Download Beta, decay and how to prepare for a rising rate environment

Beta, decay and how to prepare for
a rising rate environment
September 2013
20 Church Street  Liberty Corner, NJ 07938  P: (908) 604-9336  F: (908) 604-5951  [email protected]  www.finpronj.com 0
The level of interest rates drives beta and decay . . .
•
•
•
Higher rates typically drive higher betas and higher levels of decay
Beta and decay levels are impacted by:
• the level of rates
• the slope of the curve, and
• how competition responds.
Beta and decay levels are forward looking and need to be fluid to changing market
conditions.
1
Long rates have been volatile since early spring due to events like Cyprus and
the Fed slowing down operation Twist . . .
4/11/2013: Cyprus temporarily
flipped the risk-on / risk-off switch to
“off” causing a near-term flight to
safety and a rise in Treasury and
German Bund prices:


12.0%
9.9%
10.0%
8.0%
6.2%
6.0%
3.3% 3.3% 3.4%
4.0%
2.0%
0.8% 0.8%
4.3% 4.6%
6/19/2013: Given United States’
fiscal situation it cannot be long
before markets swing against the
World’s Reserve Currency
2.1% 2.1% 2.2%
1.5% 1.9% 1.9%
0.0%
2
The impact to the US interest rate environment for the short term is contingent
upon Fed action. Longer term, the Debt / GDP issues will persist . . .
Anticipation of Fed
Withdrawal and Change
in Purchasing
Yield Curve Steepens
Third Quarter 2013
Through 2013
No Recovery
Fed Tapers
Steady Rate Rise
Economic Uncertainty
Leads to further
stimulus
Flat / Depressed
Longer-Term Shock Situations
China or Japan PullBack Purchases:
Rates Rise
Debt / GDP
Grows to 120%:
Rates Rise
Economic Recovery
Fed Tapers
Flat / Inverted
Government Cuts
Spending:
Rates low for 18 mo.
then rise as economy
improves
3
Which is likely? Since actions are based on the economy, it is important to note
that the Fed projects unemployment to improve and inflation to remain
tempered . . .
Source: Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents June 2013
4

To continue reading this presentation, please visit
FinPro Central Hub
5