Jump Around

We believe interest rates can see a big move this year. However, the direction of that move is yet to be determined.

On one hand, the economy is at risk of slowing under the weight of a 4.75% 10-year treasury yield, which would lead to a sustained drop in interest rates. On the other hand, we have a few indicators that could trigger soon which support a bond rally.

Alternatively, any successful effort from the Trump administration that leads to:

• Expansionary fiscal policy
• Higher inflation from either higher tariffs or limited immigration
• Heavier bond issuance

could then result in an extension of the bond selloff that started in September. If yields move above the critical 5% resistance level, we could be in for unstable price action.

No matter which way rates move, there are ways to take advantage of an expected increase in volatility. Let’s explore how to profit from a move in either direction to help your clients outperform.

Interest rates are a central element analyzed by Pave’s technology, which considers several factors to construct a picture of an asset’s interest rate sensitivity. As a result, Pave may identify impactful portfolio updates that are often overlooked.

Let’s take the example of an advisor tasking Pave Pro with optimizing an existing portfolio benchmarked to the S&P 500 so that it has increased interest rate sensitivity. If an advisor were to do this today, one of the changes Pave Pro would suggest is increasing the weight of the oil company Exxon (XOM).

Why? Interest rates reflect inflation and growth, and those two factors determine the price of oil. In turn, changes in the price of crude oil impact the direction of energy stocks.

How does an advisor task Pave with creating an interest rate sensitive portfolio? It’s as simple as navigating to a portfolio’s Investment Preferences, finding the Factor Tilt section, and selecting Overweight in the Interest Rate Sensitivity dropdown. After that, save the changes and Pave Pro will generate a new portfolio in a matter of seconds.

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Two items of note:

1. Isolating individual stocks such as XOM does not do the Pave Pro optimization process justice, but it’s a useful exercise to show the logic behind the portfolio updates. Our portfolio construction process looks across several dimensions to compile a portfolio with a particular risk return profile to match that of the S&P 500 while also satisfying the constraint of choosing interest sensitive stocks. As such, various influences govern why a particular group of stocks is included to build the final portfolio.

2. As economic and market conditions evolve, changes to the interest rate factor tilt portfolio a month from now will not be the same as if you did so today. The power of this software is that it positions your clients for rate changes not using cookie-cutter reactions but precise, calculated moves based on whatever environment currently presents itself.

Rates are sitting at an inflection point and are unlikely to stay put, so take advantage of Pave Pro’s edge and set yourself up to enable your clients to take advantage of bond market movement.

To learn more, please reach out by emailing sales@pavefinance.com or pressing the button below. We look forward to speaking with you.

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1. Testimonial provided by Josh Allen in April of 2024. Josh is a current client of Pave Finance, Inc. No compensation was provided in exchange for this testimonial.

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