It would be only the second time since December 2015 but the Federal Reserve’s expected rate hike could mean insurance companies will get out of the long-term bond business.
That’s according to Bryan McNee, President and Solutions provider at three long bond data companies.
This is a peculiarly fascinating Fed meeting, McNee said, because the US central bank is making decisions about an unpredictable future where Trump is president, taxes may change and the Fed itself could be populated by different people.
“Whether they’re insurance companies collecting all their premiums and dumping them in long-term bonds as a nice safe way, you’re going to see them move out of those bonds and put them to work in other areas,” McNee said. “Anyone who is holding bonds wants out, it’s the great unwinding.”
Like many speculators, McNee said he was anticipating a 0.25 interest rate bump, which still leaves the United States’ federal charges on borrowing a full percentage point below inflation.
“Maybe (insurance companies) are not in government in backed securities or US treasuries any more, maybe they go into corporate bonds that may pay a different yield with a little more risk,” McNee said.
The move takes the US central bank out of their crisis-mode, a change McNee said is long overdue.
“Regional community banks, all kinds of banks that cannot lend money…they can’t make enough interest to justify risk,” McNee said. “So they don’t lend money, so medium and small sized businesses don’t get loans and the economy doesn’t grow.”
McNee explained that interest rate hikes hurt the rate-of-return on long-term bonds because higher interest rates create growth.
Explore the factors causing insurance rates going up with this article.
With more growth comes more inflation and that hurts the profits of long term bonds.
“Bonds hate inflation,” McNee said.
Investors believe Trump will deliver what he promised in terms of repatriation of companies and lower taxes, McNee said, which will stimulate the economy and create inflation.
The curious case of this Fed decision is, McNee points out, what role it plays in a future less predictable than usual, with Trump swearing in just over a month after the Fed meeting on January 20, 2017.
“After January everything the Fed has been operating on, can change,” McNee said.
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