A new Bank of America report is bound to shine a spotlight on bonds.
BofA is predicting the Fed may raise interest rates up to seven times this year, moving yields from near zero to as much as 3%.
I bring this up because other analysts have suggested one of the reasons behind the recent tech selloff is rising bond yields.
Here’s the thing. If I were you, I would be very cautious about making big moves into bonds.
As yields rise, bond prices fall – meaning you could get hammered if you need to sell.
Moreover, with so much uncertainty in the air, I believe we’re likely to see a lot of volatility in bonds.
But what if you could find a tech leader who stands to gain from it all?
Today, I want to reveal a great one who is poised to double earnings in three years…
How the Fed May Deal with Inflation
Bond yields are set to rise as Wall Street worries about rising inflation and slowing economic growth.
That second part may sound strange given that we just had GDP growth hit 6.9%, the highest since 1981, coupled with the possibility of war between Russia and Ukraine.
But the Street is fretting that growth may slow because of Omicron combined with a tight labor market, the highest rate of inflation in 40 years plus breakdowns in the supply chain.
See, the U.S. inflation rate hit 5.8% last year. That’s the steepest price rise since 1982, and way above the Fed’s official goal of 2%. Consumers are spending about $250 more every month. And as employment and economic growth continue to recover, that’s giving the Fed more room to fight inflation.
The main ways the Fed accomplishes this is by raising interest rates. Over the last couple of weeks, Wall Street heavy hitters have been putting their estimates for how much and how fast the Fed will do that.
Goldman Sachs says the Fed will raise rates five times in 2022.
BNP Paribas estimates six raises. Meanwhile, Bank of America sees the Fed raising rates seven times, once at each meeting. That would put the Federal funds rate at 1.75% to 2%, back to pre-COVID levels.
In short, the Federal funds rate sets how much big banks get paid for their reserves. The higher that rate is, the less these banks are interested in buying bonds.
Lower demand for bonds means lower prices, which in turn sends bond interest rates up.
As these changes ripple through the market, there’s going to be a huge amount of churn. Big institutions will be buying and selling their bond portfolios to reposition themselves to the new reality of higher interest rates.
That’s no small thing. The fixed income market, as bonds are also known, is one of the largest in finance. The U.S. fixed income market, including government securities and corporate issues, is worth more than $41 trillion.
Statista reports the average trading volume for Treasury securities alone often runs as high as $547.8 billion per day, despite the fact that the 91-day Treasury bill rate has been below 0.5% for years.
The Perfect Stock for this Market
For regular investors like you and me, there’s no way to take part in this market. But there is a way to make bank off this trading enormous volume.
New York-based Tradeweb Markets Inc. (TW) offers its 2,500-plus clients advanced electronic marketplaces for over 40 fixed-income and related financial products, where they can see who’s trading what kind of products and when.
Think of this like your broker’s online trading platform, but for fixed-income and derivatives rather than stocks and options.
Since going public in 2019, Tradeweb has expanded through acquisitions and product development into all kinds of financial products – interest rate swaps, credit default swaps, repos, mortgage securities, and bonds of all kinds.
You have to understand, before electronic markets like Tradeweb’s, trading bonds and other fixed-income securities meant calling up a big bank, fund, or the issuer directly and asking them for a quote.
Fixed-income and related markets are extremely complex. While a company will usually have at most two or three classes of shares, every bond differs by when it was issued, when it expires, what its terms and covenants are, and so on.
As you can imagine, trading in that situation took a lot of time and effort, and you got far from the best price. If you even knew who to call, that is.
A Brokerage You Can Count On
That’s where TradeWeb comes in. The firm’s clients are spread across more than 65 countries and include more than 55 central banks or governments, over 90% of the world’s top 100 asset managers, and a whopping 45,000 financial advisors.
Today, TradeWeb handles over 50,000 daily transactions. And while that might not sound like much, consider the firm’s average daily trading volume in dollars adds up to $970 billion.
From 2004 to 2020, that number grew by 13.8% a year. And much like stock brokers, TradeWeb makes money the more trades it handles. In fact, the firm’s revenues over the same time period saw similar growth at 12.5% a year.
With the Fed set to raise interest rates throughout the year, the fixed-income market is going to see huge churn. That’s going to increase the trading volume TradeWeb handles, increasing its revenues even more.
I expect the company’s per-share profits to grow by 24% a year, meaning they will double in right at three years.
As you can see, TradeWeb is a great tech leader that can remain in your portfolio for years to come as fixed-income trading remains a massive trend.
Cheers and good investing,
— Michael A. Robinson
Source: Strategic Tech Investor