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>>> Vanguard's new CEO eyes fixed income offering expansion
Reuters
September 25, 2024
by Davide Barbuscia
https://finance.yahoo.com/news/vanguards-ceo-eyes-fixed-income-155352330.html
NEW YORK (Reuters) - Vanguard's new chief, Salim Ramji, said on Wednesday that he plans to expand the fixed income offering of the U.S. top asset manager given the market's size and opportunities.
Ramji said that there was an opportunity to take "the same mindset" Vanguard has brought the equities market to the fixed income market.
"Our clients can benefit from that type of mindset. ... They can get better and better quality fixed income exposure," he said at the Financial Times' Future of Asset Management North America conference in New York. "It goes back to our sense of mission and purpose around how you reduce costs and give people a higher quality set of exposures."
Vanguard, with about $9 trillion in assets under management, is the world's second-largest asset manager after BlackRock.
Ramji, who became Vanguard's chief executive officer in July, replacing Tim Buckley, joined the Malvern, Pennsylvania-based firm from BlackRock, where he was responsible for two-thirds of the firm's assets and growth.
The two firms are the largest providers of exchange traded funds (ETFs) - low-cost products often aimed at retail investors as a cheap way to invest in the world’s biggest markets.
Fixed income markets have experienced severe volatility over the past two years as a rapid succession of hikes in interest rates across developed markets has hit bond prices and boosted yields. At the same time, higher yields have attracted hefty inflows into the asset class.
"When you look at the macro environment for fixed income today , relative to say 10 years ago, it has a really important place," said Ramji. "It's going to be more important based on ... our views of the long-term rate environment," he added.
Ramji said he was also looking at opportunities in private markets, a sector that includes debt and equity that is not publicly traded or listed. “In privates we’re open to exploring partnerships.” he said.
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QT pace - >>> Fed announces reduction in balance sheet runoff pace
Reuters
by Michael S. Derby
May 1, 2024
https://www.reuters.com/markets/us/fed-announces-reduction-balance-sheet-runoff-pace-2024-05-01/
May 1 (Reuters) - The Federal Reserve announced plans on Wednesday to slow the speed of its balance sheet drawdown to ensure this process does not create undue stress in financial markets.
The Fed said that starting on June 1 it will reduce the cap on Treasury securities it allows to mature and not be replaced to $25 billion from its current cap of up to $60 billion per month. The Fed left the cap on how many mortgage-backed securities it will allow to roll off its books at $35 billion per month, and it will reinvest any excess MBS principal payments into Treasuries.
The move was announced at the end of its two-day Federal Open Market Committee meeting, at which the U.S. central bank left interest rates unchanged.
The downshift in the pace of the runoff had been widely expected, although market participants weren’t sure whether the tapering of the runoff process would be announced at this week’s FOMC gathering or the one scheduled for June. To the extent there was a surprise, many analysts had been eyeing a drop in the Treasury runoff cap to $30 billion per month.
Federal Reserve Chair Jerome Powell, speaking in a press conference following the Fed meeting, said the new caps would likely result in around $40 billion per month in total balance sheet runoff, alluding to how actual reductions in bonds have frequently fallen short of the caps, notably on the mortgage bond side.
Paul Ashworth, chief North America economist at Capital Economics, said the new Treasury runoff cap "is a little more aggressive than we were expecting," while noting the Fed, in the current interest rate environment, will still face challenges getting mortgage bonds to run off at the desired pace.
Fed officials have been making the case that by moderating the drawdown pace they reduce the risk of unwanted market disruptions of the sort that occurred when they last shrunk their balance sheet. They’ve also noted that by slowing the pace of balance sheet contraction, it may allow them to reduce the overall size of their holdings by a greater degree.
Powell reiterated those views in his press conference, saying "the decision to slow the pace of runoff does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to approach its ultimate level more gradually," which reduced the risk of market tumult.
Fed officials have been mindful about the market turmoil that took place in September 2019 during the last QT runoff and wish to avoid that happening again.
REVERSE GEAR
After doubling the size of the balance sheet to about $9 trillion from its pre-pandemic size, the Fed has been allowing some of its holdings of Treasuries and mortgage-backed bonds to expire. That process, started in the latter half of 2022, has seen the Fed’s balance sheet fall to $7.5 trillion.
The balance sheet drawdown, referred to as quantitative tightening, or QT, runs separately from the changes in central bank interest rate policy.
That said, rate rises and QT were both part of the process of rolling back the stimulus provided by the Fed due to the economic impact of the coronavirus pandemic. QT is aimed at reducing excessive liquidity in the financial system to a level that will still allow normal money market volatility and afford the Fed control over the federal funds rate.
While the drawdown thus far has not had much of a market impact, the latest shift might at the margins. The downshift in QT "has the serendipitous effect of putting some downward pressure on yields, mitigating the risk of a push upwards towards 5%," said analysts at Evercore ISI.
The yield on the benchmark 10-year Treasury note sank 9.5 basis points to 4.589% after the Fed announcement.
The Fed has yet to give any target for where it would like its balance sheet to stand when it is done with QT. A report last month from the New York Fed said that market demand for liquidity will be the key driver of the QT endgame, with the runoff likely finishing up some time in 2025, with Fed holdings potentially somewhere between $6 trillion and $6.5 trillion.
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>>> Boeing Risks Being Cut to Junk as Strike Hurts Production
Bloomberg
by Julie Johnsson and Olivia Raimonde
September 13, 2024
https://finance.yahoo.com/news/boeing-risk-being-cut-junk-163804703.html
(Bloomberg) -- Boeing Co. is at risk of losing its investment-grade credit rating as the embattled planemaker faces the prospect of a drawn-out strike by workers that will further disrupt production and cash flow.
The credit score on Boeing’s unsecured debt has stood at Baa3 with Moody’s Ratings since April. Moody’s said in a statement on Friday that it’s reviewing the ratings for a possible downgrade and that it “will assess the strike’s duration and impact on cash flow and the potential equity capital raising Boeing may undertake to bolster its liquidity.”
Boeing has been fighting to hang on to its investment-grade rating, a mission that’s now been complicated by the strike called by workers overnight. The company has more than $45 billion in net debt and has been bleeding cash after it was forced to pare back output in the wake of a near catastrophic accident in January.
A descent into junk territory would increase Boeing’s borrowing costs at a time when it’s struggling to turn around its commercial and defense operations. Boeing has also been losing money on some defense contracts, and its space business has been dogged by delays and cost overruns. The company has $4 billion of debt coming due in 2025 and also $8 billion coming due in 2026, according to Moody’s.
There are other financial consequences to a junk downgrade, such as a smaller pool of investors willing to buy a company’s debt. Two credit graders must lower a company to speculative grade before its debt leaves the investment-grade index and is no longer considered high grade.
Chief Financial Officer Brian West told analysts at a Morgan Stanley conference on Friday that the company will consider necessary steps to shore up its balance sheet. The planemaker is evaluating its capital structure to ensure it can meet its upcoming debt payment over the next 18 months, he said.
“We remain committed to manage the balance sheet prudently,” West said at a conference. “We want to prioritize the investment grade credit rating.”
About 33,000 workers at Boeing’s main sites in the Seattle area voted last night to reject a new labor accord and go on strike. Boeing has said it’s willing to get back to the negotiating table, after offering a 25% pay increase alongside other sweeteners. It’s unclear how long and disruptive a strike might be, and the union leadership has also said it’s willing to resume talks.
Fitch Ratings also said on Friday that Boeing’s investment-grade rating has “limited headroom for a strike.” Like Moody’s, Fitch has Boeing on the lowest rung above speculative grade. The same applies for Standard & Poor’s, which rates Boeing at BBB-.
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>>> A Record $1.2 Trillion Interest Payments Are Blowing Up The Federal Budget
Investopedia
by Diccon Hyatt
September 13, 2024
https://finance.yahoo.com/news/record-1-2-trillion-interest-194844790.html
Key Takeaways
The U.S. government will spend a record $1.2 trillion on interest payments in 2024, the highest amount ever recorded.
Interest payments are driven by a combination of deficit spending, especially during the pandemic, and the Federal Reserve's campaign of anti-inflation interest rate hikes.
The trajectory of the deficit could be influenced by the election.
While both Democrats and Republicans propose new tax cuts and spending that could push up the deficit, Vice President Kamala Harris has proposed tax increases on the wealthy and corporations, to offset them.
The U.S. government is on track to spend more than $1 trillion on interest payments this year, surpassing military spending for the first time in history.
Interest payments on the national debt (held by the public in the form of Treasury securities) will cost the government $1.2 trillion in the government's fiscal year ending in October, the Treasury Department said in a monthly report on the budget. Net interest outlays are the third costliest item in the budget behind Social Security and Medicare benefits.
Economists have grown increasingly concerned about the potential impact of those payments on the U.S. economy. Interest payments took up 2.4% of the entire U.S. gross domestic product in 2023, and The Congressional Budget Office estimates that could swell to 3.9% over the next 10 years.
Why Is The Government Paying So Much Interest?
Two major factors have driven those payments skyward. First, the government spent trillions to support households and the economy during the pandemic, paying for it by borrowing rather than raising taxes. Second, the Federal Reserve raised interest rates starting in 2022 to fight inflation, which pushed up how much the government owes for that debt.
Although the Fed is set to gradually lower those interest rates starting next week, the pressure on the budget is likely to keep ratcheting up in the years to come.
The results of the presidential election could have a major impact on the trajectory of the budget deficit. Both former President Donald Trump and Vice President Kamala Harris have proposed tax cuts and new spending that could push up the budget deficit. Harris has also proposed offsetting those new costs with tax increases on the wealthy and corporations. Trump has proposed heavy tariffs on foreign goods, but mainstream economists are skeptical those would bring in much revenue compared to the impact of the tax cuts.
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>>>Companies Return to Debt Markets, Pushing Sales Pass $1 Trillion
Bloomberg
by Josyana Joshua
Aug 6, 2024
https://finance.yahoo.com/news/corporate-america-stampedes-debt-sales-173901520.html?.tsrc=fin-notif
(Bloomberg) -- Corporate borrowers sold investment-grade bonds at the fastest clip since 2020 as companies take advantage of lower yields to issue debt before the November election — even after a market rout Monday briefly froze the market.
Blue-chip firms issued $6.77 billion Tuesday, pushing yearly volume over the $1 trillion mark just eight months into the year. Weak economic data reports last week fueled worries the Federal Reserve has waited too long to cut rates, leading to Monday’s market rout when at least 10 issuers stayed on the sidelines. Just seven companies opted to sell debt Tuesday when the markets were relatively calmer.
The speed and breadth of issuance this year is being driven by two factors: issuers are pouncing on demand from yield-focused investors plowing into the asset class. Finance chiefs are also eager to raise cash before the upcoming presidential election has the potential to inject volatility into the market.
Both Treasury yields and the average cost for blue-chip debt plunged in recent days, creating an additional opportunity for issuers to raise cash at cheaper levels. High-grade bond yields fell to 4.99% on Monday, hovering at the lowest since February 2023 after weak employment data sparked a stampede into Treasuries. The 10-year Treasury yield also dropped below 4% for the first time since February, “a psychological threshold for many issuers,” Barclays Plc strategists Bradley Rogoff and Dominique Toublan wrote in a report Friday.
“If Treasury yields stay low, I think we are going to see issuance move forward even into a volatile market because financing costs are as attractive as they’ve been since early 2022 at this point,” Blair Shwedo, head of fixed income sales and trading at U.S. Bank, said in an interview. “So yes, we’re wider in spreads, but if you’re a borrower looking to lock in all-in costs, this is the best time to do so in over two years if you can get the deal printed.”
Risk Premiums ‘Drift Wider’
To be sure, risk premiums — the amount of extra yield investors demand to hold debt riskier than US Treasuries — have widened 18 basis points to 111 basis points in the past three trading sessions to the highest since November. Spreads ended last year at 99 basis points.
Richard Cheng, an investment-grade portfolio manager at Nuveen, says there is room for spreads to “drift wider” from here. “We came into July thinking that spreads were slightly overvalued, pricing in higher probability of a soft landing,” he said. “A lot of good news was priced into the market. Market participants are now concerned about whether there is a Fed policy error,” he said.
The only time sales surpassed the $1 trillion mark earlier than this year was in May 2020, after the Federal Reserve cut rates to near zero to prop up the economy amid the pandemic.
Issuance has been busy all year with companies borrowing $867 billion in the first half, the second largest haul, according to data compiled by Bloomberg, behind only 2020. July was one of the busiest in seven years with $118.9 billion issued. Volumes in both January and February also set records this year.
Credit markets usually see a decrease in debt sales during the US summer, but the slowdown hasn’t materialized yet. US leveraged loan sales have also reached new seasonal records. In asset-backed securities, deal volume has been trending higher over the summer.
Companies should start issuing debt at a slower pace, but likely not until after the presidential election in November. Dealers were calling for around $95 billion in new bond issuance in August, which would be the most for the month since 2022, while September is historically one of the busiest months for the high-grade primary market.
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>>> Why regional banks are now willing to take billions in losses
Yahoo Finance
by David Hollerith
Jul 29, 2024
https://finance.yahoo.com/news/why-regional-banks-are-now-willing-to-take-billions-in-losses-123009272.html
More US regional banks are taking a step that was unthinkable more than a year ago in the aftermath of the Silicon Valley Bank failure: selling underwater bonds at a loss.
When Silicon Valley Bank did it, it spurred a panic among investors and depositors.
The difference this time around is that regional banks aren’t selling lower-yielding securities to pay depositors. Instead they are preparing for interest rate cuts from the Federal Reserve.
Some cash from these sales is being used to buy new bonds that lenders hope will perform well as rates come down in the coming months or years. The Fed is expected to start cutting rates as early as September.
“If they’ve got extra cash, bank treasurers who think we’re at the top of the cycle may decide to go ahead and lock in long-duration bonds so that once we’re in a lower-rate environment they still have a decent yield,” Feddie Strickland, an equity research analyst with Hovde Group, said.
Locking in 'the swoosh'
Regional banks that announced bond sales in recent weeks include Pittsburgh-based PNC Financial Services Group and Charlotte-based Truist (TFC), two of the top 10 biggest lenders in the US, along with Regions (RF) and Webster (WBS). More are expected to do the same.
PNC took a half-billion dollars in losses on its bond sales and reinvented the proceeds into securities with yields "approximately 400 basis points higher than the securities sold," according to the bank.
That raised the bank's confidence that it would reap a record amount of net interest income next year. Such income measures the difference between what a bank earns from its assets and pays out on its deposits — a critical source of revenue for any regional bank.
One analyst on PNC’s second quarter earnings conference call said the uptick over the next year looked like Nike’s "swoosh" logo.
"Essentially, what we've done is locked in some of the swoosh," PNC CFO Robert Reilly told analysts.
PNC's decision to realize bond losses didn’t impact earnings, thanks to a one-time stock gain it recorded from its Visa (V) holdings.
Other banks are choosing to take these bond losses even when they aren't able to offset them with one-time quarterly gains.
Truist took a $5.1 billion after-tax loss when it sold bonds that yielded a measly 2.80%.
It used some of the proceeds — $29.3 billion — to buy new bonds yielding 5.27%. The bank now expects its net interest income to be 2% to 3% higher next quarter.
Regions also took a $50 million pre-tax loss to replace approximately $1 billion of bonds.
The CFO of the Birmingham, Ala.-based bank, David Turner, called the "repositioning" move a "good use of capital" and said Regions may look for chances to do more bond sales.
Another bank that sold some underwater bonds was Webster, based in Stamford, Conn. It took a $38.7 million after-tax loss in the quarter from realizing those losses.
Despite replacing more of its bonds with higher-yielding ones, the bank lowered its net interest income expectations for the year by $60 million to $80 million, predicting higher deposit costs and lower yields from its loans.
"We missed the mark on the guidance, obviously, and we're not pleased with it," Webster CFO Glenn MacInnes told analysts Tuesday.
When the rate cycle changes
Not all regional banks are making such moves. And the direction of interest rates remains a thorny challenge for many regional lenders still struggling with high deposit costs, troubled borrowers, and lackluster profits.
A reminder of those challenges came again this week when commercial real estate lender New York Community Bancorp (NYCB) reported a second quarter loss, the sale of a mortgage-serving business, and disclosed that it had added more to its reserves for future loan losses.
Its stock fell Thursday after reporting the loss but recovered on Friday. It remains one of the worst-performing stocks of the year, a sign that investors are still concerned about the exposure of some regional banks to commercial real estate weaknesses.
The hope for many regional banks is that the loans on bank balance sheets will recover their value as rates come back down, and that deposit costs could drop too.
"When the rate cycle changes is going to have a big impact on what the profitability story looks like," said Moody's Ratings analyst Megan Fox.
How those dynamics play out will still vary a lot between banks. Thus buying new bonds now is one of the surest bets lenders can make ahead of the cuts they expect to happen.
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>>> This bond-market signal of impending recessions went on a wild ride. Here’s its message.
‘Global markets are in the process of shifting to trade the realities of the next phase in the policy cycle,’ said BMO Capital Markets strategists Ian Lyngen and Vail Hartman
MarketWatch
by Vivien Lou Chen
July 25, 2024
https://www.marketwatch.com/story/this-bond-market-signal-of-impending-recessions-went-on-a-wild-ride-heres-its-message-54162861
One of the bond-market’s most reliable indicators of approaching U.S. recessions finished Wednesday’s session at its least-inverted level in two years, following a wild day of trading.
As risk-off sentiment swept the globe on Wednesday and handed U.S. stocks their worst day since late 2022, the bond market was acting in a rather strange way.
Shorter-term U.S. government debt rallied, sending the policy-sensitive 2-year yield to its lowest level in more than five months or almost 4.42%. Meanwhile, long-term Treasurys sold off, pushing the 10-year benchmark yield to a two-week high of nearly 4.29%. The result was a narrowing difference or spread between the two yields that left this part of the Treasury curve at its least-inverted level since July 12, 2022, or minus 13 basis points.
Ordinarily, the 10-year yield trades above its 2-year counterpart when traders assume brighter U.S. economic growth prospects ahead, leaving the so-called 2s10s spread as positive.
Instead, the spread has been inverted or below zero for two full years as higher interest rates from the Federal Reserve’s inflation fight took hold, raising expectations for an eventual U.S. economic downturn. Though it can take up to two years for a contraction to emerge after this part of the Treasury curve starts to inverts, a recession still has yet to materialize.
Conventional wisdom is that the 2s10s curve becomes less inverted, as it did on Wednesday, as a recession actually draws near.
But the next-day analysis of what happened in Treasury-market trading on Wednesday now includes some analysts’ doubts that a less-inverted 2s10s spread automatically means a recession is moving closer. That’s because it is equally possible that the Fed might be able to lower interest rates by enough to secure a soft landing and help the world’s largest economy dodge a downturn.
The 2s10s spread “was previously a good recession indicator because it reflected the Fed’s response to high inflation, which was to raise rates by enough to bring inflation down. But there are a lot more cross currents right now,” said economist Derek Tang of Monetary Policy Analytics in Washington, a firm founded by former Fed Gov. Larry Meyer.
Via phone on Thursday, Tang said “the curve is basically a collection of views and reflects a weighted-average view of the market. It works when the market has a pretty good read on the economy.” Right now, though, “it’s much more difficult to forecast recessions because there are so many more forces at play,” including the possibility that the government might become more active with fiscal policy
Moves like those in the 10-year Treasury note, which rallied on Thursday, are now capturing traders’ expectations on everything from inflation and growth to corporate profits and a less-stable U.S. political system, in which neither major party is seen as likely to curtail the federal deficit, according to Tang.
“The bond market does not exist in a vacuum,’’ he said. “Investors are thinking about whether to devote funds to bonds or equities, and bonds might be more attractive than they used to be if the profit picture for equities looks less certain.”
Wednesday’s trading did reinforce at least one piece of conventional wisdom, which is that the 2s10s spread tends to go less negative following a prolonged period of inversion on rising assumptions that the central bank needs to start cutting rates. This was the case on Wednesday and again on Thursday, when fed-funds futures traders priced in a 100% chance of at least a quarter-point rate cut from the Fed by September. Traders mostly priced in a total of five or six quarter-point cuts through next June.
On Thursday, U.S. stocks closed mostly lower, while long-dated Treasurys rallied — sending the 2s10s spread further below zero again to minus 18.7 basis points.
Meanwhile, BMO Capital Markets strategists Ian Lyngen and Vail Hartman described the steepening Treasury curve seen on Wednesday as one sign that “global markets are in the process of shifting to trade the realities of the next phase in the policy cycle.”
This next phase is expected to include a narrowing difference between the policies of the Fed and the Bank of Japan in coming months, with a September rate cut by the U.S. central bank widely seen as the start of a series of cuts, the strategists wrote in a note on Thursday.
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WSJ - Timiraos - >>> Fed to Signal It Has Stomach to Keep Rates High for Longer
The Wall Street Journal
by Nick Timiraos
4-30-24
https://www.msn.com/en-us/money/markets/fed-to-signal-it-has-stomach-to-keep-rates-high-for-longer/ar-AA1nUQof?cvid=482d5eba932247e68c1fe028770906b5&ei=51
An ancient Chinese proverb that counsels “do nothing, and everything will be done” could sum up the Federal Reserve’s latest approach to interest-rate policy.
Fed officials will hold their benchmark federal-funds rate steady at its highest level in more than two decades, around 5.3%, at their two-day policy meeting that begins Tuesday.
Firmer-than-anticipated inflation in the first three months of the year has likely postponed rate cuts for the foreseeable future. As a result, officials are likely to emphasize that they are prepared to hold rates steady, at a level most of them expect will provide meaningful restraint to economic activity, for longer than they previously anticipated.
With no new economic projections at this meeting and minimal changes expected to the Fed’s policy statement, Fed Chair Jerome Powell’s press conference will be the main event on Wednesday. Here’s what to watch:
The inflation setback
Since officials’ meeting in March, the economy has continued to demonstrate strong momentum. But inflation has disappointed after a string of cool readings in the second half of 2023 stirred optimism the central bank might be able to lower rates.
In March, Powell held out the prospect that strong price pressures in January had been a bump on the road to lower inflation. Firm readings for February and March (even if not quite as hot as January) punctured that optimism. They raise the prospect that inflation might settle out closer to 3%. The Fed targets 2% inflation over time.
Powell is likely to repeat a message he delivered two weeks ago, when he said recent data had “clearly not given us greater confidence” that inflation would continue declining to 2% “and instead indicate that it’s likely to take longer than expected to achieve that.”
The focus at this meeting will be how Powell characterizes the interest-rate outlook. While most Wall Street strategists think one or two rate cuts are still possible later this year, the prospect of such a recalibration without clear evidence of economic weakness remains a bigger wild card than it did just a few weeks ago. Some think the Fed might not cut at all.
The Fed’s rate outlook hinges on its inflation forecast, and the most recent data raises two possibilities. One is that the Fed’s expectation that inflation continues to move lower but in an uneven and “bumpy” fashion is still intact—but with bigger bumps. In such a scenario, a delayed and slower pace of rate cuts is still possible this year.
A second possibility is that inflation, rather than on a “bumpy” path to 2%, is getting stuck at a level closer to 3%. Without evidence that the economy is slowing more notably, that could scrap the case for cuts altogether.
Rate policy remains “well-positioned”
Powell is likely to acknowledge that officials have less conviction about when and how much to reduce interest rates. In March, most officials projected two or more rate cuts would be appropriate this year, and a narrow majority penciled in at least three cuts.
Even though officials won’t submit new projections this week, at other meetings without them, Powell has taken the opportunity to reaffirm those one-meeting-old projections or, alternatively, declare them out of date. Wednesday’s meeting is more likely to yield the latter outcome.
At the same time, Fed officials have indicated that they are broadly comfortable with their current stance. This makes a hawkish pivot toward entertaining rate increases unlikely.
“Policy is well-positioned to handle the risks that we face,” Powell said on April 16. If inflation continues to run somewhat stronger, the Fed will simply keep rates at their current level for longer, he said.
As financial-market participants anticipate fewer cuts, longer-dated bond yields will rise. In effect, this achieves the same kind of tightening in financial conditions that Fed officials sought when they raised interest rates last year. Higher yields across the Treasury yield curve should ultimately hit asset values, including stocks, and slow the economy’s momentum.
If inflation stays firm “that is what they will want to see, ultimately,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale.
Low risks of a hawkish pivot
The difficulty for Fed officials in communicating their outlook right now boils down to the conditional nature of the “if/then” statements volunteered by Fed officials, which are premised on one set of outcomes. When the economy performs in ways that officials don’t anticipate, their past statements may no longer be valid.
To that end, Powell might be hard-pressed to rule out any additional increases, even though it is likely premature for officials to meaningfully move in that direction.
But a hawkish pivot, suggesting an increase in rates is more likely than a cut, appears unlikely, for now. Any such shift is likely to unfold over a longer period. It would require some combination of a new, nasty supply shock such as a significant increase in commodity prices; signs that wage growth was reaccelerating; and evidence the public was anticipating higher inflation to continue well into the future.
A key measure of wage growth released Tuesday showed that a sustained cooling in wage growth last year may have stalled in the first quarter. Compensation for private-sector workers rose 4.1% in the first quarter from a year earlier, essentially unchanged from the fourth quarter, the Labor Department said.
Signs that wage pressures had been easing were an important factor allaying some Fed officials’ concerns about stickier service-sector inflation. Additional evidence in the coming months that wage growth is accelerating could trouble officials.
The balance sheet
Fed officials have said they could announce “fairly soon” their plan to slow the runoff of their $4.5 trillion in holdings of Treasury securities, which are part of their $7.4 trillion asset portfolio. That has led analysts to expect a formal plan announcing the slowdown at their meeting this week, though some see a chance this happens at their subsequent meeting in June.
At issue is a program the central bank initiated two years ago to passively reduce those holdings by allowing bonds to “run off” its balance sheet without buying new ones. It acquired trillions in Treasurys and mortgage bonds to stabilize financial markets in 2020 and to provide additional stimulus in 2021.
Every month, officials have allowed as much as $60 billion in Treasury securities and as much as $35 billion in mortgage-backed securities to mature without being replaced. The process is designed to shrink the Fed’s balance sheet, which topped out at nearly $9 trillion two years ago.
At the March meeting, officials appeared to coalesce around a plan to reduce the pace of runoff “by roughly half.” Because high interest rates have kept mortgage-bond runoff at a subdued level, officials wouldn’t change that part of their program and instead lower the cap on monthly Treasury redemptions.
The latest changes aren’t related to the setting of interest rates and are instead designed to avoid a messy upheaval in overnight lending markets that occurred five years ago.
The reduction in assets is also draining the financial system of bank deposits held at the Fed, which are called reserves. Officials don’t know at what point reserves will grow scarce enough to push up yields in interbank lending markets. Slowing the process now is seen as preferable by many officials because it could allow the portfolio runoff to continue for somewhat longer without risking the same kind of market ruckus that occurred in 2019.
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>>> Fed's reverse repo facility plummets to lowest level in nearly three years
Reuters
Apr 15, 2024
By Michael S. Derby
https://finance.yahoo.com/news/feds-reverse-repo-facility-shrinks-174128320.html
NEW YORK (Reuters) - A key Federal Reserve facility that takes in cash from money market funds and others saw inflows drop sharply on Monday.
The U.S. central bank's reverse repo facility took in $327.1 billion, down $80.2 billion from Friday, marking the lowest level of inflows since the facility took in $293 billion on May 19, 2021.
The Fed's reverse repo facility exists to put a floor underneath short-term rates, taking in cash from eligible firms in loans collateralized with Treasuries held by the central bank. Inflows have been contracting for some time as the Fed withdraws liquidity from the financial system by allowing its holdings of bonds to shrink.
Monday is the deadline for most U.S. tax returns and a key settlement date for Treasury debt auctions, which can influence activity at the reverse repo facility. Scott Skyrm, executive vice president at money market trading firm Curvature Securities, says money is coming out of reverse repos to deal with financing the Treasury's debt issuance.
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>>> America’s bonds are getting harder to sell
The Wall Street Journal
by Eric Wallerstein
Apr 14, 2024
https://finance.yahoo.com/news/america-bonds-getting-harder-sell-093000703.html
A series of weak auctions for U.S. Treasurys are stoking investors’ concerns that markets will struggle to absorb an incoming rush of government debt.
A selloff sparked by a hotter-than-expected inflation report intensified this past week after lackluster demand for a $39 billion sale of 10-year Treasurys. Investors also showed tepid interest in auctions for three-year and 30-year Treasurys.
Behind their caution lies a growing conviction that inflation isn’t fully tamed and that the Federal Reserve will leave interest rates at multidecade highs for months, if not years, to come. The 10-year yield—the benchmark for borrowing rates on everything from mortgages to corporate loans—finished the week around 4.5%, near its highest levels since touching 5% in October.
At the same time, the government is poised to sell another $386 billion or so of bonds in May—an onslaught that Wall Street expects to continue no matter who wins November’s presidential election. While few fear a failed auction—an unlikely scenario that analysts said could potentially trigger prolonged turmoil—some worry that a glut of Treasurys will rattle other parts of the markets, raise the cost of government borrowing and hurt the economy.
“There’s been a big shift in the market narrative. The CPI [consumer-price index] report changed everybody’s view of where Fed policy is headed,” said James St. Aubin, chief investment officer at Sierra Mutual Funds.
The government funds its operations by selling the world’s safest bonds to investors and dealers at regular auctions. And issuance of Treasurys has exploded since the pandemic began. In the first three months of 2024, the U.S. sold $7.2 trillion of debt, the largest quarterly total on record. That surpasses the second quarter of 2020, when the government was financing a wave of Covid-19 stimulus. It also builds on a record $23 trillion of Treasurys issued last year, which raised $2.4 trillion of cash, after accounting for maturing bonds.
The size of the sales has expanded along with the market for U.S. debt. After poor demand at a series of auctions late last year jarred investors, the Treasury Department eased concerns by shifting to financing America’s deficit mostly with short-term debt. That helped, in part, because the Fed simultaneously signaled a pivot to easier monetary policy: Hopes that interest-rate cuts would come soon helped reassure investors about the Treasury’s strategy.
Now, those hopes are dwindling, and the Treasury is expected to announce its third-quarter borrowing plans at the end of April. The nonpartisan Congressional Budget Office forecasts that the deficit will increase from 5.6% of U.S. gross domestic product to 6.1% in the next decade. Debt held by the public is set to expand from $28 trillion to $48 trillion in that time, up from $13 trillion 10 years ago.
Wall Street doesn’t expect the Treasury to raise auction sizes of longer-term notes and bonds until next year. But the government must also contend with refinancing a chunk of its bonds. A record $8.9 trillion of Treasurys, roughly a third of outstanding U.S. debt, is set to mature just in 2024, according to Apollo Global Management’s chief economist, Torsten Slok.
Investors are also watching how revenues from tax season boost America’s coffers in the coming weeks.
“We’ve been losing liquidity as people and companies pull out money to pay taxes,” said Thomas Tzitzouris, head of fixed-income research at Strategas. “We’re in a bit of an air pocket that’s letting the bond market float more freely and yields rise.”
One line of support is likely to come from the Fed. Minutes from the Fed’s March meeting, released last week, showed that policymakers are looking to slow the pace of running down the central bank’s large holdings of bonds accumulated to prop up the economy. They would likely reduce the rate at which they let Treasurys mature to $30 billion a month, half of the current $60 billion pace.
Balance-sheet runoff, known as quantitative tightening, is meant to drain the banking system of reserves and increase the market’s share of the sovereign-debt pile. With the Fed paring back that program, and prepping to stop it sometime in the future, investors will have to absorb a smaller net share of Treasury securities. That could support bond prices and remove some upward pressure on yields.
Another factor supporting Treasuries: Global investors have a lot of savings and few viable options to place them. The eurozone and Japan both run current-account surpluses, meaning they take in more money from trade than they spend on imports. Treasurys provide them a safe place to stash their cash and pick up more than 4% of yield. They also offer an easy way to invest dollar-denominated income from trading with America.
The euro and yen are both sinking relative to the dollar, in part because the Bank of Japan is still holding rates low and investors expect the European Central Bank to slash them soon. That could increase demand for U.S. debt, with Treasury yields remaining elevated relative to global alternatives.
That leaves many investors hopeful that as long as inflation continues to trend toward the Fed’s 2% target, Treasury yields will remain under 5%. But some worry the influx of new Treasurys will exacerbate already-volatile markets, particularly if inflation stays sticky. After the CPI report and weak auction Wednesday, the 10-year yield posted its biggest one-day rise since 2022, jumping nearly 0.20 percentage point.
“If we continue to see hot inflation prints, it’s going to keep a lot of people on the sidelines,” said Sierra’s St. Aubin.
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>>> Why the Fed is wading into uncharted waters: Morning Brief
Yahoo Finance
by Jared Blikre
April 4, 2024
https://finance.yahoo.com/news/why-the-fed-is-wading-into-uncharted-waters-morning-brief-100027194.html
Wall Street is all but convinced the Federal Reserve will cut rates this year.
Most sell-side desks are penciling in one 25-basis-point cut in June, with another two to three similar cuts by year-end. Fed Chair Jerome Powell has telegraphed rate cuts are coming since his pivot late last year.
Even the bond market agrees, though that confidence is waning.
But recent hotter-than-expected data in the US is prompting questions of whether rate cuts are advisable for an economy that is finally coming off the inflation boil — and is even showing nascent signs of reacceleration in certain areas.
Tuesday's release of the March ISM Manufacturing PMI is a good example. It was stronger than analysts estimated and, more importantly, topped 50 for the first time since late 2022. This indicates the manufacturing sector is in an expansion phase once again (though additional data points are needed to confirm).
Meanwhile, the unemployment rate sits well below the historical average at 3.9%, GDP is humming at 3.4%, and progress to bring inflation to heel remains slow and "bumpy."
Powell's big headache right now is an economy that reaccelerates, requiring further rate hikes. This is the so-called no landing scenario.
An economy that ran too hot and stayed there was the fate of Paul Volcker, who led the Fed in the late 1970s and early 1980s. Volcker presided over a "double-dip" recession as he tamped down inflation that at one point spiked to 15% annually.
It would be supremely ironic if the same fate befell Powell, forcing another round of uncomfortable rate hikes — just as rate cuts are on the horizon.
Yahoo Finance crunched the numbers, and over the last 50 years, the Fed has presided over 22 rate-cutting cycles. Most were short-lived — especially during the period of high inflation in the US that persisted through the 1970s and 1980s.
But what's clear from the chart is that the Fed didn't change directions nearly as often as during those inflationary decades. And inflation is only one of many factors that have changed in the intervening decades.
Volcker was a bit of a maverick who famously targeted the money supply as opposed to interest rates or the size of the Fed's balance sheet. And it wasn't until his successor Alan Greenspan that we even got an official monetary policy statement after each Fed meeting that said what the Fed intends to do.
Clearly, the Fed is a different animal than it was decades ago — as is the US economy — as is the world writ large.
It's tempting to read the Wall Street reports that can handicap rate cut odds to three decimal places and tell you where the S&P 500 will land on the final trading day of the year.
But the safe bet is to remember that, at best, history only rhymes. And when it comes to the US economy, perhaps it's not "this time is different." Arguably, each time is different.
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>>> The Fed’s massive economic upgrade: Chart of the Week
Yahoo Finance
by Ethan Wolff-Mann
Mar 23, 2024
https://finance.yahoo.com/news/the-feds-massive-economic-upgrade-chart-of-the-week-123035274.html
Ahead of the Fed’s meeting this week, everyone was focused on dots.
But the most important number offered by Fed officials was the FOMC’s surprisingly bullish expectations for economic growth, revised upward, as our Chart of the Week shows.
In December, the market cheered after hopes for rate cuts were restored following pleasing inflation numbers. But economic growth projections for 2024 had fallen to 1.4% from September’s 1.5% projection for 2024 GDP growth.
Now, though disinflation may have stalled in comparison to December, the FOMC projects 2024 growth at 2.4%, almost double forecasts from just three months ago. And with an optimistic Fed holding its expectations for three cuts this year — the most important old number — this confirmation that the economy is expected to stay strong has helped push stocks to new highs.
There’s an old market saw that says lower rates are good for stocks. But so too are a strong job market and a healthy consumer, which are good for profits and, in turn, good for stock prices. Throw in a long-awaited boost in worker productivity and things look even better.
The Fed’s bullish growth projections, even with an expectation that 2025 growth moderates, are a certification from the central bank that the market is right.
While breathless AI energy has boosted the S&P 500, very real earnings buttress these high prices across the index. The job market remains healthy. The consumer is spending. And as a bonus, the Fed doesn’t see these trends as inflationary.
“If what we're getting is a lot of supply and a lot of demand … that supply is actually feeding the demand, because workers are getting paid and they're spending,” Fed Chair Jay Powell said during his press conference this week, likening the economic situation to last year when inflation fell as the economy grew. A strong economy — and strong stock market — are by no means incompatible with Powell’s mandate and mission.
The only fly in the ointment, then, is that money is expensive as long as rates are high, pushing companies towards efficiency (earnings!) rather than chasing growth and continuing the housing market’s frustrations.
So as reporters tried to coax out hints to the Fed’s plans during the press conference, Powell consistently channeled Patrick Swayze in “Roadhouse” in his responses. How will we know when the Fed will cut? “You won't. I'll let you know.”
By now, we all know what we’re waiting for: convincing inflation data, full stop.
And the fact that neither we nor Powell have seen it yet underscores the fact that obsessing over when the next cut will be may not be the best use of our time.
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>>> The great central bank policy reversal kicks off
Reuters
by Balazs Koranyi and Howard Schneider
March 22, 2024
https://finance.yahoo.com/news/analysis-great-central-bank-policy-061353930.html
FRANKFURT/WASHINGTON (Reuters) -The world's biggest central banks are on the starting line of reversing a record string of interest rate hikes but the way down for borrowing costs will look very different from the way up.
There will be no floodgates or fireworks. Instead, banks on opposite sides of the Atlantic are likely to move in the smallest increments with periodic pauses, fearing that ultra-low unemployment could rekindle inflation rates still above their targets.
The eventual bottom for interest rates is also set to be far higher than the historic lows of the last decade and mega-shifts in the structure of the global economy could put borrowing costs on a higher path for years to come.
Central banks started to jack up rates from late 2021 as post-pandemic supply constraints and surging energy prices on Russia's war in Ukraine sent inflation into double-digit territory across much of the world.
This seemingly synchronized response tamed prices and inflation will be just above or already at target - 2% for most big economies - this year.
"The bottom line is that across the OECD, central banks... are softening up again, or are about to do so," investment bank Macquarie said in a note to clients.
Indeed, the Swiss National Bank became the first major central bank (to) ease policy on Thursday with a surprise 25 basis point cut to its key rate as inflation is already in the 0% to 2% target range.
The move also ends rampant investor speculation that policymakers will be hesitant to move before the U.S. Federal Reserve since any rate cut is certain to weaken a currency and push up imported inflation.
The European Central Bank is bound to be next in June after incessantly repeated references to that meeting painted the bank into a corner.
The Fed and the Bank of England both hinted they could be next but have kept their language sufficiently vague to make moves in either June or July possible, provided data do not upset plans.
Still, investors expect the Fed, the ECB and the BoE to each deliver only 75 basis points of cuts by the end of this year, in three 25 basis point moves, tiny changes compared to rate hikes in 2022 when they sometimes increased rates by that much in a single day.
The pricing also suggests cuts at just three out of the five meetings each will hold between June and the end of the year, so pauses are also on the cards.
To be sure, these banks are not the first to cut rates. Some emerging market economies, like Brazil, Mexico, Hungary and the Czech Republic have all cut rates already, but financial markets take their cue from the major central banks, so their influence on financial instruments is oversized.
OUTLIER
The Federal Reserve could in fact end up being the outlier this time.
The U.S. economy is chugging along and the Fed even upgraded its growth projections this week, meaning it may end up cutting rates when growth remains strong, or delaying cuts if inflation proves stubborn. In Europe, data continues to paint a bleak picture, with activity stabilizing at a low level.
The U.S. election in November adds to the Fed's dilemma.
Policymakers do not want to be seen interfering with the vote, so if they cut, they need to do it well clear of November.
"Traditionally, the Fed would not pivot rates policy to cushion inequality," Societe Generale strategist Albert Edwards said. "But growing inequality has been a key issue ever since the 2008 Global Financial Crisis triggered a backlash against ‘The Establishment’ - most evident in the rise in popularism."
"Might the unfolding inequality crisis force the Fed to bow to intense political pressure to cut rates faster and deeper? I think that is entirely plausible," Edwards said.
Fed Chair Jerome Powell in congressional testimony earlier this month said policymakers would "keep our heads down and do our jobs" ahead of the elections.
All the while Europe continues to struggle. Germany is in recession, Britain is barely growing after a recession, and the rest of the continent is staying in positive territory mostly from unexpectedly strong data out of Southern Europe, traditionally the euro zone's weak spot.
Where rate cuts could end in either 2024 or 2025 remains far too uncertain but policymakers appear confident that the ultra low rates - negative in some cases - will not be revisited.
In fact, some argue that the world is undergoing such profound changes that the historic downtrend in the so-called neutral rate, which neither stimulates nor slows growth, could reverse.
"We may now be facing such a turning point," ECB Executive Board member Isabel Schnabel said this week.
"The exceptional investment needs arising from structural challenges related to the climate transition, the digital transformation and geopolitical shifts may have a persistent positive impact on the natural rate of interest."
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>>> January economic data challenges soft landing narrative
Yahoo Finance
by Josh Schafer
February 19, 2024
The growing economic consensus has hit a bump in the road.
Over the past several months a string of stronger-than-expected data had many investors embracing a possible soft landing, in which inflation would fall to the Federal Reserve's 2% goal without a severe economic downturn.
Recent data over the past week has challenged that narrative. January inflation reports from the Consumer Price Index (CPI) and Producer Price Index (PPI) showed prices increased more than economists projected in the last month. And the January retail sales report showed sales dropped by more than economists had expected. In other words, neither inflation nor consumer strength improved.
To some, one month's prints could be points of concern, but not necessarily game changers.
"Let's not get amped up when you get one month of CPI that was higher than what you expected," Chicago Fed President Austan Goolsbee said during a question-and-answer session hosted by the Council on Foreign Relations in New York on Wednesday. "It is totally clear that inflation is coming down."
While Goolsbee may have a point that one print might not change a trend, the recent string of January data is notable because it's largely the first chunk of data to challenge the soft landing narrative since Federal Reserve Chair Jerome Powell hinted the US economy may be headed to the ideal outcome during the December Fed meeting.
"The data is stacking up against investors in a way that's making people more nervous," SoFi head of investment strategy Liz Young told Yahoo Finance Live.
Prior to the readings in the past week, the data hadn't worked against investors. Fourth quarter economic growth had come in higher than expected. The January jobs report shocked economists. And the December retail sales print came in better than anticipated, all while wage increases continued to provide a positive outlook for consumer spending and inflation continued to moderate.
After this week though, economists are cutting their projections for first quarter gross domestic product (GDP), a popular economic growth measure. Goldman Sachs has shifted its forecast from 2.9% annualized growth in the first quarter entering the week down to 2.3%. The Atlanta Fed's GDP tracker moved down to 2.9% from a 3.4% projection on Feb. 8. Not auspicious for the economic growth component of a soft landing.
The data is also moving projections for Personal Consumption Expenditures (PCE), the Fed's preferred inflation gauge, ahead of its release later this month. Goldman now projects core PCE, which excludes the volatile food and energy categories, increased 0.43% in January, an increase from its prior forecast of 0.35%. Bank of America's economics team also sees a reading near 0.4%.
Notably, this would bring the six- and three-month annualized rates, which had been celebrated recently as tracking below the Fed's 2% target, back above the 2% level. Not auspicious for the second component of a soft landing.
"While January data are often noisy, the inflation data do suggest that disinflation took two steps back in January," Bank of America US economists Stephen Juneau and Michael Gapen wrote in a note to clients on Friday.
Juneau and Gapen wrote that the January inflation data vindicates the Fed's "wait-and-see approach" to cutting interest rates, and that they agree with the new market consensus that the first interest rate cut will come in June rather than March or May.
This marks a stark shift in investor sentiment on Fed cuts. Investors are now pricing in a roughly 35% chance the first cut comes in May, per the CME FedWatch Tool. A month ago, investors had placed a 97% chance that the first cut would come by the end of the May meeting.
With the Fed rate cut question mostly answered for now, the looming question remains whether the twin inauspicious data points of inflation and consumer strength have upended hopes for a soft landing.
Gapen noted in a weekly economic roundup that it's still too early to tell.
"Our (perhaps unsatisfying) take is that investors should remain in wait-and-see mode," he wrote.
"The surprises in jobs, inflation, retail sales, and [industrial production] were all probably a combination of signal and noise. ... we need to see a few more weeks' worth of data before drawing strong conclusions on the trajectory of the economy."
Consumers, for their part, are still saying they're doing great.
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Bar, With bonds, the best time to load up in our lifetime was back in the early 1980s. Not only were the rates extremely high, but with the capital gains component figured in, by the late 1990s the total return on those bonds purchased in the early/mid 1980s actually matched or exceeded the return of the stock market plus dividends. That was an anomaly though, but I remember kicking myself for not keeping those 15% bonds that my dad and I both had back in the mid 1980s. Their prices eventually went up so much I couldn't resist taking profits at some point, but actually holding them to maturity would have equaled to the total return of the stock bull market over that long period, without taking on the risks of owning stocks.
Also, I remember reading that long ago (pre WW 2), the typical dividend rate on a large cap stock was higher than what bonds were paying in interest at the time. So the reverse of today. It was reasoned that the higher stock dividend rate was necessary in order to compensate for the higher risk of owning stocks vrs bonds.
But the problem with owning too many bonds now is that the dollar reserve system is approaching the end of its run. Not imminent, but not too many years off. The 34 tril debt bomb will reach 40 tril in just a few short years, and then 50 tril won't be far off, and eventually there will be a loss of confidence in the dollar globally. Bretton Woods collapsed in 1971, but the Petrodollar arrangement arrived to save the day (Kissinger / Rockefellers), and it worked brilliantly for decades. Globally, oil could only be purchased with dollars, which maintained strong continuous demand for dollars and Treasuries. But the Petrodollar is ending, and global de-dollarization is in full swing. First countries stop using the dollar for trade, then the central banks reduce their use of dollars as a reserve currency, and down the slippery slope we go toward a dollar crisis, with our bonds eventually becoming toilet paper. It's not imminent, but I figure it could happen within 5-10 years. Anyway, something to consider when looking at the juicy bond yields. In a debt based money system like we have (where money is lent into existence, at interest), money is actually a debt instrument. The system ultimately drowns in debt.
The Money Masters -
I was just reading this learned article in the Financial Analysts Journal
"Stocks for the Long Run? Sometimes Yes, Sometimes No"
Analyzing historical data for 19th century US stock and bond returns, this study challenges Jeremy Siegel’s “Stocks for the Long Run” thesis. Evidence indicates that 20th century US asset returns cannot be generalized out of sample.
"Abstract
When Jeremy Siegel published his “Stocks for the Long Run” thesis, little was known about 19th-century stock and bond returns. Digital archives have made it possible to compute real total return on US stock and bond indexes from 1792. The new historical record shows that over multi-decade periods, sometimes stocks outperformed bonds, sometimes bonds outperformed stocks and sometimes they performed about the same. New international data confirm this pattern. Asset returns in the US in the 20th century do not generalize. Regimes of asset outperformance come and go; sometimes there is an equity premium, sometimes not.
https://rpc.cfainstitute.org/research/financial-analysts-journal/2023/stocks-for-the-long-run
https://www.linkedin.com/in/edward-mcquarrie-8a08a515/
Bar, Looks like NJHowie only had 148 posts on I-Hub since 2007. Not very many bond guys here on I-Hub. Bond yields were so low for so long, there just wasn't much reason to own them, although it's a different ballgame with yields at 4-5%. But with a bull market in stocks, bonds are once again on the back burner.
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GFP, Whatever happened to the guy who loved muni bonds, NJHowie? Actually bonds have outperformed stocks for many periods but not often in the last century.
No one talks about another BRK group, the_employees. About 400,000 of them!
Munger's death didn't affect BRK noticeably but of course he's just 2nd banana. If BRK sags, they can always institute a small dividend. The original group of Omaha billionaires are almost all gone now. Those, along with Buffett and Munger, are the shareholders who opposed dividends. They didn't need the cash and they didn't want to pay taxes on something they didn't want.
My *guess* is BRK won't move much if Buffett passes away and if his death causes the stock to underperform for awhile, the company has options for propping things up, Including splitting the A shares. Perhaps 100 for one but not much more They want to keep the riff raff out. Both Charlie and Warren would agree on that.
It'd be a cryin' share for bunches of day traders to target the annual meetings to pump the stock for short term flips.
Bar, With Berkshire, I wonder what will happen when Buffett is gone? They have solid plans in place, but considering the cult like stature of Buffett, plenty of investors can be expected to leave. And what will happen tax-wise, I wonder (?) That's why I decided to not own Berkshire itself, although I have a bunch of Buffett stocks. Hard to imagine a world without 'The Oracle', but unfortunately it's inevitable.
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The Bulletshares aren't in treasuries. They hold very widely diversified portfolios of investment grade corporate bonds. Hundreds of issues from many issuers.
Did you notice that BRK.a has touched $600,000? My class B shares can't quite break $400. Their ATH is $399!
Buffett's having a fantastic year with BRK up 29% even with all the cash!
Notice how well megacap stocks have done compared with smaller caps. 2023 wasn't good for the average IHUB microcap "player."
Bar, I see the Bulletshares do have a .10% expense ratio, so that could explain part of the lower yield compared to Treasuries.
Fwiw, for the bond allocation I went with a monthly Treasury ladder going out 3 years. No commissions to buy, and no state income taxes, and being retired the Federal tax aspect isn't too big a deal. But I can see where the muni route can make a lot of sense for people like you in the higher tax brackets. Locking in some longer maturities is looking like a good move (like your 7 year corporates), since it won't be long before these high rates are no longer available.
Btw, on the stock side I moved the allocation up to 30%, mostly in the S+P 500, but some small positions in individual stocks. The individual stocks provide a fun aspect, and are meant to be long term buy / holds (link below). Got a little carried away though, lol. I also got back into 3 of Buffett's Japanese stocks, with small positions (ITOCY, MARUY, SSUMY). Never should have sold those last year, but from what Buffett and Munger have said, these are still bargains -
https://investorshub.advfn.com/Great-Stocks-37555
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One other thing: I've never sold one. I've just held them to maternity which is probably what most investors do. Their bid/ask spreads are small and they trade actively on the Nasdaq so they should be easy to turn into cash if need be. Again I don't know how that would go amid panic selling.
Both of my sons have a lot of money sitting in cash, Been trying to get them to test Bulletshares.
I own several Bulletshare bonds, each with a different maturity, ranging from a year out to three years. Now, I've had two or three mature. Have yet to discover any drawbacks. Easy to buy; easy to hold thru maturity. Very easy to ladder. I wouldn't put a ton in them. I also have bank CDs and Vanguard muni bond funds for fixed income diversification.
Happily I haven't tested mine in a terrible recession (like 2008) or in a period of raging inflation, but they should be pretty safe in tough times.
Bar, Even if the recent bond rally was overdone, % rates should be way lower by year end, so the exact timing shouldn't matter too much, unless you are actively trading BSCR for the bounce potential.
With BSCR, it looks like the yield on the 7 year Treasury note is a little higher, so the main advantage for using the corporate BSCR route would have to be from it's greater upside bounce potential. A lot more variables with corporates though, compared to Treasuries, and also Treasuries aren't taxed at the state level, so that's another aspect.
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I hope rates don't rise much. Just today I bought a large slug of BSCR Bulletshare ETFs that mature in 2027. They yield about 4%.
>>> Uncertainty creeps back into US Treasury market after Fed, blockbuster data
Reuters
Feb 7, 2024
By Davide Barbuscia
https://finance.yahoo.com/news/analysis-uncertainty-creeps-back-us-060557038.html
NEW YORK (Reuters) - A rethink on when the Federal Reserve will cut interest rates is reverberating through the fixed income market, heightening risk for those betting the explosive rally that took bonds higher at the end of 2023 will continue this year.
Investors piled into Treasuries late last year on expectations that the Fed will cut rates as soon as the first quarter of this year, sending government bond prices roaring back from 16-year lows.
Many are now recalibrating those bets following a blowout U.S. jobs number and a cautious message from the Fed, which last week said the strong economy could spur an inflationary rebound if rates are cut too soon. Yields on the benchmark 10-year Treasury, which move inversely to price, have surged in recent days and now stand 20 basis points above December’s lows.
While investors still expect the Fed to deliver a number of rate cuts this year, they are now less certain of when the central bank will begin lowering borrowing costs and how far rates will fall. Worries over an expected surge of bond supply resulting from government issuance are also sapping bulls’ enthusiasm.
“The combination of the jobs numbers and the Fed press conference has really caused a splintering in the potential outcomes,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, which manages $794 billion in assets.
He believes 10-year yields this year could approach last year’s high of around 5%, from their current level of about 4.1%.
Futures tied to the Fed’s policy rate late Tuesday showed investors assigning about a 20% chance of the Fed cutting interest rates in March, down from 64% a month ago, CME Group data showed.
Fed Chair Jerome Powell shot down expectations of a March cut at the end of last week's monetary policy meeting, saying officials needed greater confidence that inflation is moving towards its 2% target. He reiterated his views during an appearance on CBS’ "60 Minutes" on Sunday.
The probability of a first rate cut coming in May, meanwhile, has increased to 55% from 37% a month ago. Investors are now pricing in a total of 122 basis points in cuts in 2024, from around 150 in mid-January.
John Madziyire, head of US Treasuries and TIPS at Vanguard, the world’s second-largest fund manager, said that prior to the Fed’s policy meeting last week he expected to “buy the dip” if 10-year yields hit 4.25%.
“Now maybe we'll start scaling in at 4.25% on the view that we could potentially go to 4.5%, pricing a ... higher-for-longer scenario," he said.
For others, the pullback in Treasuries confirmed suspicions that last year’s rally was overdone.
Spencer Hakimian, CEO of Tolou Capital Management, a New York-based hedge fund, has been reducing exposure to long-term Treasuries in recent weeks and added shorter-term ones on expectations of rates remaining elevated for longer than markets had expected.
“We are more exposed to the front end of the curve because we believe there's a lot less interest rate risk there,” he said. The risk of high interest rates reducing the value of a bond's payout is greater for long-duration bonds.
Nearly $2 trillion in expected new U.S. government bond issuance this year is also keeping investors wary, as many believe yields will have to rise in order to attract buyers. U.S. fiscal worries exacerbated the Treasury selloff in October, and rating agencies Fitch and Moody's warned last year about the burden of higher interest rates on state coffers.
Matt Eagan, portfolio manager at Loomis, Sayles & Company, sees 10-year yields at 4.5%, partly because of the expected large government issuance.
So far, the rise in yields hasn’t had much effect on stocks, in contrast with the equity selloff surging Treasury yields set off in September and October. The S&P 500 is up over 4% for the year and stands near a record high.
At the same time, many still believe the direction of travel for rates is lower, as long as inflation remains on a cooling trend. Fed officials in December projected three quarter-point rate cuts this year, forecasts that Powell recently said were still likely in line with policymakers' views.
Strong economic data changes the Fed's timing but not its direction, said Jason Pride, chief of investment strategy at Glenmede.
"It doesn't mean they can't cut rates, it just means their pace is a little slower," he said.
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Timiraos - >>> Plummeting Inflation Raises New Risk for Fed: Rising Real Interest Rates
Central bank feels pressure to cut interest rates as falling inflation raises real cost of borrowing
The Wall Street Journal
By Nick Timiraos
Jan. 28, 2024
https://www.wsj.com/economy/central-banking/plummeting-inflation-raises-new-risk-for-fed-rising-real-interest-rates-fd2a4f37?siteid=yhoof2
Federal Reserve officials start the year with a problem they would ordinarily love to have: Inflation has fallen much faster than expected.
It does, nonetheless, pose a conundrum. The reason: If inflation has sustainably returned to the Fed’s 2% target, then real rates—nominal rates adjusted for inflation—have risen and might be restricting economic activity too much. This means the Fed needs to cut interest rates. The question is, when and by how much?
The Fed won’t cut at its two-day meeting ending this Wednesday because the economy has been growing solidly. While inflation excluding food and energy on a monthly basis has been at or below 2% in six of the last seven months, the Fed wants to be sure that can be sustained before cutting rates.
Instead, Fed officials are likely to take a symbolically important step this week by no longer signaling in their policy statement that rates are more likely to rise than fall. Ditching this so-called tightening bias would affirm that officials are entertaining lower rates in the coming months.
Normally, the Fed cuts interest rates because economic activity is slowing sharply. Not this time: Growth remained surprisingly robust through the end of last year. Rather, they are mulling whether softening inflation means real interest rates will be unnecessarily restrictive if they don’t act.
Militating against a rate cut soon: Bond yields have fallen and stocks have risen, which could bolster economic activity and consumer spending. For that reason, officials could wait until May or even later to cut, said William English, a former senior Fed economist who is a professor at Yale School of Management.
On the other hand, “if they get genuinely reassuring inflation numbers and the real economy seems to be slowing a bit, I could see them getting comfortable with a cut in March,” he said.
The case for cutting later
Policymakers might want to move carefully to lower rates because they are not sure if the recent inflation cooling will last or if the economy will rev up in a way that sustains somewhat higher inflation. Several officials have said they want to avoid at all costs cutting rates only to have to raise them again.
Dean Maki, chief economist at hedge fund Point72 Asset Management, thinks the Fed will wait until June to cut interest rates because growth and hiring will exceed its expectations this year.
Concerns that lower inflation will raise real rates are misplaced because it will also boost purchasing power, consumer confidence and spending, said Maki. “Growth strengthens when inflation falls. I can’t think of examples in the last several decades where growth weakens after inflation falls,” he said.
It is also possible the economy can tolerate higher rates than before. In December, most officials thought the neutral rate, which balances supply and demand when the economy is operating at full strength, was 2.5%, well below the actual rate, which has been between 5.25% and 5.5% since July. That implies rates are highly restrictive, yet the economy hasn’t behaved that way.
Officials “have tended to let the data tell them they’re overly restrictive rather than rely” on estimates of neutral, said Maki.
The case for cutting sooner
Others warn that waiting for the data to signal the Fed is too restrictive will require the type of aggressive cuts reserved for an economy falling into recession, as occurred in 2001 and 2007. They point to latent risks from heavily indebted companies, especially in real estate, which locked in lower interest rates earlier in the pandemic. Those borrowers might struggle as that debt is refinanced at higher rates.
The argument for lowering rates sooner goes like this: Fed officials raised rates rapidly to a 22-year high and telegraphed plans to keep them there for a while because they worried it would take years for inflation to fall back to their target. But inflation has fallen much faster than they expected. Prices excluding food and energy rose at a 1.9% annualized rate between July and December, down from 4% in the previous six-month period.
“We made a very aggressive tightening. Look not only at the supply that came back but also the demand that came down last year,” said Esther George, who served as president of the Kansas City Fed from 2011 until last year. There is potentially “a lot of room” to cut rates before they are in neutral territory again.
Officials are also shrinking their $7.7 trillion asset portfolio—sometimes called “quantitative tightening” or QT—faster than they did five years ago. “They’ve got QT going on steroids, still,” said George.
Policymakers are right to worry that cutting rates then raising them again would blemish their credibility, said George. But she said the greater risk now is that taking too long to cut rates causes damage to the labor market that is hard to repair.
In November, for example, the hiring rate in the U.S. dropped to its lowest level in 10 years, a sign more companies might feel they are overstaffed. “The labor market is such a tricky one,” said George. Before a downturn, “it always looks like it’s not too bad, and then it goes south quickly.”
Officials raised rates because they worried high inflation would lead businesses and consumers to expect high prices to persist, creating a self-fulfilling cycle and a rerun of the 1970s. But it increasingly looks as if a series of shocks generated a one-off surge in prices across successive sectors—goods, housing, services and labor, said Dario Perkins, an economist at GlobalData TS Lombard in London. That gave the impression inflation’s increase was persistent when in fact it wasn’t.
“You should be able to cut interest rates quite rapidly if that scary 1970s dynamic isn’t happening, and it isn’t happening,” he said. “The lesson of the last 12 months is that we don’t really need pain to get inflation down to tolerable levels.”
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>>> The Fed got the inflation reading it wanted. When cuts begin is still a tossup.
Yahoo Finance
by Jennifer Schonberger
January 26, 2024
https://finance.yahoo.com/news/the-fed-got-the-inflation-reading-it-wanted-when-cuts-begin-is-still-a-tossup-151221930.html
The Fed's preferred inflation measure — a "core" Personal Consumption Expenditures index that excludes volatile food and energy prices — clocked in at 2.9% for the month of December, beating estimates.
That marked the first time the gauge fell below 3% since March 2021 — well before the central bank began its most aggressive rate-hiking campaign since the 1980s.
What is even more encouraging for central bankers is that the core PCE inflation rate fell to 1.5% on a three-month annualized basis, its lowest since late 2020. On a six-month basis it was 1.9% for the second month in a row.
Both of those marks are below the Fed's 2% target.
The question now is whether the data is enough to justify a cut in rates that aligns with the expectations of investors who began the year predicting that a loosening would start in March.
Policymakers have been pushing back on that optimism, cautioning that they need more data to be sure about such a pivot. Some have even suggested it may not happen until the second half of the year.
Traders as of Friday morning are now pricing in a 46% chance that central bankers will lower rates at the meeting in March. That’s down from about 56% a week ago, and a long way down from last month’s 88%.
Investors still by a slight margin expect the first cut to arrive in May, with the chance of that happening now at 51%.
While inflation continues to fall, hotter-than-expected economic growth could support an argument for pushing any cuts beyond March.
The advance estimate of fourth quarter US gross domestic product (GDP) released Thursday showed the economy grew at an annualized pace of 3.3% during the period. It blew out consensus forecasts that the number would come in at 2%.
If economic growth continues to surprise to the upside and inflation pops back up, the Fed may be forced to hold rates at current levels for longer. It last raised rates in July, to a 22-year high.
During the December Fed press conference, Fed Chair Jay Powell signaled the central bank had likely reached the peak on rate hikes and would turn attention to rate cuts looking ahead.
He also told Yahoo Finance's Jennifer Schonberger that the Fed would want to be "reducing restriction on the economy" well before inflation hits 2%.
Fed officials at that December meeting did predict three cuts this year, without saying when exactly they could happen.
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>>> Aon Agrees to Buy NFP for About $13.4 Billion in Cash, Stock
Bloomberg
by Josyana Joshua and Allison Nicole Smith
December 20, 2023
https://finance.yahoo.com/news/aon-agrees-buy-nfp-13-213641576.html
(Bloomberg) -- Aon Plc agreed to buy NFP Corp. for about $13.4 billion in cash and stock as part of a push into the middle-market segment of the insurance brokerage and wealth-management business.
Funds affiliated with Madison Dearborn Partners and HPS Investment Partners are the sellers, the companies said in a statement Wednesday. The transaction will be funded by $7 billion of cash and $6.4 billion of Aon’s stock.
Aon expects to fund the cash portion with around $7 billion of new debt, according to a filing. It plans for $5 billion of it to be raised in 2024 and $2 billion raised when it completes the transaction. The new debt will span a range of maturities, subject to market conditions. NFP Chief Executive Officer Doug Hammond will continue to lead the business as an independent, connected platform within Aon, reporting to Aon President Eric Andersen.
Aon said it expects about $400 million in one-time transaction and integration costs. The combination is expected to dilute adjusted earnings per share in 2025, and break even in 2026. It will add to earnings starting in 2027, according to the statement. The deal is expected to be completed in the middle of next year.
The sale is welcome news for holders of the NFP’s high-yield debt. The company’s 6.875% bond due 2028 rose more than 8 cents on the dollar, making it Wednesday’s biggest gainer, according to Trace data.
“Every now and then Santa Claus visits the high yield market in the form of investment grade M&A,” David Knutson, senior investment director at Schroder Investment Management, said in an interview. “Not something you plan for, but it is a nice surprise.”
From Aon’s perspective, “investment-grade spreads are very compelling right now for issuers,” said Bloomberg Intelligence’s Noel Hebert, “so the funding market is as compelling as it’s been in a while.”
Similarly, the high-yield bonds of United States Steel Corp. rallied after Nippon Steel Corp., an investment-grade company, agreed Tuesday to buy the Pittsburgh-based firm for $14.1 billion.
However, the sudden wave of investment-grade M&A won’t necessarily last, said Knutson.
“The market has embraced the ‘soft landing’ narrative. This has fueled an ‘everything rally,’” said Knutson. “If future data doesn’t support this narrative, the market and buyers will lose their appetite for risk.”
UBS Group AG served as financial adviser to Aon, and Cravath, Swaine & Moore and McDermott Will & Emery were external legal counsel. Evercore Inc. acted as lead financial adviser to NFP, while Skadden, Arps, Slate, Meagher & Flom and Ropes & Gray were external legal counsel.
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>>> US government debt is on track to surpass $50 trillion by 2033. That means $5.2 billion is piling up every day.
Business Insider
Matthew Fox
Nov 7, 2023
https://markets.businessinsider.com/news/bonds/us-debt-50-trillion-2033-federal-deficits-treasury-bond-crash-2023-11
The US government's public outstanding debt is on track to surpass $50 trillion by 2033.
The increase comes out to roughly $5.2 billion every day or $218 million every hour, Bank of America estimated.
"Central banks may simply bail out governments in coming years via QE," BofA said.
The US government's debt is on track to surpass $50 trillion by 2033, Bank of America said in a Tuesday note, citing data from the Congressional Budget Office.
US public debt outstanding currently sits at $33.6 trillion and is expected to surge by $20 trillion to $54 trillion within the next decade amid "fiscal excess in the 2020s," Bank of America investment strategist Michael Hartnett said.
"US public debt is... more than the combined GDPs of China, Japan, Germany, and India," he wrote, adding that the outstanding debt is set to surge by $5.2 billion every single day, or $218 million every hour, for the next 10 years.
The surge in debt has coincided with an explosion in the federal deficit, which jumped by $320 billion to $1.7 trillion in 2023. That's forced the Treasury Department to auction trillions of dollars of fresh bonds.
Adding to the burden is the surge in annual interest payments caused by spiking bond yields. Those payments are taking up a bigger slice of the federal budget and widening deficits. Estimated annualized debt interest payments surpassed $1 trillion in October.
And as long as US policymakers continue to borrow more heavily and add to the government's outstanding debt, investors are poised to worry about the lingering risks of inflation, bond defaults, and currency debasement, according to BofA.
"Likely central banks may simply bail out governments in coming years via quantitative easing and the introduction of yield curve control (policies that would be US dollar negative)," Hartnett said.
A separate measure of US debt that's more closely followed by economists is "debt held by the public," which is less daunting but still on a steep uptrend. At the end of fiscal 2023, it stood at $26.3 trillion, or 98% of projected GDP, and the CBO sees it climbing to 115% by 2033.
But even if interest rates do fall and the federal deficit is contained, don't expect the federal government to ever stop borrowing money. US debt will always rise because it fuels economic growth and helps drive the circulation of money.
Besides, the one time the government did pay off all of its interest-bearing debts in 1835, a two-year depression shortly followed.
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Rickards - Petrodollar - >>> Kissinger Created the Doomsday Deal
BY JAMES RICKARDS
DECEMBER 4, 2023
https://dailyreckoning.com/kissinger-created-the-doomsday-deal/
Kissinger Created the Doomsday Deal
As I’m sure you know by now, Henry Kissinger died last week at the age of 100. He leaves a complex legacy, which is certainly understandable because he operated in a complex geopolitical environment.
But Henry Kissinger was a master strategist and political scientist. With his recent passing, I thought I’d retell the story of one of his most brilliant plans, and explain how it relates to the demise of the dollar.
In February 1974, I was asked by Professor Robert W. Tucker of the Johns Hopkins School of Advanced International Studies to join him and four other foreign policy experts for a meeting at the White House.
At the time, confidence in the dollar was on shaky ground because President Nixon had ended gold convertibility of dollars in 1971.
The price of oil was skyrocketing, partly due to inflationary policies pursued by the Federal Reserve, and partly due to an Arab oil embargo in response to U.S. aid to Israel in the Arab-Israeli Yom Kippur War of 1973.
Saudi Arabia was receiving dollars for their oil shipments, but they could no longer convert the dollars to gold at a guaranteed price directly with the U.S. Treasury. The Saudis were secretly dumping dollars and buying gold on the London market. This was putting pressure on the bullion banks receiving the dollar.
Confidence in the dollar began to crack. Anyway, back to my meeting at the White House…
Should We Invade Saudi Arabia?
We were ushered through the security gate on Pennsylvania Avenue near West Executive Avenue, closest to the West Wing. We were then escorted to the office of Dr. Helmut Sonnenfeldt, Secretary of State Henry Kissinger’s deputy on the National Security Council.
There, we engaged in a strategy discussion. Our focus that night was debating a full-scale military invasion of Saudi Arabia.
The idea was we’d then secure their oil fields, pump enough oil to supply Western and Japanese needs and price it however we wanted. We debated the pros and cons of this plan, including potential supply disruptions and international reactions until well into the evening.
Now, it may not be covered in the history books, but a military takeover of Saudi Arabia was very much on the table. In fact, the planning was well underway. But the Nixon administration under Henry Kissinger decided to try one other approach first. And what they came up with was absolute genius.
A few months after my meeting, in June 1974, President Nixon met with King Faisal in Saudi Arabia. A month later, he sent his representatives to offer a new deal. The deal was as straightforward as it was brilliant.
Birth of the Doomsday Deal
The Saudis would agree to sell their oil only for U.S. dollars. These dollars for oil were called “petrodollars.” And the Saudis would then reinvest these petrodollars in U.S. Treasury securities and deposits in U.S. banks.
In return, the U.S. would sell advanced weapons and military hardware to the Saudis and we’d promise U.S. military support to protect Saudi oil fields and the royal family.
This would effectively guarantee the House of Saud long-term rule over the country.
The final twist was that U.S. banks would then “recycle” the petrodollars deposited by Saudi Arabia as loans to emerging markets in Latin America, South Asia and Africa.
In turn, those developing countries would purchase U.S., European and Japanese exports. That would ignite global growth. And, of course, to do that they’d need lots of oil. That meant oil demand would grow endlessly as would demand for dollars. It was the ultimate win-win.
And the 1974 “Petrodollar Accord” was born. Or as I call it, the Doomsday Deal. Behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force, which I was invited to the White House to consider.
BRICS and the End of the Doomsday Deal
Now, almost 50 years later, the wheels are coming off. The world is losing confidence in the dollar again, and the cracks in the dollar are already getting larger.
It’s important to understand all of this concerning BRICS.
If you’re unfamiliar with BRICS, I’m talking about the economic alliance between Brazil, Russia, India, China and South Africa. I wrote a lot about it this past summer and fall. I explained the changes in the global monetary system that will send shock waves throughout markets.
The BRICS nations represent almost one-third of the entire global GDP. Their economies are bigger than the United States, Germany, Japan, the U.K., France, Canada and Italy combined.
And thanks to Biden’s weakness and foreign policy failures our enemies — and even our allies — are emboldened and the Doomsday Deal is cracked wide open.
The BRICS countries have been running circles around blundering Biden lately.
Blunders
Here’s a quick rundown of some of Biden’s recent failures. On Jan. 17 of this year, shots were fired when Saudi Arabia humiliated Biden and thumbed its nose at America by announcing it is considering accepting other currencies for its oil.
And that announcement opened the floodgates.
On March 8, 2023, Reuters reported another massive blow as India and Russia are now ditching the dollar and trading oil in non-dollar currencies. On March 28, Brazil and China announced an agreement to conduct all future trade transactions using their own currencies.
And it gets even worse. Even our so-called allies saw the writing on the wall.
That same day, French oil giant Total Energies announced they had bought liquefied natural gas from a Chinese oil company using the Chinese currency, the yuan.
Now, other U.S. allies like India, Pakistan and the United Arab Emirates have made deals with Russia or China to buy oil or other commodities in their own currencies.
With Biden in the White House, they’re laughing at us now.
The Beginning of a Seismic Shift
Iraq announced earlier this year they’re now trading their oil for Chinese yuan. Recently it’s only gotten worse…
In August of this year, it was announced Saudi Arabia — our old partner in the Doomsday Deal — will be joining the BRICS group of nations starting in 2024.
And more recently, China and Saudi Arabia agreed to a currency swap deal.
Our enemies were already salivating, and now with this most recent news they are ready to pounce.
In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift.
Eventually a tipping point will be reached where the dollar collapse suddenly accelerates as happened to the British pound sterling last century.
My background inside the U.S. intelligence community, investment banks and global currency markets has shown me how smart investors could profit from the failure of the Doomsday Deal.
One of the best ways investors can anticipate this monetary earthquake is by buying gold.
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>>> Is China really dumping Treasury bonds and sending yields higher? A former US official explains the mystery
Business Insider
by Filip De Mott
November 25, 2023
https://finance.yahoo.com/news/china-really-dumping-treasury-bonds-002534002.html
China is not dumping its stockpile of US bonds, Brad Setser, a former Treasury official, wrote.
A large part of China's holdings is not accounted for in official US data, he said.
While it has sold some Treasurys, Beijing has bought up US debt in the form of agency bonds.
China isn't fueling the bond-market rout with a large sale of its Treasury holdings but is instead reshuffling its US debt assets, Brad Setser, a former Treasury official, wrote for the Council on Foreign Relations.
After US Treasury yields surged to highs not seen in 16 years, economists have looked for explanations for what is now one of the worst market crashes in history.
Apollo Global Management's Torsten Sløk also pointed to China recently, citing official US data that showed the country had sold $300 billion worth of Treasurys since 2021. And in August, a $21.2 billion dump of US assets by China was largely made up of Treasurys.
But Setser said such data presented an incomplete picture. Drawing on other sources, he estimated that China's overall US-bond holdings had been relatively stable since 2015.
Though China's holdings appear to be slipping in official US Treasury International Capital data, the metric reflects only foreign holdings in US custodians, or the financial institutions that safeguard the assets, Setser said.
"If a simple adjustment is made for Treasuries held by offshore custodians like Belgium's Euroclear, China's reported holdings of US assets look to be basically stable at between $1.8 and $1.9 trillion," he wrote.
Added to that, the US data fails to capture US asset holdings that were handed over to third-party management. China's State Administration of Foreign Exchange is known to hold accounts at global bond and hedge funds, as well as private-equity firms, Setser said.
He added that even where China had reduced its Treasury holdings, the sales were much smaller than other data suggested and purchases of US debt in other forms, such agency bonds, had increased.
Agency bonds are issued by government-sponsored enterprises, and some of the top issuers are US-backed firms such as Fannie Mae and Freddie Mac.
In fact, Beijing's agency bonds once outpaced its Treasury assets, Setser said. Though it moved away from that market during the Federal Reserve's quantitative-easing era, soaring yields on agency debt have brought back China's buying habit.
In 2022 and the first six months of 2023, China purchased over $100 billion in agency debt and sold just $40 billion in Treasurys, he estimated.
"Bottom line: the only interesting evolution in China's reserves in the past six years has been the shift into Agencies," he wrote. "That has resulted in a small reduction in China's Treasury holdings — but it also shows that it is a mistake to equate a reduction in China's Treasury holdings with a reduction in the share of China's reserves held in US bonds or the US dollar."
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>>> $7.6 trillion of US government debt will mature in the next year, adding pressure on rates
Business Insider
by Filip De Mott
November 26, 2023
https://finance.yahoo.com/news/7-6-trillion-us-government-040643412.html
A whopping $7.6 trillion in interest-bearing US public debt will mature within a year, Apollo's chief economist said in September.
That represents 31% of all outstanding US government debt, adding upward pressure on rates.
That's still below 2020, when debt maturing within a year made up a significantly larger share.
Nearly a third of all outstanding US government debt is set to mature in the next 12 months, according to an analysis from asset management firm Apollo.
A chart shared by Chief Economist Torsten Sløk in September showed that the share of US public debt set to mature in a year or less has steadily risen toward pandemic-era levels and is now at 31%.
In terms of dollar amount, that's $7.6 trillion, a high not seen since early 2021, and is a source of upward pressure on US rates, he added.
In addition, public debt maturing in the near term accounts for more than a quarter of US GDP. However, this is below its 2020 peak, when it made up a significantly larger share.
The estimate comes as federal deficits have exploded in recent years, sharply elevating the trajectory of US debt. The Treasury Department auctioned $1 trillion in bonds just within the third quarter.
The US debt coming due next year could keep rising, after the Treasury issued its latest quarterly refunding statement in early November. Against expectations, the department elected to lean more on T-bills issuance moving forward, and slow the sale of longer-dated bonds.
Meanwhile, borrowing costs have soared in the last year and a half as the Federal Reserve embarked on an aggressive tightening campaign, raising the government's debt-servicing costs. Despite coming down sharply in November, they remain well above year-ago levels.
Rates have also been under pressure from the Fed's quantitative tightening program, which removed a top buyer from the bond market. The central bank has allowed about $1 trillion of its debt holdings to run off its balance sheet.
The Treasury has hit some snags trying to find enough buyers for the surge of fresh debt. Recent auctions have been met with weak demand while others saw normal uptake.
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Bar, Yes, bonds prices are finally starting to rebound after the worst bond bear market in decades. I'm figuring bonds can rally for the next several years from their oversold levels, so bonds could produce some nice capital gains for a while, assuming the interest rates have in fact peaked. For corporates and munis, I figure the diversification aspects make owning a fund better than owning the individual bonds. While the bond funds lack the protection of having a definite maturity date, with rates at/near their peak that shouldn't be an issue.
But I'm leery of the longer maturities for other reasons. The recent 30 year Treasury auction was a disaster, with few buyers, and this is probably not just a one off, but could dog Treasury auctions from here on out. Despite QT, the Fed is still actively buying the longer term Treasuries, since few others want them. Not exactly a ringing endorsement when your own central bank has to buy its own debt due to lack of demand. So I'm wary of going out much past 5 years, and for the bond allocation I set up a monthly Treasury ladder going out only 3 years. I may add an interim bond fund like VGIT for the capital gains aspect, since % rates should trend lower over the next few years. But that's the basic strategy.
The bigger picture is deteriorating as the US debt continues to balloon exponentially. This debt bomb will hit the fan eventually, we always knew it would happen 'someday', but that day is getting a lot closer. I figure we're OK for 3 years, but beyond 5 years who knows. The US debt hitting $40 tril (2026) might be the pivotal 'confidence' point where other countries simply lose faith in the US dollar system and then the dumping turns into a flood. Already the main buyers of US debt (China, Saudis, etc) are not showing up at the Treasury auctions. And increasingly, countries are abandoning the dollar for trade, and with the Saudis joining BRICS (officially in Jan), the Petrodollar system will soon be history, thus removing the key underpinning for the dollar system that has maintained demand for US dollars for over 4 decades. In a few years the new gold linked BRICS currency will become a viable alternative to the dollar system.
So the handwriting is on the wall, with the timeline being the big unknown. Luckily the strong global demand for short term T-Bills should continue for an extended period of years (link below), so the end of dollar hegemony isn't imminent, though the clock is clearly ticking. Fwiw, my plan with the 3 year Treasury ladder (currently a 40% allocation) is to gradually move out of bonds into more 'hard asset' type investments over the next 3 years, a little each month. I figure in 3 years the US debt should be closing in on $40 tril, so getting close to the 'confidence' tipping point where the global community gives up on the US dollar system. Let's hope not, but projecting out 5 years, the US debt could then be approaching $50 tril. Anyway, it looks like this 'sinking Titanic' viewpoint is no longer far off in the future, but most likely within 5 years (yikes)..
>>> Rickards - >>> Why’s the Dollar So Darn Strong?
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=173197642
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My bond funds have done darn well lately... for a change.
>>> The Federal Reserve Broke The Budget. Buckle Up For What Comes Next.
Investor's Business Daily
by JED GRAHAM
11/24/2023
https://www.investors.com/news/economy/federal-reserve-broke-the-budget-what-budget-deficits-mean-for-the-economy-and-sp-500/?src=A00220
The 10-year Treasury yield set off roaring alarms about the U.S. budget when it surged to 5% last month. Now those warnings look like a fire drill. Federal Reserve rate hikes seem to be over for now, giving the bond market a reprieve and allowing a powerful S&P 500 rally to resume.
Enjoy it while it lasts. The next debt scare may be the real thing, and it could rock the U.S. economy and stock market.
Here's why: The Fed's historic turnabout, from enabling massive budget deficits to directing the sharpest rate hikes in 40 years, has seemingly broken the budget. Treasury market stress is almost certain to return.
The era of Fed quantitative easing and near-zero interest rates promoted carefree fiscal policies that led the U.S. to rack up $20 trillion in federal debt since the 2008 financial crisis.
Federal Reserve Fuels Red Ink
Exhibit A in the case of the broken federal budget is the deficit's surge in fiscal 2023, which ended Sept. 30. Unemployment was near a record low and GDP growth was strong. Under those conditions, the budget deficit usually shrinks. But it essentially doubled to $2 trillion, if you ignore accounting for Biden's student loan forgiveness that was struck down by the Supreme Court.
The Federal Reserve's fingerprints are all over the red ink. After the Fed sent more than $100 billion in interest on its bond portfolio to the Treasury in fiscal 2022, it had to halt those payments last year as bond prices fell. Having let inflation get out of the bag, an 8.7% cost-of-living adjustment stoked a $134 billion increase in Social Security checks.
Another roughly $100 billion went to FDIC bailouts, as banks like Silicon Valley Bank that loaded up on Treasuries when rates were ultralow became insolvent when Treasury yields surged. To top it off, the Fed hiking its key rate past 5% forced Uncle Sam to pony up an extra $177 billion in interest on the debt. That problem is destined to keep growing by leaps and bounds.
Debt Service Costs Skyrocket
With the Federal Reserve reversing its easy-money policies, the expense of servicing the national debt is exploding. Interest on the debt vaulted to $711 billion in fiscal 2023. That's up from $534 billion in 2022 and $413 billion in 2021. This month, debt service is running at an $825 billion rate. That's about what the U.S. spends on national defense.
US debt servicing costs chart
"The misjudged confidence that we had entered a brave new era of low interest rates is costing us dearly now — first through a period of high inflation and now through persistent pressure on a government budget that already has precious little room for maneuver," wrote Sonal Desai, chief investment officer at Franklin Templeton Fixed Income.
While a debt spiral isn't inevitable, almost no one thinks that Washington will act to avoid one. Fitch Ratings, in August's U.S. credit rating downgrade, bemoaned "a steady deterioration in standards of governance." When Moody's cut its U.S. rating outlook to negative this month, it warned of "rising political risk to the US' fiscal position and overall sovereign credit profile" as political polarization thwarts budget deficit reduction.
The catalyst for another bond-market rout — and possibly another U.S. credit-rating downgrade — could be the coming debate over the $3.3 trillion cost over 10 years to renew parts of the 2017 Trump tax cuts. Those cuts are due to expire at the end of 2025.
Bond Vigilantes
That tax debate won't get serious until after the 2024 election. But you can expect to hear plenty from "bond vigilantes" — a term coined by Wall Street strategist Ed Yardeni in the 1980s for the bond traders who made Washington pay for fiscal excess by driving up Treasury yields.
"At that point we can have renewed pressure on the bond market to the extent that nothing is being done to alleviate the reckless path the deficit is on," Yardeni, president of Yardeni Research, told IBD.
The "unsettling" thing, Yardeni said, is that "the bond vigilantes may be more powerful than ever because there's more debt than ever and it's compounding at a faster rate because of higher interest rates."
The Congressional Budget Office's latest projections show that under current law — meaning all of those 2017 tax cuts sunset on schedule — public debt as a share of the U.S. economy would rise from 98% to 119% by 2033. The Committee for a Responsible Federal Budget estimates that extending all of the tax cuts would raise that share by 10 percentage points. Under that scenario, the projected annual budget deficit in 2033 would exceed $3 trillion, or 8% of GDP. That's unheard of, except during war or in the wake of a recession.
No Plan To Rein In Budget Deficits
For reserve-currency countries like the U.S., for which default isn't a real risk, Moody's is less concerned about a high debt-to-GDP burden. Instead, it's focused on another metric reflecting its willingness to take action to curb escalating debt costs.
US budget gap chart
In 2022, the government spent 10 cents of every dollar in tax revenue on servicing the national debt. CBO projections show interest expense doubling to 20 cents on the dollar by 2033. But Moody's sees that as too optimistic. It sees 26 cents of each dollar in taxes going to debt service. Moody's says that would be the kind of fiscal stewardship consistent with a C-type credit rating.
America's unique strengths, including the central role of the dollar, solid productivity growth and technological leadership, afford Washington more leeway, Moody's says. But the lack of any plan to improve the fiscal outlook "is fundamentally different" from most "Aaa"-rated peers, such as Germany and Canada.
A credit-rating downgrade, if it comes to that, would signal that fiscal weakness will erode Treasuries' "preeminent safe-haven status."
Wall Street barely flinched after Moody's shot across the bow on Nov. 10 because the bond market had already flashed its own warning.
"The Bond Vigilantes may be saddling up," Yardeni wrote Aug. 3, heralding their return after a 16-year hiatus.
Federal Reserve QE Era
Bond vigilantes' long absence was marked by ultralow rates, low inflation and tepid demand ushered in by the 2008 financial crisis.
The Fed began its quantitative easing as an emergency market stabilization tool in late 2008. The central bank bought up government-backed mortgage securities to keep housing finance flowing. Yet with its key interest rate already at zero and the recovery unusually subdued, the Federal Reserve announced a second round of asset purchases — this time Treasuries — and then a third.
Joe Gagnon, senior fellow at the Peterson Institute for International Economics, argues that the Fed "really should have been even more aggressive," saying it took too long to achieve its full-employment mandate. The unemployment rate wouldn't fall to 5% until late 2015.
'Crazy' Not To Swell Budget Deficits
Yet QE, which held market interest rates low despite massive federal deficits, made a mockery of fiscal responsibility.
Conventional wisdom came to hold that "governments would be crazy not to deficit-spend more, since they could borrow pretty much for free," wrote Franklin Templeton's Desai. And for a while, it seemed to work.
Federal Reserve's 'Massive Mistake'
Even as public debt nearly tripled as a share of the U.S. economy from 2007 to 2021, net interest outlays actually dipped. That's because the average interest rate on debt held by the public fell from 4.7% of GDP to 1.4%.
US Treasury yields chart
Then came the Federal Reserve's "massive mistake," as Gagnon sees it, of keeping its pedal to the metal in 2021, despite gargantuan fiscal stimulus to speed Covid recovery. The biggest inflation outbreak in 40 years ensued, spurring rapid-fire Fed rate hikes to stem it. The interest rate hikes steadily lifted the Treasury's average borrowing rate to 2.3% by the end of 2022 and 3.1% as of October.
About $8 trillion worth of debt held by the public is set to mature over the next year. The Treasury will have to reissue that sum. The key question is at what interest rate.
Fed Rate Cuts Won't Be Enough
Following soft recent jobs and inflation data, markets expect the Federal Reserve to cut its key rate a full point in the coming year to 4.25%-4.5%. That would reduce the risk of a near-term fiscal derailment over runaway debt-service costs.
Yet it won't take sky-high rates to blow up the budget. Moody's projection of soaring debt-service costs assumes that the 10-year Treasury yield will settle back to around 4%. But the high stock of national debt is only about half the reason the budget deficit may hit 8% of GDP in a decade. The other half is a structural fiscal gap, with tax revenue insufficient to pay for the rising cost of Social Security and Medicare.
National defense, income-security and health care programs will continue to take up close to 100% of tax revenue, CBO 10-year projections show. That's even if most Trump tax cuts expire. Almost all the rest of federal spending will go on the government's credit card. That includes government salaries, veterans' health, border security, Pell Grants, National Institutes of Health research, infrastructure projects and more.
Fiscal Responsibility? Not Yet
Could fiscal responsibility make a comeback, now that the bond vigilantes have awakened? Not as long as big budget deficits are a realistic alternative to tax hikes on the right and spending cuts on the left. That will take significantly higher 10-year Treasury yields than we have today.
Consider this litany of reasons not to worry about the deficit from Dean Baker of the liberal Center for Economic and Policy Research. The inflation surge is fading. Addressing climate change will do a lot more for future generations than cutting the budget deficit while ignoring climate change. Japan has a far higher debt load than the U.S. and it's getting by OK. And artificial intelligence could ignite a productivity boom that spurs faster growth and makes our debt more manageable.
Treasury Yield Fire Alarm
The 10-year Treasury yield's surge to 5% in October — up 1.5 percentage points over three months — set off alarm bells that the scale of government debt issuance was overtaking the market's willingness to absorb it. That seemed to raise a risk of still-higher yields ahead.
News that Treasury will borrow less than expected in Q4 and further signs of easing inflation pressures have sent government bond yields tumbling over the past month. Yet it appears that the bond vigilantes are biding their time, rather than going back into hibernation.
Real Treasury Yields At Pre-2008 Levels
Confirmation of bond vigilantes' return came in September. That's when the yield on 10-year TIPS, or Treasury Inflation-Protected Securities, made a clear break above 2% for the first time since 2007. Though off its October high of 2.5%, the 10-year TIPS yield is holding at 2.20%. That's after spending most of the QE era below 1% — and below 0% for some of it.
The TIPS yield subtracts the inflation rate, making it synonymous with the real 10-year interest rate. The challenge the federal government will face in paying its bills is that real Treasury yields have largely reverted to pre-financial-crisis levels.
A number of factors help explain the reversion. Federal Reserve bond buying that squelched market signals has given way to reducing its assets. Baby boomers have gone from saving for retirement to living off their savings. Offshoring of production has turned to onshoring, with massive investment in chip manufacturing, electric vehicle supply chains, artificial intelligence and more. In general, funding has been scarcer relative to the demand for it.
What's unknown is where real interest rates will settle. Franklin Templeton's Desai thinks the neutral Fed policy rate — neither accommodative nor restrictive — may be at least 4%. That implies at least a 2% neutral real rate.
The term premium for holding bonds longer could add another 1 percentage point to the 10-year Treasury yield, putting it around 5%, she says.
If that's right, then the fiscal outlook is even worse than Moody's thinks.
What does all this mean for the U.S. economy, Fed policy and the S&P 500?
Jurrien Timmer, Fidelity's director of global macro strategy, envisions a scenario in which U.S. Treasury yields stretch, not to the breaking point, but enough to create "choppier seas" for the economy and financial markets.
Over the past several decades, the ongoing fall in interest rates and inflation, with little volatility, produced "elongated cycles, with a recession every 10 years, if that," Timmer told IBD.
The Federal Reserve could pivot quickly and pull out all the stops, if needed, without worrying too much that inflation would take off.
Federal Reserve May Not Ride To Rescue
But going forward, Timmer says, the Fed "might have to be much more muted in its reaction" to economic weakness. Higher rates might be quicker to choke off growth, leading to shorter expansions.
What if the 10-year Treasury yield shoots to 6%, threatening runaway interest costs and an economic slump, as bond vigilantes rebel?
In that case, Wall Street shouldn't necessarily expect the Fed to ride to the rescue with rate cuts, Gagnon says. That's especially true if massive and growing fiscal deficits prove inflationary, as he expects they will.
"The bottom line is inflation is going to be at 2% and the Fed is going to make sure that happens. It doesn't matter what interest rate Treasury has to pay," said Gagnon, who served in various Fed roles over two decades.
Even if the economic toll from a rise in Treasury yields sends inflation below 2%, the Federal Reserve might not be quick to roll out the heavy artillery. The Fed's modus operandi still treats QE as a last line of defense — after interest rates are cut to zero. In the new old normal, in which a 4% fed funds rate is neutral, that might take a while.
Fed End Game?
Still, some see that QE end game as inevitable, with the Federal Reserve essentially carrying some of the debt it enabled. "We will need QE in some form again, and in big size, in the future to control the rise in debt," Deutsche Bank strategist Jim Reid said.
Others think the Fed might eventually resort to yield curve control, dictating interest rates on the debt rather than influencing them with bond purchases. That's the approach it used to finance World War II, before the Fed got its independence in 1951. It's what the Bank of Japan uses today.
"The real acid test will only come if Treasury bond prices fail to rally on bearish economic data, such as a sudden collapse in payrolls or, for that matter, a stock market crash," wrote Jefferies strategist Christopher Wood. "This is the context where it becomes much more likely that Washington will end up resorting to Japanese-style yield curve control policies."
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>>> Prime Time for Bonds
In our 2024 outlook, bonds emerge as a standout asset class, offering strong prospects, resilience, diversification, and attractive valuations compared with equities.
Asset Allocation Outlook
BY ERIN BROWNE, GERALDINE SUNDSTROM, EMMANUEL S. SHAREF
NOVEMBER 14, 2023
https://www.pimco.com/en-us/insights/economic-and-market-commentary/global-markets/asset-allocation-outlook/prime-time-for-bonds/
The global economic outlook along with market valuations and asset class fundamentals all lead us to favor fixed income. Relative to equities, we believe bonds have rarely been as attractive as they appear today. After a turbulent couple of years of high inflation and rising rates that challenged portfolios, investors may see a return to more conventional behavior in both stock and bond markets in 2024 – even as growth is hindered in many regions.
In this environment, bonds appear poised to perform well, while equities could see lower (though still positive) risk-adjusted returns in a generally overvalued market. Risks still surround the macro and geopolitical outlook, so portfolio flexibility remains key.
Macro outlook suggests a return of the inverse stock/bond relationship
In PIMCO’s recent Cyclical Outlook, “Post Peak,” we shared our baseline outlook for a slowdown in developed markets (DM) growth and, in some regions, the potential for contraction next year as fiscal support ends and monetary policy takes effect (after its typical lag). Our business cycle model indicates a 77% probability that the U.S. is currently in the “late cycle” phase and signals around a 50% probability of a U.S. recession within one year.
Growth has likely peaked, but so has inflation, in our view. As price levels get closer to central bank targets in 2024, bonds and equities should resume their more typical inverse relationship (i.e., negative correlation) – meaning bonds tend to do well when equities struggle, and vice versa. The macro forecast favors bonds in this trade-off: U.S. Treasuries historically have tended to provide attractive risk-adjusted returns in such a "post-peak" environment, while equities have been more challenged.
Valuations and current levels may strongly favor fixed income
Although not always a perfect indicator, the starting levels of bond yields or equity multiples historically have tended to signal future returns. Figure 1 shows that today’s yield levels in high-quality bonds on average have been followed by long-term outperformance (typically an attractive 5%–7.5% over the subsequent five years), while today’s level of the cyclically adjusted price/earnings (CAPE) ratio has tended to be associated with long-term equity underperformance. Additionally, bonds have historically provided these return levels more consistently than equities – see the tighter (more “normal”) distribution of the return outcomes. It’s a compelling statement for fixed income.
Delving deeper into historical data, we find that in the past century there have been only a handful of instances when U.S. equities have been more expensive relative to bonds – such as during the Great Depression and the dot-com crash. One common way to measure relative valuation for bonds versus equities is the equity risk premium or "ERP" (there are several ways to calculate an ERP, but here we use the inverse of the price/earnings ratio of the S&P 500 minus the 10-year U.S. Treasury yield). The ERP is currently at just over 1%, a low not seen since 2007 (see Figure 2). History suggests equities likely won’t stay this expensive relative to bonds; we believe now may be an optimal time to consider overweighting fixed income in asset allocation portfolios.
Price/earnings (P/E) ratios, are another way that equities, especially in the U.S., are screening rich, in our view – not only relative to bonds, but also in absolute.
Over the past 20 years, S&P 500 valuations have averaged 15.4x NTM (next-twelve-month) P/E. Today, that valuation multiple is significantly higher, at 18.1x NTM P/E. This valuation takes into account an estimated increase of 12% in earnings per share (EPS) over the coming year, an estimate we find unusually high in an economy facing a potential slowdown. If we assume, hypothetically, a more normal level of 7% EPS growth in 2024, then the S&P today would be trading even richer at 18.6x NTM P/E, while if we are more conservative and assume 0% EPS growth in 2024, then today’s valuation would rise to 19.2x NTM P/E. Such an extreme level, in our view, would likely drive multiple contraction (when share prices fall even when earnings are flat) if flat EPS came to pass.
We note, however, a crucial differentiation within the equity market: If we exclude the seven largest technology companies from this calculation, then the remainder of the S&P trades close to the long-term average at 15.6x NTM P/E. This differentiation could present compelling opportunities for alpha generation through active management.
Overall, we feel that robust forward earnings expectations might face disappointment in a slowing economy, which, coupled with elevated valuations in substantial parts of the markets, warrants a cautious neutral stance on equities, favoring quality and relative value opportunities.
Equity fundamentals support cautious stance
Our models suggest equity investors appear more optimistic on the economy than corporate credit investors. We use ERP, EPS, and CDX (Credit Default Swap Index) spreads to estimate recession probability implied by different asset classes, calculated by comparing today’s levels with typical recessionary environments. The S&P 500 (via ERP and EPS spreads) is currently reflecting a 14% chance of a recession, which is significantly lower than the estimates implied by high yield credit at 42% (via CDX).
Such optimism is underscored by consensus earnings and sales estimates for the S&P 500, which anticipate a reacceleration rather than a slowdown (see Figure 3). We’re concerned about a potential disconnect between our macro outlook and these equity earnings estimates and valuations. It reinforces our caution on the asset class.
Managing risks to the macro baseline
We recognize risks to our outlook for slowing growth and inflation. Perhaps the resilient U.S. economy will stave off recession, but also drive overheating growth and accelerating inflation that prompts into much more restrictive monetary policy. There’s also potential for a hard landing, where growth and inflation fall quickly.
In light of these risk scenarios, we believe it’s prudent to include hedges and to build optionality – and managing volatility, especially in equities, is attractively inexpensive (see Figure 4). For example, one strategy we favor is a “reverse seagull” – a put spread financed by selling a call option.
Investment themes amid elevated uncertainty
Within multi-asset portfolios, we believe the case for fixed income is compelling, but we look across a wide range of investment opportunities. We are positioned for a range of macroeconomic and market outcomes, and we emphasize diversification, quality, and flexibility.
Duration: high quality opportunities
At today’s starting yields we would favor fixed income on a standalone basis; the comparison with equity valuations simply strengthens our view. Fixed income offers potential for attractive returns and can help cushion portfolios in a downturn. Given macro uncertainties, we actively manage and diversify our duration positions with an eye toward high quality and resilient yields.
Medium-term U.S. duration is particularly appealing. We also see attractive opportunities in Australia, Canada, the U.K., and Europe. The first two tend to be more rate-sensitive as a large portion of homeowners have a floating mortgage rate, while the latter two could be closer to recession than the U.S. given recent macro data. Central bank policies in these regions could diverge, and we will monitor the bond holdings on their balance sheets for potential impact on rates and related positions.
In emerging markets, we hold a duration overweight in countries with high credit quality, high real rates, and attractive valuations and return potential. Brazil and Mexico, where the disinflation process is further along and real rates are distinctly high, stand out to us.
By contrast, we are underweight duration in Japan, where monetary policy may tighten notably as inflation heats up.
While we recognize cash rates today are more attractive than they’ve been in a long time, we favor moving out along the maturity spectrum in an effort to lock in yields and anchor portfolios over the medium term. If history is a guide, duration has significant potential to outperform cash especially at this stage of the monetary policy cycle.
Equities: relative value is key
Although the S&P 500 appears expensive in aggregate, we see potential for differentiation and opportunities for thematic trades. From a macro perspective, there’s also the potential for economic resilience (such as a strong U.S. consumer) to support equity markets more than we currently forecast. Accordingly, we are neutral in equities within multi-asset portfolios. An active approach can help target potential winners.
In uncertain times, we prefer to invest in quality stocks. Historically, the quality factor has offered an attractive option for the late phase of a business cycle (see Figure 5). Within our overall neutral position, we are overweight U.S. equities (S&P 500), which present more quality characteristics than those in other regions, especially emerging markets. Also, European growth could be more challenged than in the U.S., so we are underweight the local equity market despite its more attractive valuation.
We also favor subsectors supported by fiscal measures that may benefit from long-cycle projects and strong secular tailwinds. The U.S. Inflation Reduction Act, for example, supports many clean energy sectors (hydrogen, solar, wind) with meaningful tax credits.
On the short side of an equity allocation, we focus on rate-sensitive industries, particularly consumer cyclical sectors such as homebuilders. Autos could also suffer from higher-for-longer interest rates; as supply normalizes, we think demand will struggle to keep up.
Credit and securitized assets
In the credit space we favor resilience, with an emphasis on relative value opportunities. We remain cautious on corporate credit, though an active focus on individual sectors can help mitigate risks in a downturn. We are underweight lower-quality, floating-rate corporate credit, such as bank loans and certain private assets, which remain the most susceptible to high rates and are already showing signs of strain.
In contrast to corporate credit, attractive spreads can be found in mortgages and securitized bonds. We have a high allocation to U.S. agency mortgage-backed securities (MBS), which are high quality, liquid, and trading at very attractive valuations – see Figure 6. We also see value in senior positions of certain securitized assets such as collateralized loan obligations (CLOs) and collateralized mortgage obligations (CMOs).
Key takeaway
Looking across asset classes, we believe bonds stand out for their strong prospects in the baseline macro outlook as well as for their resilience, diversification, and especially valuation. Given the risks to an expensive equity market, the case for an allocation to high quality fixed income is compelling.
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NJHowie, Thanks again. Sounds like you could be running your own muni bond fund :o) And you actually are, via your own personal portfolio.
Fwiw, the only individual bonds that I purchased were some corporates, and I went with AA and AAA rated. Some of these (MSFT, JNJ) now have higher ratings than the US govt, lol. But there's actually nothing funny about the US debt rating being downgraded, and this is one reason to worry about the future of bonds in general. The US will not default, since they can just keep on printing more, but at some point the money itself becomes worthless, ala the Weimar Republic. And even without a crisis, the purchasing power of the dollar will just continue to erode over time, so having everything in fixed income / bonds, while 'safe' in the short term, can be a big loser in the long run. So I figure 'moderation in all things' -- some bonds, some stocks, some gold/silver, some real estate, etc.
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emma.msrb.org is for municipal bonds the equivalent of what sec.gov is for stocks - most importantly a repository for all the filings.
msrb.org has online training topics available which are good for gaining an understanding of municipal bonds and the market.
https://www.msrb.org/Education-Center
Thanks NJ, that was a dandy fact-filled post. I've read it (twice), GFP too no doubt. But ihubbers only want to hear fairy tales about what's gong to make them rich, preferably before the week is out. IHUB is mostly for slobbering stock gambling addicts, not prudent investors.
Have bookmarked emma.msrb.org which I didn't know about.
Right - so general obligation bonds are usually best, because the municipality is pledging full faith and credit, meaning they will pay the bonds by whatever means necessary which they have at their disposal - pulling from any accounts they have, and including raising fees, general/sales taxes and property taxes. So, aside from the risk of bankruptcy, the general obligation bonds are going to be paid. Although nobody can predict the future, it is rare that bankruptcy will come in to play. And, in general you can get a good feel for the financial strength simply by reviewing the financial statements - income, balance, cash flow which they are required to have audited and report annually, and made available through emma.msrb.org. Weak municipalities are going to have a weak balance sheet and weak cash flow.
Revenue bonds can be higher quality or lower quality depending on what the security is backing them. Available in the offering statement, again, loaded at emma.msrb.org. If you've never reviewed an offering statement, just look up any municipal bond currently offered at your brokerage, jump over to emma.msrb.org, plug in the CUSIP, download and review the offering statement. In general, they all follow the same format. Which is nice, because after you've reviewed a few, you immediately know where to go in the document for the important information when doing your research.
As far as 6%-7% taxable munis - do you have an account with Fidelity? If so, copy/paste this in to your address bar and it will run a query I do daily:
https://tinyurl.com/2wpmbp5r
It uses min yield=5.7%. If you don't put some kind of bound on it, it will return over 3000 bonds, which is Fidelity's display limit.
Obviously the highest yielding are going to be lower quality. As I mentioned in prior comment, if you stick to A-rated or better, as shown in the Moody's report, the chances of default is well below 1%. So, in the list scroll down until you begin to start seeing A's. I have no problem taking BBB+, sometimes a BBB, and once or twice even a BBB-. To me, at the lower ratings, it boils down to if I believe Moody's/S&P are rating them correctly. Since I'm reviewing the financial documents, I'm gathering my own readings. If something is BBB-, but there is a backstop in case they run in to trouble, that is a benefit which the rating agencies may not be giving enough weight to. Or, maybe the finances have strengthened but they just haven't re-rated in a while?
Anyhow, water/sewer/electric revenue bonds are generally very strong - right up there close behind the GO bonds. They have very strong cashflow, as folks/businesses need/want their utilities. Additionally, if you read through a few of the offering statements, you'll see additional "covenants" that they are usually agreeing to - like their debt coverage will remain at/above some minimum, maybe something in the 1.1x to 1.25x range. They generally also stipulate that they will charge rates sufficient to maintain those debt coverage ratios. Most school district bonds are GO, so in general, they are also very safe. Those that are insured come with that extra level of safety, but at the same time should alert you that the issuer may be so strong - requiring them to get the insurance to allow them to issue the bonds at the original rate.
Chicago bonds are problematic. It's a very public issue how bad their finances are. Find the CUSIP for a Chicago bond, again go to emma.msrb.org and pull up the latest audited financial statements. You can see how terrible the balance sheet looks.
Now, the majority of folks will avoid Chicago bonds. But, there are always exceptions. Many smaller municipalities around Chicago get lumped together with it, some simply because they are in Illinois, but have strong financials. So, you'll see very weak pricing in the secondary market for the bonds - and this creates opportunity. However, it does take time to do the research, so if you don't want to get your hands dirty, it is easier to avoid it, and again, stick to A-rated or better.
I can go on and on if you like - just keep asking, I'm more than happy to share.
NJHowie, Thanks. Concerning your preference for taxable munis, since avoiding taxes isn't a primary concern, I assume you like these more than Treasuries because of the munis' higher yields? Just curious if you mainly get general obligation bonds, or do you include some revenue bonds also? And do you have a preference for particular US states or cities? Chicago is one that is often mentioned to avoid.
Thanks for any insights. I decided to mainly stick with Treasuries, since my Fed tax rate is fairly low, and Treasuries aren't taxed at the state level. I remember my dad had a fair number of munis, mostly GOs but some revenue bonds (water + sewer), and some school district bonds. Just curious where you are finding the 6-7% taxable munis you mentioned? Thanks.
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Again, happy that funds work for you. For me, they are not an option, except for the case where funds are the only option available - like DW's 401k. When I invest, I am the fund manager. I don't delegate that to anyone. Funds have different objectives than I do. (Bond) Funds will sacrifice quality in exchange for yield to boost their reported yields - I will not. I can go on and on. We're not going to come to agreement on this.
I'm quite familiar with every flavor of fund you want to discuss - mutual, index, ETF, closed-end, and so on. I will not trust my investments to a fund manager or the whims of an irrational market. I like certainty, just as everyone else does. I have the ability to create certainty, and so I do.
Hey there.
I have been redeeming my I-Bonds as they pass the 1 year mark and are resetting to the lower 3.38%. I did my first redemption on Oct 1 and will do another on Nov 1. I think I may leave $10k or $20k with Treasury Direct to be an emergency savings fund of sorts. My bank is one that only pays 0.01% on savings, so I don't want to keep it there. I don't have the restraint to simply leave the funds in a money market account at the brokerage - I've tried that, and it's just too close and easy to access and buy more things. Treasury Direct took care of my redemption very quickly, so I'm comfortable with my ability to access the funds should I need to in an emergency situation. At the same time, it's out of sight in that I don't see the cash sitting in my brokerage account daily, begging me to invest it.
All that being said, I have continued purchasing municipal bonds and CDs as the maturities, interest payments, and redemptions/calls take place. I have focused on longer maturities with the municipal bonds, 7, 10 years and more is certainly the case. I regularly scan the secondary market for CDs and it's almost like a game. I have gotten some incredible deals for 6 months to 5 years depending how lucky I get.
Most things I have maturing over the coming 14 months is in the 2% to 3% range so locking in 6% to 8% for up to 20 to 30 years is really something else - upping our future retirement income in real time. It is extremely easy to purchase high quality taxable municipal bonds right now in the 6% to 7% range with very little research. Yesterday I noted over 400 available. I pray that things stay like this over the next year to give me the opportunity to continue raising our future income/returns.
Bar, Thanks for the info on Bulletshares. They do look like an interesting alternative to individual bond ladders. Invesco points out that during the maturity year for the particular Bulletshare ETF, it may tend to have a reduced yield as the various bonds mature and the proceeds go into the $ market for varying periods of time. But these days the money market rate is at/near the bond's rate, so it currently wouldn't be an issue.
The diversification and simplicity of the Bulletshare would more than make up for any downside aspects, and it sure sounds simpler than the laddering approach using individual bonds. With a Treasury ladder there are no commissions, but with corporates, many discount brokerages still charge a commission (Vanguard charges $10 for a $10 K corporate or muni bond purchase). So Bulletshares avoid that problem. Seems like a great way to go, and having a maturity date removes the big disadvantage / unknown with regular bond funds and ETFs - ie what if rates go up and stay up for years (1970s), then you are locked in and unable to sell the fund without taking a loss.
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NJHowie, Just curious if you are holding on to your I-Shares? The rates went from 9.62% last year, to 6.48% in Jan, and now to 3.38% in July, so I decided to sell this month and pay the 3 month interest penalty. Those rates were too good to last, but at least inflation itself has come back down.
Also, I'm curious if you are extending the maturities on your new muni bond purchases? Analysts are recommending extending out to 7, 10 years or more, in order to capture the expected capital gains when rates finally start coming down. But I decided to only extend out from 2 year maturities to 3 years with my Treasury ladder, with the idea of holding until maturity. But are you favoring the longer term bonds? Thanks for any insights :o)
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YT has several videos on Bulletshares. Seeking Alpha had some good info on them too.
In the last year or two, I've mainly bought Invesco BulletShare ETFs which have just been around for several years. Those are taxable bond ETFs available in almost any maturity out to 2033. Recently they yielded (YTM) about 6.2% in maturities of a few years out. For instance BSCP matures in 2025. Each Bulletshare contains about 300-500 issues. Each is available in either Investment Grade, High Yield or Muni flavors. I've only bought the IG ones. They trade actively on the NASDAQ just like stocks. Clean and simple. At maturity, the proceeds are dumped into my brokerage account and the issue disappears from my account.
I've used them for several years and have yet to encounter any unexpected drawbacks. Expense ratios are around 0.10%
https://www.invesco.com/us/en/solutions/invesco-etfs/bulletshares-fixed-income-etfs.html
https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Advisor&productId=ETF-BSCP
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