Quick view: Fed turns a page, cuts rates



​The US Federal Reserve lowered interest rates for the first time in more than a decade. Co-Head of Global Bonds Nick Maroutsos explains why this may be the first of many cuts, and which assets could benefit.

As expected, the US Federal Reserve (Fed) lowered its benchmark rate today, its first rate cut since the Global Financial Crisis in 2008. Although some market participants were expecting a reduction of 50 basis points (bp), the Fed took a more moderate approach and cut by only 25 bp, leaving the benchmark rate ranging from 2.0% to 2.25%. The Fed also decided to end – two months earlier than planned – the reduction of its balance sheet, but said today’s rate cut did not mark the beginning of a “long cutting cycle.”
We believe the Fed is trying to thread the needle, balancing market jitters about slowing global growth with robust consumer spending and a strong jobs market in the US. In other words, by cutting just 25 bp, the Fed is trying to bolster market confidence while also keeping some dry powder in reserve in case of an economic shock.

More cuts likely to come
Immediately following the Fed’s announcement, US stocks sold off on concerns that further rate cuts may not be in the offing. But make no mistake, we think the trajectory for future Fed moves is down. One reason, in our view, is that the US cannot stay insulated from the global economy’s deceleration forever. Last week, the European Central Bank, noting a worsening outlook for the region’s manufacturing sector, suggested that a potential rate cut and/or additional quantitative easing could come as early as September. Slowing domestic growth has already prompted two quarter-point cuts in Australia this year, and other major central banks facing tepid rates of growth and inflation are expected to keep their benchmark rates near record-low levels.

Chart 1: FOMC median rate path projections
Although still not near the low levels the futures market expects, Fed officials have lowered their projected interest rate path.

Source: Bloomberg, as at 19 June 2019.

In turn, global bond yields have retreated, causing demand for the relative attractiveness of 10-year Treasuries to climb and the US dollar to appreciate. If trade uncertainties and persistently weak inflation – to say nothing of demographic headwinds, excess leverage and low productivity – continue to weigh on global growth and, as a result, keep a lid on global rates, the Fed may have no choice but to respond in order to keep the US market competitive.

Chart 2: Yields on 10-Year government bonds
While yields on 10-Year Treasuries have slid from 3.24% to just above 2% since last autumn, US bonds are still among the highest yielders globally, which may keep upward pressure on the dollar. 

Source: Bloomberg, as at 26 July 2019.
Staying focused on duration
We think this backdrop is supportive of stocks, as low rates help fuel risk taking. We also believe that sovereign debt in regions where yields remain positive but could have further room to fall, such as Australia, appears attractive. In the US, we can envision a scenario in which the 10-year Treasury yield tracks to as low as 1%, down from the current 2.06% (as at 30 July 2019). We also see total return potential on the short end of the curve as the Fed embarks on this next, rate-cutting chapter.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Absolute Return Fixed Income Fund

Specific risks

  • When the Fund, or a currency hedged share class of the Fund (with ‘Hedged’ in its name), seeks to mitigate (hedge) exchange rate movements of a currency relative to the Fund’s base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Callable debt securities (securities whose issuers have the right to pay off the security’s principal before the maturity date), such as ABS or MBS, can be impacted from prepayment or extension of maturity. The value of your investment may fall as a result.

Risk rating


Important message