Hard blow to our portfolios after interest rate increases

Both Federal Reserve (Fed) such as Bank of England (BoE) They raised interest rates again this week, as central banks around the world realize they cannot ignore the difficult road ahead.

Let's recap... 樂

• The United States Federal Reserve (Fed) decided to raise interest rates by 50 points, placing them in a target range of between 0,75% and 1%, as reported this past Wednesday in a statement. This is the largest rate hike since 2000, 22 years ago.
• It also eliminated speculation circulating about even bigger interest rate hikes in the coming months, prompting a temporary rally in stocks.
• A day later, the Bank of England (BoE) raised the United Kingdom's interest rates by 25 points, reaching 1%, its highest level since 2009, as announced by the institution in its fourth consecutive meeting. In turn, new rate increases are anticipated in the coming months, which negatively affected the price of the pound sterling (GBP).

Connecting the dots…里

After admitting in March that it should have acted sooner, the Fed raised interest rates by 0,5 basis percentage points on Wednesday, the largest increase since 2000. The central bank said it would continue raising rates at this pace for the next several years. next two meetings, but shot down speculation that he was considering even larger rate hikes of 0,75 percentage points in the coming months, much to the relief of investors.

It also announced that it will begin reducing some of its $9 trillion in bond holdings through a process known as "roll-off", that is, it will not buy new bonds when the ones it owns mature, at a final interest of 95 one billion dollars. At this rate, the Fed's balance sheet will be close to what it was before the pandemic in 2024.

A day later, the Bank of England (BoE) raised its own interest rates 0,75% al 1%, the highest level since early 2009. According to forecasts, the central bank said it expects inflation to exceed the 10% in October, when the cap on gas and electricity is removed, which will increase costs another 40% upward. That says a lot about how much has been underestimated by the BoE the country's potential rise in inflation – less than half a year ago, it predicted inflation would peak at 5% in April – and now they appear to have demonstrated a lack of training in financial investment.

The BoE is not as confident as the Fed in being able to engineer a soft landing, that is, managing to reduce inflation without significantly interrupting economic growth. In fact, he warned that the UK economy will enter a recession later this year, as inflation and higher interest rates reduce household spending and consumer spending, the main driver of the UK economy. country.

Keys to take advantage of this situation

1. The Fed is not alone in reducing its bond holdings 

The BoE already began to reduce its balance sheet by ending bond reinvestments in February, while the reduction of the Bank of Canada have its public debt holdings reduced by 40% in the next two years. In fact, Bloomberg Economics estimates that the central banks of the Group of Seven countries will reduce their balance sheets by about $410.000 billion in the remainder of 2022, a marked change from last year, when they totaled $2,8 trillion. Dollars. This coordinated “quantitative tightening,” the opposite of quantitative easing, will only introduce another shock to the world’s economies and financial markets…

2. The FED's actions have caused increases in US bonds.

Rising inflation, rising interest rates and anticipation of quantitative tightening have pushed 10-year bond yields above the 3% for the first time in more than three years this week, more than doubling its level at the beginning of the year. That has important implications for the economy: bond yields affect mortgage rates, corporate borrowing costs, the attractiveness of riskier investments, and much more.

Also in our sights

The vacation rental market Airbnb (ABNB) recently reported first-quarter sales and gave a revenue forecast for the current quarter that topped analyst estimates. The company sees “substantial demand” for travel ahead of the busy summer season, after more than two years of Covid restrictions. That's the same message investors received from their peers Expedia (EXPE) y Booking Holdings (BKNGMore), who said they expect this summer to be one of the best the industry has ever seen.

POINTS TO MARK: Increases in interest rates, decrease in bond holdings, increase in demand for hospitality activity.