuts, with some officials even hinting at potential rate increases should inflation rises further. Market participants have dutifully followed Fed-speak and are now pricing in just one rate cut until the end of 2024 (Figure 6).   Figure 6 - Market expects just 1 rate cut in 2024 (CME) The Fed's back-and-forth monetary policies are whipsawing the bond markets and causing irreparable harm to investors' portfolios as treasury bonds now trade like penny stocks. The ICE BofAML MOVE Index, a measure of bond volatility, has been stuck near 2020 crisis highs for more than 2 years (Figure 7).   Figure 7 - MOVE Index has been elevated for 2 years (Yahoo Finance) Large Hurdle To Raise Policy Rates Again While I believe the November 'Fed Pivot' was yet another policy mistake in a long list of monetary policy mistakes by the current FOMC committee, I also think the hurdle rate to the Fed restarting policy rate increases is very high. For the Fed to restart rate hikes now, they will have to admit they were wrong to consider rate cuts last November, and I do not believe core CPI inflation at 3.8% YoY is alarming enough for the Fed to admit its mistakes. Just recently, we heard (around the 19 minute mark in the linked speech) Jerome Powell characterize the recent string of higher than expected inflation readings as having \"not given us [the Fed] greater confidence\" that inflation was on a sustainable path to 2% and \"instead, indicate that it's likely to take longer than expected to achieve\" the confidence required to lower interest rates. Furthermore, if higher inflation persists, the Fed can maintain the current level of restriction for as long as needed. By not admitting lower confidence in the Fed's rate cut plans, I believe Mr. Powell is signalling that the Fed still believes cutting rates is ultimately the correct policy, and their plans are simply 'inconvenienced' by higher inflation data at the moment. Therefore, I believe the most likely path forward is for the Fed to remain on hold indefinitely until either inflation slows down enough to give the Fed sufficient 'confidence' to cut policy rates, or it reaccelerates above 5% and forces the Fed to admit its mistake and resume policy rate hikes. Looming Election Also Shrinks Window For Rate Cuts Furthermore, a looming general election will likely factor into the Fed's willingness to cut interest rates in the coming months. While historical precedence suggests the Fed will do what they consider to be right for the economy regardless of politics, the reality is that if the Fed were to cut interest rates repeatedly so close to a hotly contested election, the Fed will be accused of favouring the incumbent Democratic party. Currently, as shown in Figure 6 above, futures markets expect the Fed will make its first and only interest rate cut of 2024 at the September FOMC meeting. I agree with this assessment and I expect the Fed will make a token cut sometime in the Summer, and then be on hold until after the November elections, to avoid the appearance of being partisan. Higher For Longer(er) Good For SGOV For the SGOV ETF, a Fed on hold means more time for investors to earn the fund's attractive 5.3% 30-Day SEC yield (Figure 8). Until the data changes, SGOV and its peer short-duration funds remain the best 'risk-free' asset to hold.   Figure 8 - SGOV has a 30-day SEC yield of 5.3% (ishares.com) Downside Risks For SGOV For now, my base case scenario is for a token rate cut in July or September. This is the least controversial path, allowing the Fed to justify its dovish pivot from last November while avoiding the appearance of favouring one political party over another in the coming November general elections. However, the downside to SGOV is if the economy were to weaken significantly over the coming months, then the Fed has stated they stand ready to cut policy rates to support growth. I expect multiple interest rate cuts in this scenario, which could lead to lower distributions for SGOV. This downside economic risk is not as far-fetched as one would think. For example, the recent Q1 GDP report showed the U.S. economy grew at a slower than expected 1.6% QoQ pace compared to 3.4% in Q4/23 and 2.5% expected (Figure 9).   Figure 9 - Q1 GDP growth was slower than expected at 1.6% (investing.com)   What About TUA? While a Fed on hold is positive for SGOV, it is not necessarily a negative for TUA. At 5%, 2 year yields are now saying the Fed will cut just once over the next 2 years (Figure 10).   Figure 10 - 2 year at 5% is decent value for economic downside risk (St. Louis Fed) While that may indeed be true, and there is a risk that the Fed may even restart raising interest rates should inflation spike higher, there is also the downside economic risks I mentioned above. For now, I believe the risks are fairly balanced for TUA and so I am maintaining my small allocation to the TUA ETF as a hedge against a worsening economy.   Conclusion  With inflation stubbornly high and the Federal Reserve likely on hold or executing a single token interest rate cut in 2024, short-duration treasury bills once again become the preferred 'cash' asset to hold. I recommend investors buy SGOV or similar funds for their cash holdings until macroeconomic data suggests otherwise. I am raising SGOV back to a buy rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2431567381"}