Rho's Treasury Advisor on Yesterday's Fed Rate Hike, Bonds & Treasury

Editor's note: This Q&A with Rho Corporate Treasury Advisor Michael Dombrowski originally appeared on Rho's blog and has since been updated following the Fed's latest rate hike decision.

It’s official: The Fed announced a 75 basis point rate hike. Any reactions?

In our previous conversation , I mentioned there wasn't a high chance that the Fed would go over 75 basis points as that would be quite dramatic. Basically, the Fed has to manage market expectations, and part of that is telegraphing in a way that doesn't freak people out – either as a general shock or as a change that forces leaders to recalculate their models. Today's decision reflects this principle.

That said, labor data remains pretty strong, so the initial reaction from stocks trading higher could be short-lived. Sure, the Fed indicating a potential slowdown in rate hikes would benefit stocks. But a single day doesn't make a trend. We still need to see what they say and how they act in December.

As reported by the?Financial Times , futures markets that track the federal funds rate suggest the interest rate could reach 5% by May 2023. Do you think today’s announcement makes this even more likely?

I’ll start by saying there definitely isn’t a crystal ball in the financial markets. That said, futures are a pretty strong indicator, and a potential 5% rate next May is likely. I think finance leaders need to continue thinking through the construct that rates will continue rising until either markets break – meaning something happens where there’s a large single-day spike event in bond yields – or there is a meaningful decline in inflation data. So, yes, 5% is totally on the table. Quite frankly, it could very well be more than that by May. We’re basically near 4%. Even if they slow the pace in December to 50 and January to 25, you’re at 5 already.

After the previous Fed rate hike, we published a LinkedIn poll asking CFOs if the recent update impacted their plans. More than a few said it didn’t. Are you surprised by that finding – and is it still the right move if we get another rate hike next month on top of the one announced today?

It isn’t as surprising because CFOs have a plan and generally try to stick to it. However, problems arise when the environment changes, calls for you to update your strategy, and you do so later than you should. I think every finance leader should constantly reevaluate their plans with every new Fed move so that they aren’t blindsided by something they may have missed.?

At a granular level, how should the CFO of a midsize company respond to today's rate hike??

It should be a two-fold approach. First, you can continue following your existing plan for now; however, I would advise as a next step to review your investment policy and plan to do so often in the coming months. What may have been appropriate in October may no longer be technically sound in November. For example, it’s wise to keep your corporate cash in short-duration, short-maturing assets. The last thing you want to do now is subject yourself to even more interest rate risk, meaning that as interest rates go higher, the possible portfolio of assets you could have at a given time could go lower in value. You can combat this by shortening the duration of your corporate assets to make sure that your cash is continuing to turn over.?

The challenge for many midsize organizations is that you may only have one person on the team managing your company’s treasury strategy - if there is one in the first place. Should this be the case, you may want to start looking for outside assistance from a trusted third party who can help you manage the legwork.??

We recently?announced Prime Treasury ?to help companies craft bespoke treasury management strategies. As the lead for this new offering, what have you heard from clients who have signed up??

Inbound has been really strong as people are interested in learning more about the product in light of today’s macro trends. What we hear is that it is resonating for two reasons. First, the Prime Treasury solution is customizable for every unique customer’s business. It’s not an off-the-shelf, pre-packaged solution. Second, because Rho doesn’t utilize one-size-fits-all investment vehicles, we can be more nimble than those products. This means that their interest rates on the assets we are helping them own can increase faster than what they would achieve with off-the-shelf products – generally speaking.?

Another advantage is that an off-the-shelf product like a bond ETF has to operate under a specific mandate, which is great, but it isn't easy to move away from that mandate if needed because it is created to operate within that construct. This is similar to a money market fund that is only going to buy - by law - certain assets. This is fine for some. At the same time, your current needs may require you to change your investment strategy. Since every business is unique, with Prime Treasury, we aim to tailor investment strategies to reflect that reality.?

What’s one thing people may not realize about the current inflation and interest rate saga??

What immediately comes to mind is that some may not realize that high inflation rates can be around much longer than you expect. That the tools at the Fed’s disposal may not be a cure or a panacea to prevent inflation rates from moving further upward. Generally speaking, these tools are practical, but there is historical precedent where they weren’t able to wrangle things in and aren’t a substitute for time.?

In general, how does treasury strategy shift when you enter an official recession??

When you’re in an official recession, that’s when it’s more about capital preservation to keep the cash you have on your balance sheet as safe as possible. A higher rate environment - which is typical during a recession - plays to your advantage here as long as you have a sound cash management strategy. That’s where short-duration instruments are helpful while waiting for the Fed to indicate anything changing.?

Interested in exploring Prime Treasury further? Visit rho.co/treasury for more information.

About Michael Dombrowski

Michael Dombrowski is the Corporate Treasury Advisor at Rho, helping clients develop and tailor corporate treasury management strategies to optimize cash reserves effectively. He is an SEC-registered investment advisor specializing in fixed-income investments and corporate cash management. Before joining Rho, Michael served as the Head of Capital Markets at InterPrime, a Y Combinator-backed treasury management startup acquired by Rho in 2022, and as an interest rate advisor and trader at several firms including Arbor Research, Capital & Credit International, and Carlin Equities.?