Has the Federal Reserve Interest Rate hikes Caused Investors to Rapidly Flee Healthy Companies?
- Shams ul Zoha
- November 30, 2022
- 7:35 pm
WHAT YOU SHOULD KNOW
- The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) experienced an unprecedented $3 billion in outflows on Monday.
- TThe current market outlook has shifted, and the probability of a 0.75% rate hike has now increased to 34.9%.
On Monday, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) experienced an unprecedented $3 billion in outflows, the most significant single-day withdrawal since the fund was established in 2002.
The large sell-off occurred following six consecutive weeks of investors pouring money into the LQD fund, with optimism that the Federal Reserve will start to reduce its interest rate increases in December.
A week ago, the bond market had given only a 24.2% probability of the Federal Reserve announcing a fifth consecutive 0.75% federal reserve interest rate hikes in December. However, the current market outlook has shifted, and the probability of a 0.75% rate hike has now increased to 34.9%.
According to Zaccarelli, bond markets have taken on much more risk than stock markets, and the risk in 2023 will be concentrated in certain areas of the stock market, such as those companies with high price-to-earnings ratios, those with limited or no current profitability, and those that are sensitive to changes in federal reserve interest rate hikes or dips. Therefore, he recommends remaining cautious, despite the losses already experienced in the current year.
On Wednesday, the LQD fund traded slightly lower and is now down 0.5% in the past five days and 18.9% year-to-date, making it the worst annual performance in its history. This decline is largely attributed to the Federal Reserve’s policy of raising interest rates in an attempt to control inflation, which has resulted in a significant increase in the cost of capital.
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