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US rates surge and most portfolio managers don’t know what to do

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Interest rates are hitting multiyear highs at a time when most portfolio managers have never dealt with this phenomenon before.

The U.S. 10-year Treasury note yield rose to its highest level since 2011 on Tuesday, while the short-term two-year yield traded near levels not seen in about a decade, raising concern about how portfolio managers will navigate this changing investment landscape.

But most of them have never operated in a rising rates environment. Themedian tenure of an active equity manager is eight years, according to Fundstrat, citing figures gathered from Morningstar.

The last time rates were in a significant uptrend was from 2003 to 2006 before the financial crisis struck.

“There are a lot of people that haven’t been through many things in this youthful industry,” said Timothy Parton, a portfolio manager at J.P. Morgan. “The time when rates are rising coincides with a period in the cycle that is tough for any manager. You don’t want to be too cautious, but you don’t want to be too aggressive too early.”

The Fed slashed the overnight rate down to zero in 2008 during the aftermath of the financial crisis. The central bank’s goal at the time was to stimulate the economy. Now that the economy is out of its financial-crisis trough, the Fed has started to gradually hike rates closer to historical levels and market rates have responded.

Since late 2015, the Fed has raised rates a total of six times — including once this year —bringing the overnight rate to a range of 1.5 percent to 1.75 percent. Market participants are expecting the Fed to raise rates at least twice more in 2018 and many think they may even raise four times.

“We’re concerned about rising interest rates,” said Walter Price, senior portfolio manager at Allianz Global Investors. “Last year, we got a lot of multiple expansion. We think that’s unlikely in a rising rate environment.”

J.P. Morgan’s Parton and Allianz’s Price have seen their share of rising-rate cycles. Parton has worked in portfolio management since the late 1980s, while Price has 45 years of experience in the financial industry.



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Market sees nearly 50% chance of a Fed rate cut by the end of January 2020

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Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, March 20, 2019.

Andrew Harrer | Bloomberg | Getty Images

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, March 20, 2019.

Markets are becoming more convinced that the Federal Reserve will be more accommodative on interest rates.

The fed funds futures market is assigning a 47.8 percent probability of at least one rate cut by Jan. 29, according to the CME’s FedWatch tool, which has been a reliable gauge of the Federal Open Market Committee’s actions.

Futures contracts are also implying a 39 percent probability of a rate decrease by Dec.11, up from only 23 percent before the Fed’s policy decision at 2 p.m. on Wednesday.

The Fed left interest rates unchanged on Wednesday and also indicated that no more hikes will be coming this year. The central bank’s policymaker took a sharp dovish turn from policy projections just three months earlier when they estimated two rate hikes would be appropriate in 2019.

The move came along with reduced expectations in GDP growth and inflation and a bump higher in the unemployment rate outlook. The central bank also set the end of its balance-sheet reduction for September. The Fed said it will begin in May to taper the amount of proceeds it allows to roll off each month and will end the program in six months.

“They did what they needed to do to convince the market of their dovish pivot in messaging,” said Jeff Mills, co-chief investment strategist at PNC Financial Services Group.

“The very important thing along that pivot and the downgrade of the economy is that they also need to take some effort to convince the market that the economy is still on reasonably stable footing. I think there’s a balancing act going on with the dovish policy pivot and making sure they are not making investors think the economy is in worst shape than it is,” Mills said.

The CME computes the probability of a rate hike by taking the end-month futures contract, subtracting the level at the beginning of the month, and dividing that by 25 basis points, which is the assumed level of each rate hike.

“The market got what they wanted and then some,” said Jack McIntyre, portfolio manager at Brandywine Global. “This is a version of them being patient and they are going to err on the side of caution.”



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NY Mets launch new ticket subscription deal for 78 home games

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FILE- In tis April 5, 2010, file photo, New York Mets' fans celebrate after the Mets' David Wright hit a two-run home run in the first inning of a baseball game against the Florida Marlins at Citi Field in New York.  A person familiar with the announcement says Major League Baseball will announce Wednesday, May 16, 2012, that the New York Mets will host the 2013 All-Star game at Citi Field. The person spoke on condition of anonymity on Tuesday, May 15, because MLB did not reveal the purpose of W

Henny Ray Abrams

FILE- In tis April 5, 2010, file photo, New York Mets’ fans celebrate after the Mets’ David Wright hit a two-run home run in the first inning of a baseball game against the Florida Marlins at Citi Field in New York. A person familiar with the announcement says Major League Baseball will announce Wednesday, May 16, 2012, that the New York Mets will host the 2013 All-Star game at Citi Field. The person spoke on condition of anonymity on Tuesday, May 15, because MLB did not reveal the purpose of W

The New York Mets are offering up a ticket package this season that gives baseball fans Citi Field access up to the last minute.

For $39 a month, people can access the “Amazin’ Mets Pass” on their smartphone, which provides standing room access to 78 home season games. The app allows users to scan their tickets at the gate and upgrade to seated tickets on weekdays.

It’s the latest offering in an economy that’s trending towards subscription services for all types of products.

The program targets millennials and “unconventional audiences,” Mets Senior Vice President of Ticket Sales Chris Zaber told The New York Post.

The ticket service auto-renews each month and works similarly to services offered by teams like the Cardinals and Twins.



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Boeing is not ‘pro-active’ enough in 737 Max response, Argus says

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Ethiopian Airlines Flight 302, a Boeing 737 Max 8, went down shortly after takeoff from Addis Ababa on March 10, killing all 157 people on board. Aviation authorities around the world grounded Boeing 737 Max planes last week after the crash.

On Monday, eight days after that crash, Boeing CEO Dennis Muilenburg came out with a statement saying Boeing will maintain its “relentless commitment to make safe airplanes even safer.”

That statement came after French and Ethiopian investigators said data extracted from the black boxes of the Ethiopian Airlines jet showed “clear similarities” with a deadly Lion Air flight that plunged into the Java Sea in October.

“In the near term, the company is struggling, along with aviation investigators, to quickly determine the cause of two fatal crashes involving the company’s popular 737 Max jet. Until we get some clarity from investigators on the cause of the crashes, and from Boeing on its responses, we think a near-term HOLD rating is appropriate,” Argus said.

Shares of Boeing have dropped 12 percent since the crash on March 10. The stock posted its biggest weekly loss in eight years last week.

“If the cause of the crashes turns out to be a mechanical or engineering issue, Boeing can correct the problem and the industry, which is heavily dependent on the plane, the 737 Max jet, can move on,” the analyst said.

WATCH: How individual airlines are being impacted buy Boeing investigation



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