During the first quarter, it rose to 1.74%. During the second quarter, we saw a 28-basis point decline as the rate closed at 1.46%. This move lower continued in the beginning of the third quarter to a low of 1.17% on August 3rd. Rates remained range-bound during August, but in September we saw a push higher to end the quarter at 1.48%. The Federal Reserve maintains its near zero Fed funds rate, although they have signaled that they could begin tapering their bond purchasing in 2022. Currently they are purchasing roughly $120 billion in bonds every month. Inflationary concerns remain and were the fundamental support for rates moving higher – the September YoY CPI was reported at 5.4%.
While short term rates remain historically low, the yield curve did flatten slightly on the long end. The 30-year treasury rate declined 4 bps during the quarter. Spreads remained narrow as investors still see little default risk. High yield bonds have rewarded investors with a 4.5% return year-to-date while most other bond indices have been negative. With the large move in rates during the month of September, returns in all bond market sectors were negative for the month. As a reminder the relationship between bond yields and bond prices is an inverse relationship, as yields increase the price of bonds decrease. As I write this article today the 10-year treasury’s rate has moved even higher and is currently above 1.60%.
When inflation and/or inflation expectations run at a higher rate, the Fed typically takes a more hawkish tone which leads to higher interest rates. However, the Fed has thus far signaled that they are not in any rush to raise rates and will be very methodical in pulling back its bond purchasing program. For equity hesitant investors with extra cash on the sidelines, this recent move higher in interest rates may create a buying opportunity.