Worldwide Financial Planning

Since last autumn bond investors have been testing central banks’ willingness to keep rates high and have regularly had to adjust their outlooks when confronted by sticky inflation, high economic growth and central bank intransigence.

Following on from last week’s introduction to investment risk, and still using the maritime metaphors, I will cover the other risk measures you should be considering, to ensure you know the true risk of your investments and how to check them.

Markets have quickly reversed assumptions they held only a few weeks ago and the Federal Reserve is now expected to cut rates no earlier than August and the number of rate cuts expected has fallen to just two. The big drop in bond values serves as a reminder of how poor markets and central banks have been at forecasting inflation over the last few years.

Understanding the level of risk associated with your investments is akin to knowing how deep the water is before you dive in.

An end to the interest rate hiking cycle would be welcomed by US consumers, who have seen new US mortgage rates spend four weeks above 7% for just the third time this century. Despite this, new home loan applications increased by 2.3% in the week ending August 25.

While the market is easily fooled by headlines so too, unfortunately, are central banks. The true state of the economy won’t be clear for months so policy makers have to make do with the data they have, while the impact of today’s decisions won’t be apparent for another year.