I believe that where interest rates are today is closer to an anomaly rather than the norm. Over time, the US economy will likely have difficulty growing if we are going to be living in a 5% world. The mouthpiece clearly chooses his words carefully as to not to commit to his view. As much as I dislike both of the likely 2024 presidential candidates, if one of them gets back in office, he is clearly going to put pressure to lower interest rates immediately and by a lot. He wanted negative interest rates. The best he could pressure the Fed into was zero.
What I've been reading about the current attempt at de-dollarization is that it is failing and problems are arising.
I am locking in quality long-term municipal bonds above 5%, many even above 6%, 10 to 30+ years out. I have not seen yields like these ever since I began favoring municipal bonds. As long as those yields keep rising, I will keep buying.
I really do not believe the Fed has things under control. They will go too far and bring on a market crash of sorts, a recession, and have its hands forced to lower interest rates...unless incoming president forces it sooner. We've had an inverted yield curve for quite some time now. I am sure that there are some crash indicators out there in the red zone.
NJHowie, >> wonderful time for fixed income investors <<
Yes, but that could be changing as the US dollar increasingly runs into trouble globally due to de-dollarization. The new gold-linked BRICS currency will represent a major competitor to the US dollar in world trade and as central bank reserves. And with Saudi Arabia joining BRICS, that basically signals the end of the Petrodollar arrangement which has maintained global demand for dollars for many decades.
The ongoing global de-dollarization should accelerate, so getting stuck with too many longer term bonds is a growing risk. Fwiw, I decided to limit the bond allocation to 30%, supplemented by 20% in T-Bills. The 30% in bonds are laddered out only 3 years, instead of 5, 10 years or more.
I can see your point about the potential for large capital gains for long term bonds when % rates come down, but a return to ultra low rates seems unlikely for several reasons. With the dollar under growing pressure from the new gold backed BRICS currency, the Fed will increasingly need to keep % rates high to support the dollar. Fed policy will be boxed in, and have difficulty lowering % rates, much less returning to ZIRP / QE, even in the face of a faltering economy. And if a financial crisis comes along, as they periodically do, the Fed's hands will be severely restricted.
The Fed's 'unofficial mouthpiece' Nick Timiraos at the WSJ had a recent article -- "Why the Era of Historically Low Interest Rates Could Be Over".
Anyway, looks like hard assets will need to play an increasing role in asset allocation in the coming years. I figure it makes sense to be diversified among all asset classes, even in retirement.
"This climate offers an “almost generational” opportunity in fixed income, Akullian says. The potential for total return is greater now than it will be as the Fed starts to loosen. Rate cuts will boost bond prices and decrease yields, eating away at future total returns."
So the point is to buy duration. If you don't really need the money intermediate term, then don't buy it - go for the 20, 30, 50, 100 year bonds as these will see the greatest price appreciation when rates go lower. Nothing says you have to hold to maturity. There's nothing wrong with selling bonds when the appreciation is great and the forward yield is low. Profit is profit - sell and move into something better.
I've been like a kid in a candy shop the past couple months. As my maturities, redemptions, and interest payments roll in, I redeploy into new (municipal) bonds. Similar for new investment dollars.
As much as I hate mutual funds, DW's retirement plan basically requires it. We had been socking everything into their money market fund. This year, we began putting 10% into PTTRX. It's been great...though the price has continued lower, yield is now up at 5%. So, we've been accumulating more shares as it goes lower, pick up the great yield, and when rates do come down, it's going to go up about 25% to 30% to where it normally trades under more normal rates.
This is a wonderful time for fixed income investors. Stay the course. Don't get diverted to other things.
>>> Spread between 2- and 10-year Treasuries at deepest inversion since '81
By David Randall
July 3, 2023
July 3 (Reuters) - A widely watched section of the U.S. Treasury yield curve hit its deepest inversion on Monday since the high inflation era of Fed Chairman Paul Volcker, reflecting financial markets' concerns that an extended Federal Reserve rate hiking cycle will tip the United States into recession.
The closely-watched spread between the 2-year and 10-year U.S. Treasury note yields hit the widest since 1981 at -109.50 in early trade, a deeper inversion than in March during the U.S. regional banking crisis. The gap was last at -108.30 bp.
Signs of strength in the U.S. economy have prompted market participants to price in the possibility of additional rate hikes this year to keep inflation in check. Futures markets had reflected rate cuts at the central bank's September meeting as recently as May, and are now projecting that the first cuts will come in January. (lol)
"The absence of a meaningful round of dip buying is attributable to instability in the policy outlook; once investors are confident in Powell’s vision of terminal [rates], the prevailing bearish bias will be replaced by a more balanced tone," Ian Lyngen, head of U.S. rates strategy at BMO, said in a note Monday.
A yield curve inversion - in which shorter-dated Treasuries trade at higher yields than longer-dated securities - has been a reliable signal of upcoming recessions. The 2/10 year yield curve has inverted six to 24 months before each recession since 1955, according to a 2018 report by researchers at the San Francisco Fed, offering only one false signal in that time.
The spread between 2 and 10-year Treasuries has been inverted since last July.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 3.6 basis points at 4.913% in morning trading Monday. The yield on 10-year Treasury notes was up 1.2 basis points to 3.831%.
>>> Daily Spotlight: Global Demand for U.S. Debt
Bearish - Short term
We think the big move higher in longer-duration U.S. Treasury yields already has occurred for this cycle, and that yields are likely to drift modestly lower for the balance of 2023. In part, that's due to substantial foreign ownership of U.S. Treasuries. Total public debt owed by the U.S. federal government was $31.5 trillion at the end of 1Q23. Outside of U.S. investors, the two largest holders of U.S. public debt are Japan, which owns 3.5% of the debt, and China, which owns 2.7%. The other nations among the top 10 holders own 7.7% of the debt, so the top 10 holders collectively own 13.9%. The grand total of U.S. debt owned by foreign holders is $7.4 trillion, or about 23%. While the absolute holdings number is down about 3.0% over the past year, we suspect these holders are unlikely to dump much more of their holdings into the bond markets in the intermediate term.
Historically, Japan's holders have been long-term in nature, while their local sovereign-bond yields are almost zero and are not particularly enticing. China has little reason to sell a large portion of its holdings: the increase in supply would merely depress the price of the balance of its holdings and may even weaken the dollar -- setting off trade repercussions as the country works on recovering from its "zero COVID-19" policy.
Indeed, when some nations have lowered their U.S. Treasury holdings (such as Ireland, which sold off 18% of its stake over the past year), others have stepped in to buy (such as Canada, which increased its holdings by 17%.) We think this global demand for U.S. Treasuries should help keep a lid on long-term rates in 2023.
>>> A default wave is building, says Deutsche Bank. Here’s how bad it may get.
Deutsche Bank strategists Jim Reid and Steve Caprio just wrote the bank’s annual default study, now in its 25th year. Last year’s, correctly, called for the end of the ultra-low default era, though the current numbers are certainly not terrible. The U.S. high-yield bond default rate through April rose to 2.1% from 1.1%, and U.S. loan default rates rose to 3.1% from 1.4%. Over in Europe, speculative-grade default rates rose to 2.7% from 1.7%. According to Fitch, the average U.S. high-yield default rate is 3.6%.
But, the Deutsche Bank team say, “a default wave is imminent.” By the fourth quarter of 2024, they say the U.S. high-yield default rate will peak at 9%, and the U.S. loan default rate will reach 11.3%. The European speculative-default rate will rise too, though to a less steep 5.8%.
Why? “The tightest Fed and [European Central Bank] policy in 15 years is running into elevated corporate leverage built upon stretched profit margins. This is especially true in the leveraged loan market, where LBO leverage was juiced higher year after year (after year) by zero rates and central bank QE,” they say. LBO means leveraged buyouts, performed by the $5 trillion or so private-equity industry.
And don’t expect the Fed to run the rescue either, as the central bank continues to fight inflation. (Unmentioned by the analysts, but the debt-ceiling deal effectively kills any potential for U.S. fiscal support through the next election, barring an unusually nasty recession.)
Granted, Deutsche Bank is far from the only outfit calling for a recession. Isn’t a downturn, and ensuing defaults, built into prices? Maybe not. The Deutsche Bank strategists say investors might not be ready, given that high-yield bond index quality has improved this cycle, and global loan default rates have been tame for the past 15 years.
They quantify this by looking at the percentage of speculative-grade markets trading at distressed levels. Historically, distressed ratios lead default cycles by about 12 to 16 months. Regressing defaults by distressed ratios, they find the current U.S. high-yield market implying a 3.6% rate of defaults in the third quarter of next year, and European high-yield bonds projecting just over 2.2%.
Re-post - >>> If you were in bonds last year you may have felt like you went through the Great Depression. Actually it was much worse. The worst year for bonds in almost 100 years. The quadrant chart above from Black Rock shows that bonds seldom exhibit a negative return and as the previous Barron's article outlined, bonds should exhibit a nice return over the next several years. <<<
3-7 year bonds - >>> A Fed Pause Could Be an ‘Almost Generational’ Opportunity for Bond Investors
Bonds are having a moment. With the Federal Reserve expected to be at the end of its interest-rate hiking cycle, investors are reassessing the fixed-income market—and looking to high-quality bonds with intermediate maturities as the best bet for stable income.
Investment-grade corporate bonds are now yielding around 5%, up from about 2.8% two years ago. Such plump yields cushion bonds against the possibility of negative total returns if the pundits are wrong and the Fed keeps tightening.
In fact, bond pros think the total return potential for bonds this year exceeds that of stocks. For fixed-income investors, that would be a welcome change from last year, when U.S. bonds lost a dismal 13% on a total return basis.
“Now that we’ve gone through the dark tunnel, we’re seeing the end—and it’s sunny outside,” says Benoit Anne, lead strategist of the investment solutions group at MFS Investment Management. “The stars have aligned now for fixed income to do quite well in the period ahead.”
In June, the Fed is expected to pause—meaning hold rates steady, after raising them at each meeting since March of last year. The bond market may be pricing in 2023 rate cuts that might not materialize, says Kristy Akullian, senior iShares strategist at BlackRock. Instead, investors could see a more typical pause playbook, with the Fed holding rates steady at least through the end of the year.
Since 1990, the Fed paused an average of 10 months between the last rate hike and the first cut of each cycle, according to a BlackRock analysis. Every time, the bond market initially rallied, then experienced volatility as the cut approached.
This climate offers an “almost generational” opportunity in fixed income, Akullian says. The potential for total return is greater now than it will be as the Fed starts to loosen. Rate cuts will boost bond prices and decrease yields, eating away at future total returns.
The sweet spot on the yield curve is between about three and seven years, unlike last year, when the short end of the curve was more attractive, Akullian says. “It’s not a bad thing to own some duration right now,” says Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions. Shorter-maturity yields are best when inflation is hot and rates are rising rapidly.
Investors piling into three-month Treasury bills at around 5.2% should remember that’s an annualized yield, Janasiewicz says. To achieve it, you’d need to reinvest your T-bill at the same rate three more times as it matures. Given that rates may fall in the next year, he agrees with Akullian that three- to seven-year maturities are the strongest choice.
Exchange-traded funds like iShares Core U.S. Aggregate Bond AGG (ticker: AGG) offer exposure to high-quality U.S. bonds in the belly of the yield curve. The average yield to maturity is 4.33%. That fund includes Treasuries; for corporate-only exposure, the iShares iBoxx$ Investment Grade Corporate Bond ETF (LQD) now yields 5.03%.
With junk bonds offering rates of 8% or so, it might be tempting to venture into high-yield territory. But with a possible recession—and the resulting rise in defaults—they’re risky.
As bonds outperform, cash loses some of its luster. Historical data show that cash exposures return less on average than core bond and short-term bond exposures when the Fed stops tightening, BlackRock found. From 1990 to early 2023, core bond exposures performed 4% better than cash equivalents on average when the Fed held or dropped rates, while high-quality short-term bonds performed 1.9% better than cash.
“The overweight to cash was the big story of last year,” Anne says. “But everything comes to an end.”
>>> The Big I-Bond Letdown Comes With a Silver Lining
by Brian J. O'Connor
May 4, 2023
There's a Big Letdown Coming for Investors in I-Bonds – Sort of
The interest rate on Series I savings bonds bonds for the last six months has been an impressive 6.89%. But investors looking to jump into new issue bonds are in for a letdown. According to the Treasury, the rate for I bonds has reset to 4.3%.
The new annualized rate went into effect May 1 and includes a 0.9% fixed rate and a 1.69% six-month inflation rate. If you're interested in investing in I bonds or other fixed-income instruments, consider working with a financial advisor.
A Silver Lining to the Lower Interest Rate
Sure, I bonds are now paying less than they were in recent months. But, as always, things could be worse. The new rate is higher than previous estimates that were made based on known inflation data, which had pegged the rate below 4%. On the other hand, the rate paid on I bonds from May to November 2022 was a whopping 9.62%.
As of March, the annualized inflation rate was 5%, down from 6% in February and much lower than the March 2022 rate of 8.5%. The Federal Reserve's Open Market Committee has forecast inflation for 2023 to come in between 2.8% and 4.1%, with a median prediction of 3.3% for the year.
The I bond rate is made up of two components: a fixed rate set by the Treasury as well as an added inflation rate that's adjusted with each auction. Once set, the fixed rate is good for the life of the bond, while the inflation rate is adjusted in May and November. Interest is compounded twice per year.
Because of the lifetime fixed-rate component, buying and holding I bonds when inflation is high can be a profitable strategy once inflation drops. I bond holders who bought between May and November 2001 maintain a fixed rate of 3%, giving them an annualized rate of 6.43% for the next six months.
The highest rate being paid now on previously issued I bond is 7.04% for bonds purchased between May and November 2000. The lowest return is 3.38% being paid on several issues of bonds made when inflation and interest rates were low, with the fixed rate at 0%.
How to Buy I Bonds
Individual investors can buy up to $10,000 worth of I-bonds each calendar year, as well as an additional $5,000 in paper I-bonds using their tax refund, which they can then convert to their digital account.
I bonds can be purchased only from the TreasuryDirect.gov website. Buyers need to create an account, a process many investors have criticized as complicated and clunky. Besides your personal information, you'll need to enter your bank account and routing numbers, along with setting up a password and security questions. The bonds are issued electronically, and the minimum purchase amount is $25.
Investors can purchase up to another $5,000 in paper bonds using their federal income tax refunds, or $10,000 for a couple filing jointly. The purchase can be made only when you file your return, using IRS Form 8888, Allocation of Refund.
I bonds can be purchased for children by setting up a "minor account" linked from the purchaser's own TreasuryDirect account. The account is custodial and can be accessed only by the purchaser. I-bonds also can be purchased as a gift for anyone with a Social Security number, as long as the total of bonds purchased and credited to that Social Security number doesn't exceed $10,000 that year.
Interest income from the bonds is credited to the value of the bond, rather than being directly paid out to the bondholder. Interest is tax-free at the state and local level but is taxable on your federal income tax return. The tax can be paid when the bonds are redeemed or as the interest is credited during the life of the bond. Bonds sold to pay for qualified educational expenses can be redeemed tax-free.
The rate on new I bonds is lower than the previous issue but still higher than expected. The base rate is higher than before giving investors additional returns if they hold the bonds during periods of lower interest rates.
Concerning a new 'unofficial' Fed target for inflation of 3% (or 3-4%), Rickards has been saying that for years the Fed has been increasingly desperate to get inflation up even to its 2% target, but wasn't able to do it.
The reason the Fed always needs some inflation is that in a debt based monetary system like we have, you have to continually create new money to cover the cost of the ever increasing debt created. In this system, money is 'lent' into existence, at interest. Hence the need to continually expand the money supply to provide money to cover the debt service.
The other aspect to wanting higher inflation is with the debt level now having gone parabolic, the only way to keep things going is to 'inflate away the value of debt'. So the Fed needed higher inflation, but the problem is that once inflation gets out of the bag, it can zoom much higher than you (the Fed) want.
Rickards says that for years the Fed wanted a minimum of 2% inflation, but couldn't even get that. And they would have preferred 3%, which would further help to inflate away the value of the ever growing mountain of debt.
Anyway, it appears we have entered into the 'twilight' of the dollar system, due to the huge and parabolic debt levels. One would assume they have a plan to transition to another system, like SDRs, or a hybrid system, etc. China-Russia-BRICS are nipping at their heels, so desperation grows for the US/Western globalists. What is the plan? Inquiring minds want to know.
>>> For the Fed, '3% is the new 2%' when it comes to inflation
January 13, 2023
Inflation slowed for a sixth-straight month in December, data out Thursday showed.
This downtrend in price increases suggests that, at last, the Federal Reserve's inflation-fighting interest rate hikes seem to be working.
But this tool likely won't be enough to bring inflation down to levels consistent with the Fed's 2% target. At least not in the view of a growing number of investors.
At an event hosted by Wilmington Trust earlier this week at Electric Lemon — a swanky restaurant atop the Equinox Hotel in Hudson Yards, New York City — the firm's CIO Tony Roth opened evening discussions by arguing "3% is the new 2%," referring to the Fed's inflation target.
"As inflation comes down — and it’s going to come down, it's already coming down — it's going to get stuck," Roth said.
"And it's going to get stuck as a result of the real drop in labor participation and the impact that has on wages, it's going to get stuck because of the lack of unlimited cheap supply of manufacturing from China, and it's going to get stuck because energy prices are not going to back down to previous levels."
December’s Consumer Price Index (CPI) released Thursday showed inflation rose at an annual clip of 6.5% and decreased 0.1% over the prior month. Core CPI, which backs out food and energy, rose 5.7% over the prior year and 0.3% on a monthly basis — reflecting underlying stickiness in inflation.
The Fed currently targets inflation of 2% over the longer run as measured by the annual change in the price index for personal consumption expenditures.
But Wall Street increasingly sees this goal as unrealistic in a post-pandemic world. A world in which the labor force is still 3 million workers short of pre-COVID levels, companies are moving overseas manufacturing closer to home to curb supply chain disruptions, and energy prices remain persistently elevated.
"What will happen is, as we go through the year, this debate — 'Is 3 the new 2?' — is really going to be in the forefront," Roth said, adding that the Fed's choices of holding rates high or cutting rates will become even more consequential as headline inflation approaches the 4% level.
And in this view that "3% is the new 2%," Roth is not alone.
Hedge fund manager Bill Ackman is among other Wall Street voices who have questioned the credibility of the Fed’s 2% inflation target in recent months.
In December, Ackman tweeted the target was unattainable without a "deep, job-destroying recession." And during a call with investors the prior month, he said it was the firm's view the central bank would not reach that goal.
Rising wages globally, the transition to alternative energy, de-globalization, and a shift to domestic sourcing and production will all weigh on the Fed's ability to bring down inflation, in Ackman's view, in addition to production risks "that have made nearly every U.S. CEO rethink outsourced or distant supply chains."
"A lot more of that is going to come closer to home, and it is more expensive to do business here," he said.
Billionaire investor Leon Cooperman, chairman and founder of family office Omega Advisors, said in a televised interview with CNBC earlier this month that if the Fed attempts to hit 2% inflation rather than settling for 3% or 4%, the S&P 500 could fall to the low 3,000s.
And BlackRock chief executive Larry Fink shared a similar sentiment at the New York Times Dealbook Summit in New York City last month, cautioning investors will likely have to live with inflation around 3-4% and interest rates of 2-3% — leading to what he referred to as a period of "malaise" for the economy.
I-Bonds - >>> It Pays to Procrastinate: The New 6.89% I bonds Will Beat the Old 9.62% Bonds in Just 4 Years
Brian J. O'Connor
November 28, 2022
With a yield of 9.62%, the recently expired Series I bond was understandably popular. With interest rates rising, bond funds are down this year and banks continue to offer miserly rates on deposit accounts. So it's no wonder that a surging horde of investors crashed the Treasury.gov site at the end of last month, trying to beat the clock and lock in the highest rate the bonds have paid since they were introduced in 1998.
On the day of the Friday, Oct. 28 deadline to lock in the old rate, the Treasury sold $979 million of I bonds. In a bear market, this investment that offered robust yield and low risk got investors riled up.
But now it turns out that investors should have waited. Those who picked up new I bonds yielding 6.89% in the latest auction will find themselves making more money in a few years than those who rushed in to grab the old, higher rate. How is that possible? Take a deep dive into the intricacies of I Bonds below and consider matching with a financial advisor for free to see if I Bonds make sense in your portfolio.
How Can a 6.89% I Bond Rate Beat a 9.62% Rate?
The reason is that rates on I bonds are made up of two components: a guaranteed base rate and an adjustable inflation rate that changes with every new semi-annual auction. That eye-popping 9.62% rate was guaranteed only for the first six months that investors hold their bonds. After that, the rate will be heading down while the rate on the November 2022 bonds will be steadily staying up.
That's because bonds purchased between May 1, 2020, and Oct. 31, 2022, came with a base rate of 0%. The new bonds are being issued with a base rate of 0.40%. The new inflation rate of 6.49% means all those previous investors will get just that rate of return, while buyers of the new bonds will get a composite rate that includes the base, giving them 6.89%.
Even better for the new bond buyers is that the base rate is guaranteed for the life of the bonds, which don't mature for 30 years, giving those bondholders an added boost for as long as they hold on. Even if inflation drops to 0%, they'll still get a return of 0.40%.
Amid the higher base rate, the buyers who got I bonds at the 6.89% rate should be ahead of buyers who locked in the 9.62% after about four years. It's always important to ask an advisor about what makes sense for you in terms of growth and cash flow.
A Historical Glance at I Bonds
The first I bonds were issued in September 1998 with a base rate of 3.40%, which rose to 3.60% in May 2000, the highest ever. Since then, the guarantee has steadily declined, hitting 0% several times, including this latest, longest run from May 2020 until October. This means that anyone holding an I bond purchased between May 1, 2000, and Oct. 31, 2000, is enjoying a rate of 10.20% today, although that's quite a come-down from the last six months when they were getting 13.39%.
Still, last-minute I bond buyers don't have to feel too bad – they'll get the 9.62% rate until the end of April, because the bonds pay the composite rate at the time of their auction for six months, starting on the first day of the month they were purchased. The inflation rate is adjusted twice a year at each auction, which takes place on May 1 and November 1.
How Are I Bond Rates Calculated?
If you're wondering exactly how I bond rates are calculated, it's the sum of the fixed rate, plus twice the semi-annual inflation rate for the previous six months (in the latest auction, that's the change in the Consumer Price Index from March to September). That result gets added to the sum of the fixed rate multiplied by the inflation rate. The entire calculation looks like this: [Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)].
Extensive information on I bond rates and how they're calculated can be found here, while a historical chart of the entire history of each bond is published here.
In a truth that is quite counter-intuitive, investors who buy I Bonds at the new 6.89% rate may, after four years, come out ahead of investors who locked in the 9.62% rate that expired last month. Amid all the fanfare to try to catch that nearly 10% return, investors would have done well to exercise patience and factor in the base rate to the equation, which rose to 0.40% in this last offering.
It's possible to buy more than the $10,000 individual limit on I Bonds. Here's how. Senators are also currently fighting to allow you to buy even more in I Bonds.
>>> U.S. Treasury sweetens the pot on I-bonds by adding a fixed rate
Nov. 1, 2022
By Beth Pinsker
The new annualized rate will be 6.89%, down from 9.62%
The fixed rate at the time of purchase stays with the I-bond until you cash it in.
After record-breaking sales of I-bonds in October, the U.S. Treasury is dangling another good deal in front of savers for the next six months.
Starting Nov. 2, when I-bonds will be available again after site maintenance at TreasuryDirect.gov, the inflation-adjusted annualized rate will be 6.48%, down from 9.62%. But there will also be a 0.4% fixed rate, a bump from zero, where it has been since 2020. The combined rate will be annualized at 6.89%, available through April.
The fixed rate at the time of purchase will stay with the bond as long as you hold it — up to 30 years — but the inflation adjustment resets every six months in November and May.
You can buy up to $10,000 per individual each calendar year through TreasuryDirect.gov, plus an extra $5,000 in paper bonds if you designate them as a tax refund. You can gift I-bonds to others, and they can receive them if they have their own account and have not gone over their own limit for the year.
The major caveat is that you are locked into your purchase for one full calendar year. If you cash out between one and five years, you lose the last three months of interest.
The 9.62% rate for the last six months since May was a record high for I-bonds and it was matched with record buying by Americans starved for yield for their cash. As stocks and bonds both plummeted, and rates on banking products like high-yield savings and CDs crept up slowly, I-bonds beat them all for return.
The Treasury Department says it sold nearly $7 billion in I-bonds in October, with nearly $1 billion coming on the last day to qualify purchases at the top rate. That is more in one day than the sales in the three years from 2018 to 2020.
Do I-bonds beat TIPS?
The main question for savers looking for safety and yield is: Will I-bonds remain a good deal with the Federal Reserve likely to raise interest rates in both November and December? The Treasury offers another tempting inflation-adjusted investment in TIPS, which can be easier to purchase and have fewer restrictions.
“The new I-bond fixed rate of 0.40% is a nice increase, but TIPS currently have real yields in the 1.60% range. So TIPS currently have an edge,” says Ken Tumin, founder of DepositAccounts.com.
Savers might also look to Treasury bills and CDs, says Jeremy Keil, a financial planner based in Milwaukee.
“If you’re buying an I-bond today, you’re betting that inflation over the next six months is 4.5% or greater. That’s a much higher inflation rate than the bond market is predicting through the five-year break-even inflation rate,” he says.
If your alternative is banking products rather than Treasury investments, you would be getting a decent offer in comparison.
“The I-bond continues to be a better deal than what’s available from banks, even though you can’t do an exact apple-to-apple comparison. Currently, the highest online savings account yield is 3.50%, and the highest CD yield is 4.75% for a 20-month term,” says Tumin.
When you should buy in 2023
If you’ve already reached your limit on I-bonds for 2022, your next opportunity to buy for yourself would be in January.
Keil suggests that you might want to hold off until April to see how the rate landscape looks for the next inflation-adjusted rate change in May.
“It’s nice to know the full 12-month rate, and for two weeks at the end of April 2023 you’ll know that,” says Keil.
Even without record-breaking interest rates, there’s still a place for I-bonds as part of your long-term savings strategy. You just have to adjust your expectations. Most previous buyers before the frenzy were in it for the long haul.
“I-bonds are still a great part of your long-term emergency fund, but at this point there are other alternatives, especially Treasury bills, that are paying a higher interest rate over the next year,” say Keil.
>>> U.S. Fed lines up another big hike while mulling eventual downshift
Federal Reserve officials are preparing to roll out another super-sized interest-rate increase in early November.
by Jonnelle Marte
Oct 22, 2022
Federal Reserve officials are preparing to roll out another super-sized interest-rate increase in early November, when they will also likely debate tactics for completing the most aggressive tightening cycle in four decades.
Officials have been rapidly raising rates after being slow to tackle inflation that proved more persistent than expected. But with rates now approaching levels that could weigh on economic growth, policymakers are beginning to lay the groundwork for shifting to smaller moves that get them to the finish line without going too far, while leaving the door open to going further if inflation doesn’t abate.
“Front loading was a good thing,” Chicago Fed President Charles Evans told a community banking symposium hosted jointly by his bank Friday, reminding his audience that rates were down near zero in March. “But overshooting is costly too, and there is great uncertainty about how restrictive policy must actually become. So this is going to put a premium on the strategy of getting to a place and a level where policy can plan to rest and evaluate.”
Officials, who now enter their blackout period ahead of the Nov. 1-2 policy meeting, want to raise rates to a level that restricts growth and hold them there for some time while inflation comes down. After they hiked rates by 75 basis points at each of the last three Fed meetings, the central bank’s benchmark rate is now at a target range of 3% to 3.25%.
Policymakers see rates rising to a median of 4.6% next year, according to projections released last month. Investors bet that the Fed will hike by 75 basis points at their Nov. 1-2 meeting, move by either 50 or 75 basis points in December, and end the tightening cycle at a peak around 4.9% in early 2023.
US central bankers worry inflation will continue to spiral higher if they stop their rate hiking campaign too early. But if they raise rates too much, they risk pushing the economy into a painful recession.
San Francisco Fed President Mary Daly said Friday the central bank should start planning for a reduction in the size of rate increases, though it’s not yet time to “step down” from large hikes.
“It should at least be something we’re considering at this point, but the data haven’t been cooperating,” Daly said during a moderated discussion hosted by the University of California Berkeley. If officials raise rates by 75 basis points at the November meeting, “I would really recommend people don’t take that away as, it’s 75 forever,” she said.
What Bloomberg Economics says
“The Federal Reserve is primed for another 75-basis-point rate hike at the November meeting, even as chatter picked up late in the week about a possible downshift in the rate-hike pace after that.”
Downshifting to more incremental rate increases, such as a 50 basis-point increase in December, could give them room to keep hiking rates next year if inflation doesn’t start to decelerate as expected, said Derek Tang, an economist at LH Meyer in Washington. That reduces the risk that they bring rates higher than they would like, a helpful strategy since officials’ own forecasts show they are hesitant to cut rates next year.
But policymakers could face a communications challenge if investors misinterpret the downshift, stock markets rally and financial conditions ease, as they did after the Fed’s meeting in July, said Kathy Bostjancic, chief US economist at Oxford Economics. “That’s counterproductive for the Fed,” she said.
Even if officials slow to a 50 basis-point increase in December, their next summary of economic projections, to be released after that meeting, could be deployed to send a hawkish signal that they’re willing to take rates higher, said Matthew Luzzetti, chief US economist for Deutsche Bank Securities.
Still, the size of their move in December, and any shifts in their projections, will depend on what happens with the economy before then, he said. Officials will need to digest a slew of economic reports before they gather for their final policy meeting of the year, including two updates on consumer prices and two monthly jobs reports before their decision at the two-day meeting ending Dec. 14.
Some officials have said they want to see labor market demand come into better balance with supply and for there to be several monthly declines in US core consumer prices, which strip out food and energy. But the measure rose 6.6% in September from a year ago, the highest level since 1982, according to a Labor Department report published earlier this month.
“Until that evidence shows up in the data, I think it’s hard to have strong conviction that they’ve done enough in terms of the terminal rate,” said Luzzetti.
>>> Bond Market Sees No End to Worst Turbulence Since Credit Crash
October 22, 2022
(Bloomberg) -- For bond traders, the upward drift of Treasury yields hasn’t been that hard to predict. It’s the short-term swings that are vexing.
The world’s largest bond market is being whipsawed by its longest stretch of sustained volatility since the onset of the financial crisis in 2007, marking a stark break with the stability seen during the long era of historically low interest rates. And the uncertainty that’s driving it doesn’t appear set to fade anytime soon: inflation is still running at a four-decade high, the Federal Reserve is raising interest rates aggressively, and Wall Street is struggling to gauge how well a still-resilient economy will hold up.
The upshot is that money managers see no respite from the turbulence.
“Bond market volatility will stay elevated for the next six to 12 months,” said Anwiti Bahuguna, portfolio manager and head of multi-asset strategy at Columbia Threadneedle. She said the Fed could pause its rate hikes next year only to resume if the economy is stronger than expected.
The sustained volatility has driven some major buyers to the sidelines, draining cash from a market contending with the worst annual loss since at least the early 1970s. On Thursday, Bank of America Corp. analysts warned that Treasury-market liquidity -- or the ease with which bonds are traded -- has deteriorated to the worst since the Covid crash of March 2020, leaving it “fragile & vulnerable to shock.”
After retreating from June through early August, Treasury yields have surged back as a key measure of inflation jumped in September to the highest since 1982 and employment has remained strong. Those figures and comments from Fed officials have led the market to expect that the Fed will push its rate to a peak near 5% early next year, up from a range of 3-3.25% now.
The coming week’s main data releases are not expected to shift that outlook. The Commerce Department is expected to report that an inflation gauge, the personal consumption expenditure index, accelerated to an annual pace of 6.3% in September while the economy expanded by 2.1% during the third quarter, rebounding from the drop in the previous three months. Meanwhile, central bank officials will be in their self-imposed quiet period ahead of their November meeting.
The widespread expectation that the Fed will enact its fourth straight 0.75 percentage point on Nov. 2 has effectively pushed questions about where monetary policy is headed into next year. There’s still considerable debate about how high the Fed’s key rate will ultimately go and whether it will drive the economy into a recession, especially given the mounting risks of a global slowdown as central banks worldwide tighten in concert.
The uncertainty was underscored Friday, when two-year Treasury yields rose, only to tumble as much as 16 basis points after the Wall Street Journal reported that the Fed is likely to discuss plans to potentially slow the pace of its rate hikes after next month.
“If they pause after inflation is falling and the economy is slowing then market volatility will decline,” said Steve Bartolini, portfolio manager of fixed income at T. Rowe Price. “The day the Fed pauses should see volatility decline, but we are unlikely to go back to the low vol regime of the 2010s.”
While the high volatility can provide buying opportunities, any effort to call a bottom has been thwarted as yields drifted higher. Moreover, investors are also mindful that recessions and financial crises that have followed excessive monetary tightening in the past were associated with notable spikes in volatility.
That potentially spells more pain for leveraged financial investments that took off in a world of low inflation, rates and volatility, said BlackRock Inc.’s Bob Miller, head of Americas fundamental fixed income. But for other investors “there will be opportunities to take advantage of dislocations in markets and build fixed-income portfolios with attractive yields above 5%.”
Still, he expects the market to continue to be buffeted by price swings. “Implied volatility is clearly the most elevated since 1987 outside of the global financial crisis,” Miller said. “We are not going back to the prior decade experience,” he said, “any time soon.”
What to Watch
Oct. 24: Chicago Fed activity index; S&P Global manufacturing and services PMIs
Oct. 25: FHFA house price index; Conference Board consumer confidence; Richmond Fed manufacturing index
Oct. 26: MBA mortgage applications; trade balance; wholesale and retail inventories; new home sales
Oct. 27: GDP; durable goods orders; jobless claims; Kansas City Fed manufacturing index
Oct. 28: Employment cost index; personal income and spending; pending homes sales; U. of Mich Sentiment and inflation expectations
Fed Calendar: Communication blackout period until Nov. 1-2 meeting
Oct. 24: 13-, 26-week bills
Oct. 25: 2-year notes
Oct. 26: 5-year notes, 2-year floating-rate notes, 17-week bills
Oct. 27: 7-year notes, 4-, 8-week bills
>> stress over the gyrations <<
Yes, agreed. The emotional aspects of investing have always been my biggest challenge also. Buffett says the most important aspect of investing is one's temperament, rather than one's intellect. We need the ability to just stay invested and not be worrying and trading all the time.
My dad's approach was to buy quality and just hold it forever. After years trying various approaches, I finally came around to that same conclusion, and a sensible asset allocation model helps a lot.
I still have trouble staying long the stock market though, when it's clearly about to tank. I managed to get out of stocks within a day of the peak in March 2020, and again at the end of 2021 at/near the peak. I just couldn't sit and watch nice profits evaporate. But now with the market down a lot, the logical strategy seems to be a gradually cost averaging back in. But trying to consistently time the market is nearly impossible. Better to just buy/hold quality investments and let the asset allocation model handle the risk management side. Still a 'work in progress' though.
Thanks for your thoughts and insights. Sounds like you have a well thought out strategy :o)