Investors Rediscover the Importance of Getting Paid Back

Key takeaways

  • The exit from a decade of very low interest rates, via the most aggressive hiking cycle since 1980 has laid bare the distorted financing incentives that became entrenched in the years between the Global Financial Crisis in 2008 and the end of pandemic-era monetary policies in 2022.
  • Still, while financial sector leverage is high, private sector leverage, especially in households and corporations, is low, and employment is quite healthy.
  • That leaves the Federal Reserve in the unenviable position of having to administer a single monetary policy to a resilient real economy that relies on a weaker financial economy for its funding, and in this commentary, we examine the investment implications that follow from this dynamic.

Rick Rieder and team argue that one of the most important questions investors should ask today is “Am I getting paid back for the risk I am taking?”