Stock Markets
Bond investors gear up for looming Fed interest rate cuts
© Reuters. FILE PHOTO: An eagle tops the U.S. Federal Reserve building’s facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst/File Photo
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Bond investors are expecting the Federal Reserve to drop its bias toward hiking interest rates at a policy meeting this week to prepare the market for what could be multiple rate cuts this year and the first since the start of the COVID-19 pandemic in 2020.
Portfolio managers have increased bets on long-duration U.S. Treasuries ahead of the meeting, reflecting expectations that yields on those securities will decline as the U.S. central bank moves toward cutting rates. As the economy slows, longer-duration bonds tend to outperform other assets.
Generally, bonds with long maturities and low coupons have the longest duration. These bonds are more sensitive to changes in interest rates.
“We have throughout the past year suggested extending duration in anticipation of the cycle turning,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York.
The Fed is widely expected to hold interest rates steady at the end of its two-day policy meeting on Wednesday, with some investors seeing a possibility that it could ramp up its dovish tone after it was perceived to have pivoted from a tightening policy outlook at its meeting last month.
Seventeen of 19 Fed officials projected at the Dec. 12-13 meeting that the policy rate would be lower by the end of this year, compared to where it was last month. The Fed’s median projection showed the rate falling three-quarters of a percentage point from the current 5.25%-5.50% range.
Guneet Dhingra, managing director and head of U.S. rates strategy at Morgan Stanley in New York, said the Fed could talk more this week about an easing bias. “The only question is how quickly it starts and how fast the easing is.”
In the rate futures market, rate cut bets were a little more aggressive. Federal funds futures, a straightforward measure of where traders believe the U.S. central bank’s benchmark overnight interest rate will be at any given time, have priced in five 25-basis-point cuts for 2024, according to LSEG’s rate probability app.
The market is pricing in the first rate cut to occur at the April 30-May 1 meeting, with a 91% probability. Futures showed less than a 50% chance of a cut at the March 19-20 meeting. Odds of a cut in March were as high as 80% three weeks ago.
LONG DURATION
“We have moved to longer duration for all the portfolios we manage,” said Jeff Klingelhofer, co-head of investments at Thornburg Investment Management in Santa Fe, New Mexico, with around $43 billion in assets under management.
“The bar for reverting back to higher rates is quite high and we’re unlikely to go there,” he added, noting that given how aggressive the Fed’s rate hikes have been over the last two years, a U.S. recession is more likely than not.
Since last month’s meeting, however, U.S. non-farm payrolls data for December and gross domestic product growth for the fourth quarter of 2023 came in surprisingly strong.
Ryan Swift, a bond strategist at BCA Research in Montreal, wrote that with federal funds futures being overly dovish despite a run of generally solid U.S. economic data, the more likely near-term trade for investors is to reduce some of the embedded rate cuts in the futures contracts.
This argues, he said, for keeping portfolio duration close to the benchmark, or maintaining a flat bias.
According to a Reuters poll of economists, the Fed will likely wait until the second quarter of 2024 before cutting rates. Those economists see the June 11-12 meeting as the more likely time for the central bank to lower borrowing costs.
have actually risen about 8 basis points since the Fed’s meeting last month, giving investors some room to go long on Treasuries. As of Monday, 10-year yields were last yielding 4.10%.
Thornburg’s Klingelhofer said a more than 4% yield for 10-year Treasury notes is an attractive entry point for investors.
“I think it’s unlikely that we see 5% again. In order to see above 5% in the 10-year, you have to believe that either we don’t get a recession or the Fed doesn’t cut over the next 10 years,” he added, noting that both are unlikely scenarios.
On Friday, Argus increased its stock price target on Rithm Capital Corp. (NYSE: RITM) to $13.00, up from the previous $12.00, while reaffirming its Buy rating on the stock. The firm highlighted the company’s ongoing transformation and expansion efforts as the rationale behind the revised target price.
Rithm Capital, which rebranded from New Residential Investment Corp. in August 2022, has since transitioned to internal management after previously being managed by Fortress Investment Group. This change is part of a broader transformation of the company’s business model initiated following the financial crisis in late March 2020.
The company has been actively growing its mortgage servicing operations and seizing new debt-related investment opportunities. In its expansion efforts, Rithm Capital has acquired a 50% interest in GreenBarn Investment Group, a commercial real estate equity and debt investment management firm.
Further bolstering its portfolio, Rithm Capital has also made significant acquisitions, including purchasing $1.4 billion worth of Marcus consumer loans from Goldman Sachs for $145 million. Moreover, the company has completed the acquisition of Computershare Mortgage Services Inc. and its affiliates, including Specialized Loan Servicing LLC (SLS), for an approximate total of $720 million.
Completing its notable transactions, Rithm Capital finalized the acquisition of the $33 billion alternative asset manager Sculptor Capital Management (NYSE:) in the fourth quarter of 2023. These strategic moves have contributed to the firm’s positive outlook on Rithm Capital’s stock and its increased price target.
InvestingPro Insights
In light of Argus’s stock recent price target increase for Rithm Capital Corp. (NYSE: RITM), InvestingPro data further supports the optimistic outlook. Rithm Capital’s market capitalization stands at a robust $5.55 billion, while maintaining an attractive P/E ratio of 7.41, indicating that the stock may be undervalued relative to its earnings.
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The company’s significant dividend yield of 8.73% as of the last recorded date, coupled with a history of maintaining dividend payments for 12 consecutive years, reflects a strong commitment to shareholder returns.
InvestingPro Tips suggest that while analysts have revised earnings downwards for the upcoming period, the company’s stock price movements have been quite volatile, trading near its 52-week high. This could present opportunities for investors looking for value plays with substantial dividend income.
Moreover, with a notable year-to-date price total return of 9.73%, and an impressive 55.73% return over the last year, Rithm Capital’s performance has been strong. For those seeking more in-depth analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/RITM, offering insights that could help investors make more informed decisions.
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This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
On Friday, JPMorgan upheld its Overweight rating on CK Infrastructure Holdings (1038:HK) (OTC: CKISY) with a consistent price target of HK$50.00. The firm’s analysis was based on a review of the company’s financial year 2023 results and current operating trends. Adjustments were made to the earnings forecasts for the years 2024 and 2025, with a slight reduction for 2024 by 2% and an increase for 2025 by 2%. These revisions take into account the influence of regulatory changes, inflation, and fluctuating exchange rates on the company’s regulated assets, particularly in the United Kingdom, Australia, and other regions.
The updated model reflects the latest developments and anticipates the potential financial impact on CK Infrastructure. The firm has decided to roll forward its price target to June 2025, while maintaining the previous target of HK$50. The Overweight rating suggests that JPMorgan continues to view the stock favorably in comparison to the sector average.
CK Infrastructure Holdings, which operates a diversified portfolio of infrastructure businesses, has been assessed for its performance and outlook in light of various external factors. The company’s exposure to regulatory resets and economic conditions in different geographies necessitates a nuanced understanding of its earnings potential.
The revised earnings estimates are a direct result of the firm’s comprehensive evaluation of the company’s regulated assets. These assets, which are subject to oversight by regulatory bodies, can be affected by policy changes and economic shifts, such as inflation and currency exchange rates.
JPMorgan’s reaffirmation of the Overweight rating indicates confidence in CK Infrastructure’s ability to navigate the complexities of its operating environment. The price target of HK$50 remains unchanged, signaling the firm’s belief in the company’s value proposition and its prospects for the future.
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This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
On Friday, Argus maintained a Buy rating on Ashland Inc . (NYSE: NYSE:) and increased the stock’s price target to $118 from $109. This adjustment suggests a potential total return of approximately 21%, including dividends, based on the current share prices.
The specialty chemicals and additives provider has experienced underwhelming operational and financial performance over recent quarters, including the second quarter of 2024. This was attributed to slower economic growth in key regions such as China, Europe, and parts of Asia. These areas faced challenges due to soft customer demand and ongoing inventory destocking by suppliers, which adversely affected Ashland’s revenue and profit margins.
Despite these challenges, there have been positive signs in the last quarter indicating a shift in market conditions. Ashland’s management has reported a gradual increase in demand across most of the company’s end markets.
According to Argus, this improvement is a result of the destocking cycle nearing its end and customer demand beginning to rise, which are seen as favorable trends for Ashland’s future growth.
The revised stock price target reflects the analyst’s confidence in Ashland’s recovery trajectory as the market dynamics that previously hindered the company’s performance are starting to reverse. The upward revision in the price target is based on the expectation of a continued recovery in customer demand patterns and the conclusion of inventory destocking.
Investors and market watchers will be monitoring Ashland’s progress closely, as the company aims to capitalize on the improving demand in its various markets and work towards delivering value to its shareholders.
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InvestingPro Insights
As Argus maintains a positive outlook on Ashland Inc. (NYSE: ASH), highlighting the potential for a 21% total return, InvestingPro data provides additional insights into the company’s financial health and market performance.
Ashland’s management’s aggressive share buyback strategy and a high shareholder yield are noteworthy, as noted by InvestingPro Tips. Furthermore, the company’s consistent dividend growth, with dividends raised for five consecutive years and maintained for 54 years, underscores its commitment to shareholder returns.
From a market perspective, Ashland’s stock is trading near its 52-week high, with analysts predicting profitability for the year. The company’s strong liquidity position, with liquid assets surpassing short-term obligations, is reassuring for investors.
Key financial metrics include a market capitalization of $4.98 billion, a P/E ratio of 26.25, and a dividend yield of 1.64%. Despite a decline in revenue growth over the last twelve months, the stock has experienced a significant price uptick, with a 29.41% total return over the last six months.
For those considering a deeper analysis of Ashland, InvestingPro offers additional insights. There are currently 11 more InvestingPro Tips available for Ashland Inc., which can be accessed by visiting https://www.investing.com/pro/ASH. To enhance your investing strategy with these insights, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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