Financial markets are experiencing a significant amount of volatility, and the Federal Reserve is going to continue to raise interest rates. Investors are nervous and cautious, but there are quite a few reasons to be relaxed, confident, and encouraged to buy fixed income assets across the yield curve, even in the short end.
Interest rates are set to move higher, and the message from the Fed is that they will continue to move ahead with rate hikes this year. So logic might say that buying fixed income assets in the short end is counterintuitive. Why buy these assets when we all know interest rates are going up? Well, keep in mind these rate increases are going to be gradual. They are going to be measured, the yield curve is relatively flat, and a bond rout is highly unlikely.
There are plenty of additional reasons to feel comfortable with a buying strategy. First, inflation continues to be moderate, still below the Fed's target, and unlikely to breach their target in any significant or consistent fashion anytime soon. And when I say anytime soon, my reference point is years, not months.
Secondly, economic growth continues to be solid, yet not too overheated. It's measured much like Fed rate hikes are expected to be. Additionally, these data points do not indicate a recession in the near future, either. And a third reason for confidence is that, with the previously mentioned information in the market, interest rates have already risen nicely. They have priced in all the variables, and their value is thus very fair, and not expensive.
The bottom line is that there is no time like the present. Fixed income investments are not only fair and attractively valued, but also an excellent diversifier for any investor. And although if the Fed follows through with their plan and raises interest rates throughout the year, the front end of the yield curve still presents a nice opportunity with limited inherent risk. Take advantage of the current environment with confidence and conviction.