LoanStreet’s Capital Markets desk, which manages pool-building, pricing and execution for billions of dollars of participations each year, often hears: “The Fed will be raising rates shortly, so I’ll get better yields if I wait.” The data says waiting is usually not a sound strategy.
The Fed sets short rates; the market sets long rates
The Fed manages the overnight Fed Funds rate. Most credit unions price loans and participations off longer-term rates: the 2-year Treasury is a common benchmark for auto and unsecured pools, and the 5- and 7-year Treasurys for mortgages and commercial loans. Longer-term rates are all about expectations of future short rates, and the yield curve already reflects the expected path of Fed activity.
If the Fed does exactly what was expected and no other news arrives, longer-term rates should not materially change. Only surprises move them, in either direction.
A real example: June 15, 2022
Ahead of the June 15, 2022 meeting, the market was split between a 50 and a 75 bp hike, an expected increase of about 66 bps. The Fed raised 75 bps. The market read this as the Fed squeezing inflation out quickly, so it would not need to keep rates higher for longer. Despite the bigger-than-expected hike, longer-term Treasury yields declined. Across 2022, longer-term rates often fell on Fed announcement days.
In July 2022, the curve implied the 2-year Treasury would rise only 35 bps and the 7-year only 4 bps over the next year, even as short rates were expected to climb.
What about parking cash short-term?
Unless you are making an outright bet that the yield curve is wrong, investing short now and long later is expected to earn the same as investing long today, because the curve already expects longer-term yields to decline. Meanwhile, sitting on cash carries a real opportunity cost.