Posts Tagged ‘Federal Reserve’

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 9^th 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 27^th, 2016; on March 1^st, 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 15^th. 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 10^th, 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 17^th, yet the Fed chose not to move on interest rates. (more…)

Municipals, Bonds Without Peers

April 21st, 2015 by Kurt L. Smith

When will the Federal Reserve raise interest rates? This is the question investors want to know. Yet I will tell you, it does not matter. The market tells us interest rates began to rise in 2012; the market will tell us how fast interest rates rise from here. (more…)

Considerable Time Over

January 8th, 2015 by Kurt L. Smith

Long-time readers know we have been waiting for expected change in the bond markets for a…considerable time. After all, we are in year three of a bond bear market, yet all we seem to hear from bond market participants are interest rates should remain low for a considerable time…until they no longer do. (more…)

“Welcome To The Everything Boom”

July 20th, 2014 by Kurt L. Smith

The July Letter almost didn’t make it as the same old, same old markets continued their gravity defying ways. On July 7th however, The New York Times saw fit to publish this headline as their front-page lead: “From Stocks to Farmland, All’s Booming, or Bubbling.” (more…)

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