US market rates approach peak with 10-year at 5%, signaling shift for asset managers

As the US market rates appear to be nearing their peak, with the hitting 5% and the 2-year yield reaching 5.25%, financial strategists are anticipating a structural decline in rates and a steeper yield curve ahead. This situation marks a significant moment for asset and liability managers since the Federal Reserve’s rate hikes peaked on July 26.

Asset managers now find themselves at an opportune time to purchase longer-dated securities and secure a running yield, a strategy that proves beneficial even in scenarios where the yield curve is inverted. This approach allows for locking in higher interest returns over the duration of these securities.

On the other side, liability managers are presented with the option to set fixed-rate receivers, which is akin to holding a funded long position in a bond, or to pivot to floating rates. Despite the market’s volatility, exposure to floating rates often results in lower funding costs. This is attributed to the typically upward-sloping term structure of interest rates, and historically, there has never been a negative carry from a 10-year fixed-rate receiver.

At the peak of the Federal Reserve’s rate hikes, those holding fixed-rate receivers see maximized realized carry – the income earned on these investments. Conversely, when interest rates hit the bottom of their cycle, it becomes optimal for investors to swap into a fixed-rate payer position. This strategic move positions them in anticipation of future Federal Reserve rate increases, which signify another turning point in the economic cycle.

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