The current elevated Treasury rates, signaling rising investors’ concerns regarding the Fed’s potential rate hikes, may be temporary, according to Eddie Ghabour, founder of KeyAdvisors Group and author of "Common Sense Bull."
The 10-year Treasury yield (^TNX) continued to rise past 1.75% Thursday, extending 2022’s rate spike by several basis points. Higher rates come in response to fears that the Fed may be more aggressive in its attempts to curtail inflation.
Investors reacted to the Wednesday release of the minutes for the FOMC’s December meeting, in which the Fed revealed that it forecasts three rate hikes in 2022 plus a quicker curtailing of bond purchases than previously expected.
Stocks fell and the Treasury yield rose Wednesday as a result, with similar trends extending into Thursday’s trading session.
“I think this spike in rates here actually is a head fake,” Ghabour said in an interview with Yahoo Finance Live on Tuesday. “I expect a 10-year yield to actually trend lower from here.”
Ghabour warned investors that, while Treasury rates might decrease, the economy could be in for some pain in the near future as the Fed raises interest rates to combat inflation.
“For the first time in a while, my outlook for the market is not very rosy for those riskier asset classes,” he said. “Because I think we're going to be heading into a slowdown economically here over the next couple of quarters. And you have a Fed that's going to be tightening into that slowdown.”
Generally speaking, in normal economic times, higher treasury yields are correlated with a more optimistic outlook on the economy’s performance in the future. More specifically, higher yields on long-term instruments signals confidence in the ability of those assets to earn higher returns.
The coronavirus pandemic brought yield rates down to as low as 0.54% as the ensuing economic shutdowns disrupted both supply and demand across the world. Rates have been generally increasing since that trough.
“So, this increase in rates doesn't concern me at all,” Ghabour said. “I think it's going to be short-lived. The bigger concern I have right now is the fact that a lot of investors are still carrying a tremendous amount of risk heading into a year that's going to be unprecedented when the Fed is tightening during a slowdown. It usually is not a good recipe for high-risk assets.”
With inflation rising at historic speeds, the Fed has been forced to consider raising interest rates which have been ultra-low for over a decade. In doing so, Ghabour said, they will be tightening monetary policy in a period of economic cooldown, a bad combination for markets historically.
“If you tighten during a slowdown, historically speaking, that's one of the worst equations [for] risk assets, your higher beta plays, which is why we've been rotating into more defensive plays,” he said.
For investors, Ghabour said, it might be smart to look outside of risky assets and explore safer alternatives like health care and real estate. If the Fed does execute the forecasted three rate hikes, 2022 could be a long year for the stock market.
“I don't think there's any question that the Fed is the biggest risk [to the stock market rally] because they've put themselves in a lose-lose situation,” he said. “They have to tighten, and they've said they're going to tighten because of the inflation that's not going to be going away.”
Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.