Recent bank failures are predicted to lead to tighter lending conditions, which may result in a mild recession for the U.S. economy during the year's second half. According to a Vanguard executive on Monday, this situation strengthens the case for gradually increasing exposure to long-term bonds in anticipation of falling interest rates.
Yellen's Comments on Caution in Lending
Over the weekend, U.S. Treasury Secretary Janet Yellen suggested that banks will likely become more cautious and potentially restrict lending further. This development could negate the need for the Federal Reserve to implement additional interest rate hikes.
Market Expectations for Interest Rate Changes
On Monday, money market traders expected the U.S. central bank to raise rates by 25 basis points during its May rate-setting meeting. However, there needed to be more certainty about subsequent moves, with investors considering multiple scenarios, including a potential rate cut as early as June, based on CME Group data.
Policy Uncertainty and Rate Volatility
Roger Hallam, global head of rates at Vanguard, noted the current policy uncertainty, which may lead to continued volatility in the short term. He also mentioned the possibility of upward pressure on yields at the short-end of the U.S. Treasury curve.
Bond Yields and Investment Opportunities
According to Hallam, bond yields, which typically decline during economic downturns, currently present a "reasonably good opportunity" for investors to extend the duration of their portfolios. By doing so, investors can offset potential declines in risk assets, such as stocks, that may occur during a recession.