With a deal on the debt ceiling easing macro concerns, the implications of avoiding a default could pose new challenges for ETF investors.
“Interest rates are lower than you would think in the Treasury market,” Howard Lutnick, chairman and CEO of BGC Partners, told CNBC’s Bob Pisani on “ETF Edge” on Wednesday.
“Now [The Fed] will hit it with trillions of dollars of sales that will drive short-term interest rates higher,” he said. “And that will feel like a rate hike.”
Lutnik explained that the pressure from the Fed’s selloff will spur the central bank to hold off on raising interest rates again. Also, the trillions of dollars pulled out of the regional banking system and put into money market funds added pressure on big and systemic banks, he said, increasing the Fed’s constraints.
“The Fed is not raising [rates]don’t buy it,” Lutnick said. “They don’t raise.”
While the effect is positive for investors worried about further hikes, raising the debt ceiling next year could accelerate global liquidity drain.
“Low rates make people take risks [and] go buy stocks,” Lutnick said. “Now you have people saying, ‘Hey, maybe I should just put my money in Treasurys. I get 5% no risk. And that’s money coming from the stock market.”
As money market yields continue to rise, Lutnick said he sees capital continuing to flow out of stocks and into money market funds and government bond ETFs.
“You’re going to see the stock market go away, but the bond market is going to continue to attract money and get a lot of power,” Lutnick said.
But as investors prepare for an influx of Treasuries to enter the market, Tradeweb CEO Billy Hult stressed the importance of finding liquidity in the market to get a sense of how the government bond market is performing.
“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. “This market is extremely solid.”
Hult explained that the incorporation of greater transparency, cost efficiency and technology into fixed income funds has helped accelerate the development of the bond market. In turn, he said, investors’ interest in bonds and government bonds will eventually be expressed through ETFs.
“That’s not going to change,” Hult said. It’s the easier and more liquid way to express an opinion.”