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Posts Tagged ‘Federal Reserve’

Bonds Rolled Over (Again)

November 18th, 2019 by Kurt L. Smith

From the front pages this summer, the story on bonds is they are no longer a story. Prices have rolled over as yields have risen and investors who bought on the price dips lately may be rethinking their commitment.

I have spent most of the last few years, as well as the last few months telling you this was the end of the run, not the beginning of a new one. The performance of the bond market over these years fits my description.

After several years of higher yields and lower bond prices, the bond market began a price correction late last year. But it was the performance of long-term treasury bonds in July and August of this year that received the out-sized attention. One of the longest treasury bonds, the 2.875% of 2049, rallied from about 100 in May, to 105 in July and 122 in August (source: Bloomberg, with prices rounded for conversation sake). Quite a move for a bond yielding less than 3%.

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Inflation Worries?

March 4th, 2019 by Kurt L. Smith

In order to be worried about inflation I would presuppose you probably had to experience it rather than try to picture it from a textbook or figure out why economists keep talking about it. Ask your children or grandchildren to explain inflation, or better yet, ask them how important it is or whether they are worried about it.

Inflation, or the control of it, is the price stability part of the Federal Reserve’s dual mandate. Maximum sustainable employment is the other piece. So it must be important since the financial press always seems to be tracking the Federal Reserve’s every move.

Defining inflation has never been easy, so don’t be too hard on your children or grandchildren if they can’t define it easily. One formula utilizes U.S. Treasury note and bond prices to help define future inflation. If U.S. Treasury securities are viewed as riskless securities then we can say that it is future inflation that accounts for the differences between short-term U.S. Treasury interest rates and long-term U.S. Treasury interest rates. As the current two year treasury is about 2.5% and the ten year is 2.65% and the thirty year is 3%, one might presume the outlook for changes in the inflation rate over the next umpteen number of years is probably very little. With the advent of Treasury Inflation Protected Securities, or TIPS, the calculation for the outlook for future inflation was made even easier. With the ten year treasury at 2.65% and the ten year TIP at .70%, expected inflation is 1.95% (all basis Bloomberg). That’s greater than nothing but, again, it shouldn’t elicit fear and constant monitoring either.

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Top of Tops

November 6th, 2017 by Kurt L. Smith

Relish in all of the good news? Certainly you must be joking? All-time highs for stocks and bond yields seemingly at low-forever yields (meaning high forever prices) and I want to rain on this parade? In a word, just one word, yes!

The reason why I have been keeping you apprised of the albeit slow changes in the bond market is because the trend change is beyond important: it is generational. Who knew that the next and most impactful move in the bond market would also occur at the all-time high for stock prices?

We have been keeping score vis-à-vis the ten year US Treasury note. Indeed the note did hit a low of 2.01% on September 8th and yields hit 2.47% on October 27th. Not the radical change I had predicted last month, but not bad and moving in the right direction.

I am focused on bonds and the bond market as reflected by yields on the ten year treasury. We can also look at the bellwether thirty year which should be at a low here at 2.85% up from 2.63% on September 8th. These low yields certainly fit the narrative of low yields. They will not remain low for much longer; certainly not forever. (more…)

Capitulation

June 14th, 2017 by Kurt L. Smith

It is not often that followers of the all-too-staid bond markets get to use the word capitulation. Usually things don’t move fast enough (or far enough) to warrant the use of the word. We, however, having declared the end of a three decades long trend, see a significant change taking place.

We marked late 2012 as the end of the bull market in Bonds, though the hockey-stick final mania in the longest maturing bonds didn’t occur until last spring, culminating July 6, 2016. Shorter term bond yields had risen since 2012 while the 10 year US Treasury bottomed at 1.32%, a significant turning point in trend.

The second half of 2016 saw yields spike to 2.64%, such that by year-end (December 2016 Letter) we called for a correction of this first move in the long-term bear market for long-term bonds. Indeed yields moderated back down to 2.13% early in June. So far so good and right along our projected path.

Which brings us to today. Actually it was a June 9th Bloomberg headline that used Capitulation, saying “Investors betting on rising bond yields just threw in the towel in a big way, according to Bank of America.” Citing the “biggest inflows to bonds in well over two years”, BofA concluded the performance of credit equities are “highly correlated.” (more…)

Rates Rise; Who Cares?

March 8th, 2017 by Kurt L. Smith

These are heady times in the stock market. As market indexes set historical all-time highs, who cares about bonds? Stocks are all the buzz.

Back in August my letter was First Bonds, Now Stocks. “If you liked the bond market rally this year, then I think you will really enjoy the stock market rally which appears to be gathering steam.” Gather it has. The Dow Jones Industrial Average traded at 17,063 on June 27th, 2016; on March 1st, 2017 it was 21,169 for a 24% rise.

Meanwhile the bubble on Bonds did indeed burst as ten year Treasury yields bottomed at 1.32% on July 6, 2016, before doubling to 2.64% on December 15th. So while stocks were gaining steam, bond prices were indeed weakening as yields doubled. As the Dow rallied, ten year Treasury bonds sank, producing an 11% price loss into the December yield highs. The long bellwether Treasury bond was down 22% in price over the same period.

Both the rise in stock prices and the fall in Bond prices were expected. After bond prices bottomed in December we expected prices to bounce and indeed the bounce appears to be over such that prices are trending lower again as the yield on the ten year treasury is back over 2.50%.

January’s Letter, Lines In the Sand noted Big Bill Gross’s line at 2.60% for the ten year treasury.  At just over 2.50% as March begins, we are within striking distance. (more…)

Lines In The Sand

January 19th, 2017 by Kurt L. Smith

On January 10th, Big Bill Gross the Bond King, drew his line in the sand referencing the ten year treasury yield at 2.60%. If the ten year yield goes above 2.60% this year, said Big Bill, the bear bull market would be on and its effects on the stock market would be felt.

Now you tell us Bill. After a historic first half of 2016 which gave us the final throes of a mania in Bonds, we experienced  a historic sell-off in the second half with yields doubling from July to December in ten year yields. Indeed, the bear market for bonds has not only begun but, depending on maturity horizon, has been in place since 2012.

With the stock market continuing its version of the Bonds final mania, Big Bill probably also knows that nobody cares. Off his throne at PIMCO, Big Bill probably needed to reference stocks in his bond bear market call for relevance sake.

Until the mania in stocks ends, and like the long bull market in bonds, it will end, no one will probably care, or notice, the bond market. Investors in stocks are making money just by owning stocks, not by listening or following experts like Big Bill. (more…)

We Have Top Men Working On It

February 10th, 2016 by Kurt L. Smith

In late January the Federal Reserve’s Open Market Committee voted to do nothing.  Unfortunately they had to say something and it was that something that reminded me “we have top men working on it.”  Here the top man is a woman, Chairman Janet Yellen.

The Fed’s luster was destined to pale from the days in 2000 when Chairman Alan Greenspan was dubbed Maestro for his deft maneuverings.  Chairman Ben Bernanke was Time Magazine’s Person of the Year in 2009, having saved the world, or at least us, from certain financial ruin.

So from Chairman Yellen we ask “what have you done for us lately?”  Stocks swooned in August but recovered by December only to have the Federal Reserve vote to hike interest rates for the first time in ten years.  Now that stocks have swooned again to begin 2016 we find the Fed to be hesitant in its plans to normalize, I mean raise, short-term interest rates. (more…)

High Prices Good!

December 16th, 2015 by Kurt L. Smith

One of the lasting lessons learned from the financial crisis is how much better the world seems to be when asset prices are high(er). Balance sheets are strong when prices are strong. Loans look better when collateral prices are higher. As we saw in 1999 and again in 2007, higher prices make for a wonderful investor world. (more…)

The Trend Is Not Your Friend

November 11th, 2015 by Kurt L. Smith

Investors look to the Federal Reserve for economic leadership.  Looking backward, one might say the Fed helped get the economy back on track with lower interest rates, higher asset prices and lower unemployment.  Looking forward, the Fed continues to feed us the line that next month or next quarter will be better. (more…)

Markets Move; Fed Does Not

October 5th, 2015 by Kurt L. Smith

We have witnessed a reversal from the slow and steady rise of the stock market to greater volatility including a twelve percent decline in the Dow in a mere four days back in August.  Stocks recovered going into the Federal Reserve’s interest rate announcement September 17th, yet the Fed chose not to move on interest rates. (more…)

NEWS FEED

The $247 trillion global debt bomb washingtonpost.com/opinions/the-2…