A volatile and unpredictable market
March 14, 2023 | Winston Crowley, Stephen DuMont and Jason Weiler | UMB
Around this time last year, much of the U.S. Treasury curve was sub 2%, the consumer price index (CPI) year-over-year had steadily been climbing (7.9% in Feb. 2022 and still on the rise), core personal consumption expenditures (PCE) year-over-year was 5.40% and the Federal Open Market Committee (FOMC) was preparing markets for Fed target rate hikes. We ultimately saw liftoff with a 25 basis point (bps) hike on March 16, 2022.
Fast forward a year: Treasuries were well north of 4%, CPI year-over-year and PCE year-over-year have remained stubbornly high (6.4% and 4.70% respectively in Jan. 2023) despite the FOMC hiking 450 bps and potentially positioned for more.
What a difference a year makes (see chart). The sharp pace of the Fed Rate increases throughout much of last year and the subsequent climb in Treasury yields resulted in escalated unrealized portfolio losses industry-wide. Significant unrealized losses were something many were unaccustomed to seeing in their portfolios for several years during the low-rate era, but the combination of the lowest rates in history during the pandemic and the fastest pace of tightening in nearly 50 years produced runaway unrealized losses.
Yet, it is important to note, the other side of those unrealized losses is that today’s reinvestment yields are much higher. Thus, the laddered portfolio many built over the years should be able to reinvest roll-off in significantly higher yields.
