With an agreement on the debt ceiling easing concerns on the macro level, the aftereffects of avoiding default could pose new challenges for bond exchange-traded fund investors.
“Now [The Fed] is going to hit it with trillion dollars of sales that will make short-term Treasury rates rise,” he said. “And that will feel like an interest rate hike.”
Lutnick explained that the strain from the Fed’s sell-off will incentivize the central bank to pause on another interest rate hike. Additionally, the trillion dollars taken out of the regional banking system and placed into money market funds added pressure on big and systemic banks, he said, increasing the Fed’s constraint.
“The Fed is not raising [rates], don’t buy it,” Lutnick said. “They’re not raising.”
While the effect is positive for investors worried about additional hikes, raising the debt ceiling over the next year could expedite a drain on global liquidity.
“Low rates push people to take risk on [and] go buy stocks,” Lutnick said. “Now you have people saying, ‘Hey, maybe I should just put my money in Treasurys. I get 5% take no risk.’ And that’s money coming out of the stock market.”
As money market yields continue to rise, Lutnick said he sees capital continuing to flow out of equities and into money market funds and Treasury bond ETFs.
“You’re going to see the stock market go sideways, but the bond market is going to continue to draw in money and get a lot of power,” Lutnick said.
But as investors brace for an influx of Treasury securities to enter the market, Tradeweb CEO Billy Hult stressed the importance of finding liquidity in the marketplace to get a sense of how the government bond market is functioning.
“The most sophisticated players that live and breathe in my space are oriented toward creating ETF technology around liquidity,” Hult said in the same segment. “That market is exceptionally solid.”
Hult explained that the incorporation of greater transparency, price efficiency and technology into fixed income funds has helped expedite the development of the bond marketplace. In turn, he said, investor interest in bonds and Treasurys will ultimately be expressed through ETFs.
“That’s not going to change,” Hult said. It’s the easier more liquid way of expressing a view.”