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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. The level of interest rates drives beta and decay. - PowerPoint PPT Presentation
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120 Church Street Liberty Corner, NJ 07938 P: (908) 604-9336 F: (908) 604-5951 [email protected] www.finpronj.com
Beta, decay and how to prepare for a rising rate environment
September 2013
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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.
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:
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0.8% 0.8%1.5% 1.9% 1.9% 2.1% 2.1% 2.2%
3.3% 3.3% 3.4%4.3% 4.6%
6.2%
9.9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0% 6/19/2013: Given United States’
fiscal situation it cannot be long before markets swing against the World’s Reserve Currency
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 . . .
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Longer-Term Shock Situations
Through 2013
Third Quarter 2013
Anticipation of Fed Withdrawal and Change
in Purchasing
Yield Curve Steepens
No Recovery
Fed Tapers
Steady Rate Rise
China or Japan Pull-Back Purchases:
Rates Rise
Economic Uncertainty
Leads to further stimulus
Flat / Depressed
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
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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
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