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>>> A hot — or cold — jobs report Friday could be bad for stocks
Yahoo Finance
by Jared Blikre
Thu, October 5, 2023
https://finance.yahoo.com/news/a-hot--or-cold--jobs-report-friday-could-be-bad-for-stocks-100034433.html
Stocks rallied on Wednesday as US Treasury yields backed off recent highs — a brief respite from the blistering pace of higher rates that began with the third quarter.
Over the last three months, longer-term yields have been screaming higher while short-term rates have risen only modestly. In what's known as a bear steepener, the moves are making the highly inverted US Treasury yield curve a bit less inverted.
Some investors might cheer the movement toward a more normal bond market, where long-term yields are higher than short-term rates. But the breakneck pace of the rates rally combined with slowing economic growth is flashing a giant warning to bond market observers — with echoes of prior financial panics.
Alfonso Peccatiello, founder and CEO of The Macro Compass, recently joined Yahoo Finance Live to break down the market moves and add historical context.
"I think the bond market is now testing the hypothesis that the economy can handle higher interest rates," said Peccatiello, commenting on the market's resolve to test the Federal Reserve's "higher for longer" mantra.
He compared the present economic environment to that of the Global Financial Crisis and also late-2018, the last Fed hiking cycle that ended before the pandemic.
"When long-end rates go higher while nominal growth is [slowing] late in the cycle, it's a very dangerous cocktail for risk assets," he said.
Peccatiello explained that the recent bear steepener in the bond market is common at this late stage in the business cycle, when the Fed has hiked significantly and is beginning to lift its foot off the brakes.
The problem comes when the big move higher in rates occurs with slowing economic growth, which is the lagged effect of the Fed's rate hiking.
Peccatiello said these bear steepening cycles typically last six to 10 weeks and that the current episode is already in its 10th week.
"It generally takes a few months until risk assets really crack badly," he said.
Exactly how that plays out is highly contextual and difficult to pinpoint. But Peccatiello pointed to 2018 — when the credit markets froze — as one possibility, with the potential for outright disaster — á la Global Financial Crisis — at the far end of the spectrum.
Back in 2008 and 2018, the Fed rescued the markets by easing financial conditions. But today, the Fed's hands are largely tied, as inflation remains well above the Fed's 2% target.
For the time being, Peccatiello is warning investors to steer clear of risk assets like stocks until there is capitulation in the stock market, credit markets, or both.
"At some point, the pain is going to become acute," he says, adding that once capitulation occurs, investors can start wading into bond markets again. And when the Fed finally cuts rates, bonds should be the big winner.
Friday's monthly jobs report from the Bureau of Labor could be a catalyzing event after Wednesday's employment report from ADP materially missed expectations.
If the data comes in hot, Peccatiello said, investors would likely chase yields higher until they finally become a chokepoint in the markets. A 5% yield really "starts to become a real burden for risk assets," said Peccatiello.
On the other hand, if the headline payroll number comes in weak (much less negative), the weakening labor market could signal a recession is near, which would also send stocks and rates down.
Peccatiello acknowledged the irony of the situation, saying: "Too hot a number [or] too cold a number — it's bad for stocks."
A "just right" Goldilocks report merely kicks the can to the next potential catalyst.
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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".
https://www.wsj.com/news/author/nick-timiraos
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.
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"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
Reuters
By David Randall
July 3, 2023
https://www.reuters.com/markets/us/us-2yr10yr-yield-curve-hits-deepest-inversion-42-years-2023-07-03/
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%.
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>>> Daily Spotlight: Global Demand for U.S. Debt
Yahoo Finance
https://finance.yahoo.com/research/reports/ARGUS_36809_MarketOutlook_1687267806000?yptr=yahoo&ncid=yahooproperties_plusresear_nm5q6ze1cei
Market Outlook
Bearish - Short term
Summary
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.
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>>> A default wave is building, says Deutsche Bank. Here’s how bad it may get.
https://www.marketwatch.com/story/a-default-wave-is-building-says-deutsche-bank-heres-how-bad-it-may-get-efe4a4d5
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=172022482
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%.
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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. <<<
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=171938457
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3-7 year bonds - >>> A Fed Pause Could Be an ‘Almost Generational’ Opportunity for Bond Investors
Bloomberg
5-18-23
https://www.barrons.com/articles/bonds-buying-opportunity-fed-rate-pause-d07e3781
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=171938319
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.”
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>>> The Big I-Bond Letdown Comes With a Silver Lining
Smart Asset
by Brian J. O'Connor
May 4, 2023
https://finance.yahoo.com/news/big-bond-letdown-comes-silver-162444217.html
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.
Bottom Line
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.
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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.
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>>> For the Fed, '3% is the new 2%' when it comes to inflation
Yahoo Finance
Alexandra Semenova
January 13, 2023
https://finance.yahoo.com/news/for-the-fed-3-is-the-new-2-when-it-comes-to-inflation-morning-brief-102230536.html
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.
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I-Bonds - >>> It Pays to Procrastinate: The New 6.89% I bonds Will Beat the Old 9.62% Bonds in Just 4 Years
Smart Asset
Brian J. O'Connor
November 28, 2022
https://finance.yahoo.com/news/pays-procrastinate-6-89-bonds-175401666.html
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.
Bottom Line
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.
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>>> U.S. Treasury sweetens the pot on I-bonds by adding a fixed rate
MarketWatch
Nov. 1, 2022
By Beth Pinsker
https://www.marketwatch.com/story/u-s-treasury-sweetens-the-pot-on-i-bonds-by-adding-a-fixed-rate-11667322486?siteid=yhoof2
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.
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>>> 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.
Bloomberg News
by Jonnelle Marte
Oct 22, 2022
https://vancouversun.com/pmn/business-pmn/fed-lines-up-another-big-hike-while-mulling-eventual-downshift/wcm/9e7d0c81-5417-4778-973d-b4d1e8e1c0af
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.
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>>> Bond Market Sees No End to Worst Turbulence Since Credit Crash
Bloomberg
Michael MacKenzie
October 22, 2022
https://www.yahoo.com/now/bond-market-sees-no-end-200000276.html
(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
Economic calendar
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
Auction calendar:
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
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>> 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)
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I hear you on the growth front and am well aware. However, once we had "enough", the objective migrated to capital preservation. I am extremely comfortable with the muni-heavy portfolio - it is extremely strong and historical data backs the fact that muni defaults are very rare in investment grade issues ... we're talking a default rate on the order of 1 in 10,000 issues over the past 50 years. What's the likelihood that you could even try to pick one to default with those kind of odds? Of course, when there is a muni default, it grabs the headlines and folks will point to it as the example of why munis are doomed. I currently hold somewhere around 300 muni issues - researched every last one of them before purchase. There were only two over the past 10 years where I was concerned of a potential default, and then they both were called.
As far as solvency of munis - state and local municipalities are generally stronger today than they have been in years. A number of big states are running fairly large surpluses the past two years as revenues came in stronger than anticipated/budgeted. As for treasuries, I don't agree that there are risks - they are 100% safe in my view. If there is a default in the treasury market, then there are much, much larger problems and most everything will have collapsed at that time.
As for Buffett and stocks - different strokes for different folks. I'm very happy with the predictable cash flow of my portfolio and knowing that in my old age it will provide what we need to maintain our lifestyle. The other benefit of having most of it locked up in municipal bonds (and CDs/treasuries/I Bonds/etc) is that it keeps me out of trouble and from doing something stupid. If I don't have (access to) the cash, then I can't do something stupid. I also like sleeping stress free. I remember when I did have a more balanced portfolio, I would stress over the gyrations of the equity portion. Haven't experienced that in many years since bulking up on the fixed income.
Anyhow, I've rambled enough. Thanks for all the replies. Good discussion!
>> LTNC <<
Yes, I hear ya. Better to leave the penny stocks to the army of I-Hubbers out there who myopically focus on them. I followed small cap biotech and various penny stocks years ago, but almost every one eventually blew up, and some went into bankruptcy. Luckily I never invested much. Much better off in large caps, or just the S+P 500, as Buffett recommends.
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NJHowie, >> 99% fixed income <<
While a 99% bond allocation won't provide any growth potential for the portfolio, every investor's situation is different. Hopefully the 8% inflation situation won't last too long and the bond side will look better. I remember the late 1970s when the dollar lost 50% of its value in 5 years, and the purchasing power of money held in a bond portfolio was devastated. Also, Warren Buffett basically ignores bonds altogether in favor of the long term growth potential of stocks. So I figure a modest allocation to stocks makes sense.
Fwiw, I currently have ~40% in short term bonds (1-3 year), mostly Treasuries, and 20% in T-Bills. Only 5% in stocks (S+P 500), but am adding 1 share of SPY per day with the goal of restoring a 15% stock allocation by Mar/Apr, and then may get it back to 20-25%, or a max of 30-35%. Currently also have 10% in gold related, 3% silver, and the rest in cash.
With bonds, I also worry about the solvency of both corporates (leveraged loans, derivatives) and munis, so chose to stick with Treasuries, but even those have risks. It's a tough time to be an investor.
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LOL! I have not looked at LTNC in ages...and my only attraction to it was uncovering that it was a scam from the very start. It was a very wild board, corrupt CEO was posting/pumping/lying on the message board.
If they now have something real (4 or 5 corrupt CEOs later), good for them. However, if I were betting, chances are it's just another pump/scam to attract more naive investors.
Btw, Just curious what's up with Labor Smart (LTNC)? I don't follow many penny stocks, but could part of the attraction of LTNC might be their hydrogen water related acquisition? -
>>> Through this Joint Venture, Labor Smart, Inc., via its wholly owned subsidiary, Takeover Industries Inc., will secure a minority equity stake in Faith Springs LLC, and be granted the exclusive rights to market, sell and promote all hydrogen water products “Powered by H2forLife®’ technology via a two-year contract. H2ForLife® is the first and only ultra-concentrated hydrogen rich spring water, canned at the source and enhanced with proprietary technology, delivering the most powerful molecular and atomic hydrogen molecules that work at the cellular level to help rejuvenate the body’s cells while enhancing their functions. <<<
https://www.globenewswire.com/en/news-release/2021/03/17/2194866/0/en/Labor-SMART-Inc-s-Takeover-Industries-Signs-MOU-to-form-Joint-Venture-with-H2ForLife.html
Fwiw, I follow the water sector loosely, and also 'Food Innovation' (links below). Hydrogen infused drinking water is one of the newer trendy areas, so it might conceivably enable LTNC stock to emerge its 'triple zero' status, though probably a long shot.
https://investorshub.advfn.com/Water-Investment-Ideas-31293
https://investorshub.advfn.com/Food-Innovation-38028
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Thanks for the reply.
My portfolio is 99% fixed income and 1% play. The bulk of that 99% is municipal bonds and I most always hold to maturity unless called. Over the past 2 years, before rates went up, I would often sell the munis here and there when I was able to make ridiculous profit as folks bid them up. As you said - who would believe there would be such a turnaround and escalation in rates so quickly?
So, now as my maturities and redemptions come in, I just grab the best muni I can find to reinvest. It's most all IRA funds, so taxable munis of medium to long trerm work great for that - 6% to 7% is very easy to get right now. I also have some nice bank preferreds and a really good baby bond with 2026 maturity that has a yield to maturity of something ridiculous around 27%!
NJHowie, Yes, seems like the higher rates should make it a great time to increase short term bond exposure. A year ago who would have believed short term Treasuries would zoom from zero to the current 4.5% range?
But with rates still rising, I've been sticking with T-Bills and Treasury note maturities of 2-3 years max. And with inflation in the 8% range, all bonds are getting chewed up despite the relatively high 4.5% yield. Stocks are also getting cheaper, so they are competing with the bond side for investor money. Having some I-Bonds seem like a no-brainer, even with the rate likely to fall to 6-7% area.
But the bigger picture has me worried, with liquidity in the US Treasury market reportedly way down, and a severe lack of the usual international buyers. They are now talking about a potential Treasury market 'seize up' which will force the Fed to reverse course on QT. In Sept they doubled QT to $95 bil/mo, but liquidity in the Treasury market was already dwindling for some months. Not liking the looks of this -
>>> The Fed’s Next Crisis Is Brewing in US Treasuries <<<
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=170204009
>>> The next financial crisis may already be brewing — but not where investors might expect <<<
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=170207542
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Labor of love...
gfp927z, you are something else maintaining this with absolutely no participants - great job.
I really wish there were a good/active fixed income message board somewhere. If there is, I have not found it yet. If you know of one, please post it.
Now is an incredible time to be picking up nice yielding fixed income. Ironically, all I see are folks getting scared and tossing all their bonds when they should be buying more. They somehow justified buying when rates were hovering near zero, now that they can easily get 5%, 6%, and higher they are running away.
And then there's the I Bond - still another 10 days or so to lock in that 9.62% risk free interest for 6 months followed by 6 months at no less than 6.48%.
>>> Treasury I bond rates poised to slide in November
Yahoo Finance
by Kerry Hannon
October 16, 2022
https://finance.yahoo.com/news/treasury-i-bond-rates-slide-november-123200957.html
The Treasury Department’s popular inflation-protected I bonds won’t return as much when the rate adjusts on November 1, so buying them now is a better bet.
The rate will be at least 6.48%, according to estimates from Ken Tumin, a senior industry analyst at Lending Tree and founder of DepositAccounts.com, down from the current 9.62% the I bonds are offering until the end of October. The rate applies for the first six months you hold the bond.
That’s the second-best rate since November 2005 when the composite rate was 6.73% and the seventh-highest since the bond’s introduction in 1998, according to Treasury data. But if inflation cools quickly over the next six months, the bond won’t be worth as much.
“For November I bond purchases, we only can know the first six months I bond inflation rate. We won’t be able to estimate exactly the May I bond inflation rate until mid April 2023,” Tumin said. “It’s possible that the inflation rate could be much less. Then, the I bond will look much less appealing — like it has been before 2021.”
How the rate is calculated
The I bond composite rate is made up of a fixed rate and a semiannual inflation rate calculated from a formula based on the six-month change in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items.
Then, those two rates are plugged into the following formula to come up with the composite rate:
[Fixed Rate + (2 x Semiannual Inflation Rate) + (Fixed Rate x Semiannual Inflation Rate)]
If the fixed rate stays at zero — where it has been since May 2020 — and the annualized inflation rate is 6.48% (or 3.24% for the semiannual rate), then the I bond’s composite rate in November would be 6.48%, Tumin calculated. The fixed rate is announced every May and November by the Treasury Department.
The rate at purchase is in effect for the first six months you hold the bond, then the rate is recalculated based on its fixed rate and the new inflation rate for six months, and so on.
The high return on I bonds in the last year is squarely because of inflation, since the fixed rate has remained at zero.
That’s not always the case.
For instance, from November 1999 to November 2000, the composite rate on I bonds fluctuated between 6.49% and 7.49%, not because the inflation rate was high but because the fixed rate was much higher at 3.4% to 3.6%.
In November 2005, both the fixed rate and semiannual inflation rate were moderately higher (1% and 2.85%, respectively), which combined for a high composite rate of 6.73% on I bonds purchased then.
But since inflation has been propping up the I bond rate lately, when it cools as the Federal Reserve is aiming to do — so, too, goes the rate. But it never can go negative — you can’t lose your principal by design.
“I think the best argument for I bonds is that it does protect you from high inflation, and unlike marketable bonds (like TIPS), there’s no risk of principal loss if you sell before maturity,” Tumin said. “CDs and high yield savings accounts can’t say this.”
Time to buy is now
And there’s still time to pick up your I bonds with a 9.62% rate before the end of the month.
If you purchase one between now and the end of October, you’ll earn the current lofty composite interest rate of 9.62% for the first six months. And then the expected lower rate of 6.48% will kick in for the next six months. The combo will land you a respectable annual rate of more than 8%.
But even if you look at it as a one-year investment, it’s a good deal.
“You can determine the return for I bonds purchased in October and redeemed in October to December 2023 by taking into account the three-month early withdrawal penalty, when redeemed from one to five years after purchase, and that still comes out to close to 7%,” Tumin said, “which is way above today’s top one-year CD rate [of] 4.00% APY.”
You can buy I bonds with no fee from the Treasury’s website, TreasuryDirect. In general, you can only purchase up to $10,000 in I bonds each calendar year. But there are ways to bump up that amount, such as using your federal tax refund to directly buy an additional $5,000 in I bonds.
You should “complete the purchase of this bond in TreasuryDirect by October 28, 2022 to ensure issuance by October 31, 2022,” according to the site.
One niggle: I bonds must be held for a minimum of a year and, as Tumin noted, bonds redeemed before five years lose the last quarter’s interest.
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T-bills - >>> Follow Warren Buffett’s Lead. Park Your Cash in This Ultra-Safe Investment.
Barron's
By Andrew Bary
Aug. 16, 2022
https://www.barrons.com/articles/warren-buffett-t-bills-ultra-safe-investment-51660580408?siteid=yhoof2
Warren Buffett, chairman and CEO of Berkshire Hathaway, has $75 billion in Treasury bills.
Warren Buffett parks most of Berkshire Hathaway’s cash in ultra-safe U.S. Treasury bills, and individual investors may want to consider following Buffett’s lead now that they are yielding as much as 3%.
Treasury bills, which are U.S. government securities maturing in less than a year, are a good alternative to money market funds and bank certificates of deposits. Interest is exempt from state and local taxes, a contrast with bank CDs.
Investors can buy them directly from the Treasury through the TreasuryDirect program or through banks and brokers.
Buffett, the long-time Berkshire Hathaway BRK.A (ticker: BRK.A , BRK.B) CEO, prefers T-bills to such other short-term debt as commercial paper (a corporate IOU) because he never wants to worry about the safety of Berkshire’s cash trove, which totaled $105 billion on June 30. About $75 billion of that total is held in Treasury bills. Buffett regularly refers to the T-Bill holdings in his annual shareholder letter.
T-Bills are sold with maturities of three, six and 12 months as well as four and eight weeks. The three-month bill now yields 2.5%; the six-month bill, 3.05%; and the one-year bill, 3.2%, according to Bloomberg. Yields have risen from just above zero a year ago as the Federal Reserve has lifted short rates, with the key Federal fund rate now at 2.25% to 2.5%.
The three- and six-month bills are auctioned weekly by the Treasury and the one-year bills every four weeks.
Another way to get exposure to T-bills is through exchange-traded funds like the $20 billion iShares Short Treasury Bond ETF (SHV), now yielding 2.1%. It has an average maturity of about four months and holds U.S. Treasuries maturing in a year or less.
Those who want more yield—and a little rate risk—can buy the iShares 1-3 Treasury Bond ETF (SHY) now yielding close to 3% with an average maturity of about two years.
Money-market fund yields also have risen with short rates. The $250 billion Vanguard Federal Money Market Fund (VMFXX) now yields 2.1%.
T-Bills are sold at a discount from their face value of $1,000 with the discount representing the interest payable to holders. Investors get the face value of $1,000 at maturity. The minimum investment is $100.
T-Bills are liquid and can readily be sold through banks and brokerage firms. Many investors hold them until maturity.
While T-bill yields aren’t close to the inflation rate of 8.5% in the past year, they look good versus other short-term investments—and offer a tax benefit in the state and local exemption.
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>>> Series I bonds pay record 9.62% interest rate ?— here’s how to buy them
MSN.com
by James Royal
https://www.msn.com/en-us/money/personalfinance/series-i-bonds-pay-record-962percent-interest-rate-%e2%81%a0%e2%80%94-heres-how-to-buy-them/ar-AAWXe4h?li=BBnb7Kz
If you're looking for an investment with a high interest rate, inflation protection and the safety of government backing, then Series I bonds could be an attractive addition to your portfolio. The interest rate on these bonds increases as inflation rises, ensuring that your payout keeps pace with rising prices and that you don't lose purchasing power over time.
How to buy Series I bonds
This inflation protection on I bonds has caused a stir among savers in the last year, as inflation rocketed to the highest level in some 40 years, hitting 8.6 percent in May 2022. Savers have been scrambling for any way to protect their money from the ravages of rising prices.
Here's how to buy Series I bonds, how these inflation-indexed investments work and what you need to watch out for. Plus, we'll reveal a little-known tip that lets you invest even more in these special bonds.
How to buy Series I bonds
1. Determine if you qualify
The U.S. Treasury doesn't let just anyone purchase I bonds, so you'll need to see if you qualify to buy them.
You'll need to be one of the following:
A U.S. citizen, even if you live abroad
A U.S. resident
A civilian employee of the U.S. government, regardless of where you live
In addition, trusts and estates can purchase I bonds in some cases, but corporations, partnerships and other organizations may not.
2. Set up a TreasuryDirect account
If you meet the qualifications, you can proceed with opening a TreasuryDirect account. This account allows you to purchase bonds (including Series EE bonds) as well as Treasury bills, Treasury notes, Treasury bonds and TIPS right from the government.
For individuals setting up a TreasuryDirect account, you'll need a taxpayer identification number (such as a Social Security number), a U.S. address of record, a checking or savings account, an email address and a web browser that supports 128-bit encryption.
You'll enter your information at the prompts and can establish the account in just a few minutes. You'll set up a password and three security questions to help protect your account.
Children under age 18 cannot set up a TreasuryDirect account directly, but a parent or other adult custodian may open an account for the minor that is linked to their own.
3. Place your order
After you've set up the account, TreasuryDirect will email your account number, which you can use to log in to your account. Once you're in the account, you can select "BuyDirect" and then choose Series I bonds and how much you'd like to purchase. Then select the bank account to use and the date you'd like to make the purchase. You can also set up a recurring purchase.
For electronic bonds over $25, you can buy in any increment down to the cent. That is, you could purchase a bond for $76.53, if you wanted.
Review your purchase and then submit your order. Once your order is complete, your TreasuryDirect account will hold your bonds and you can view them there at any time.
If you want to use your federal tax refund to buy paper I bonds, you should complete Form 8888 and submit it when you file your tax return. Paper bonds are sold in increments of $50, $100, $200, $500 and $1,000. After the IRS processes your return, your bonds will arrive in the mail.
What are Series I bonds and how do they work?
A Series I bond is a bond issued by the U.S. federal government that earns interest two ways: a fixed rate and a variable rate that is adjusted twice a year based on the inflation rate. As inflation rises or falls, that variable rate is changed to offset it, protecting the money's purchasing power.
The bond earns interest for 30 years or until you cash out of it - and it's backed by the U.S. government, historically one of the best credit risks in the world.
For the first six months that you own the I bond, you'll get the prevailing interest rate at that time. For example, any I bond issued between May and October 2022 earns interest at 9.62 percent annually. That means even if you purchase the bond in October, you'll still earn that rate for a full six months. Then your bond will adjust to whatever new rate is announced in October.
The bonds cannot be cashed for the first 12 months that they've been owned. If you cash in the bond before it's at least five years old, you'll pay a penalty of the last three months' worth of interest. However, special provisions may apply if you've been affected by a natural disaster.
Series I bonds do offer some tax advantages, too. Interest on the bonds is exempt from state and local taxes, though you'll still have to pay federal taxes on the gains. And using the interest to pay for higher education may help you avoid paying federal taxes on the interest income, too.
Unfortunately, Series I bonds can't be purchased in a tax-advantaged account such as an IRA.
How much can you invest in Series I bonds?
In any calendar year, an individual can acquire up to the following amounts of Series I bonds:
$10,000 in electronic I bonds from TreasuryDirect
$5,000 in paper I bonds with your federal income tax refund
That means an individual could purchase up to $15,000 in I bonds each year, assuming their tax refund is large enough to max out the paper I bond portion. Many savers aren't aware that their federal tax return gets them an extra helping of I bonds, so it may make sense to withhold more money from your paycheck if you're looking to take advantage of this bonus allotment.
Any bonds that you buy for yourself or that are purchased for you count toward the limit. (There's an exception to this rule in the case of a bond that has been transferred to you due to the death of the bond's original owner. In this case, the amount doesn't count against the limit.)
It's also important to note that these limits apply to recipients of I bonds. So an individual could buy any number of bonds as gifts for any TreasuryDirect account holder, including children. For gifts, the same annual limits apply to the recipient: $10,000 for electronic bonds and $5,000 for paper bonds purchased through federal tax returns.
Therefore, an individual might be able to purchase as much as $15,000 in I bonds in a year, while a family of four could acquire as much as $60,000 in I bonds in a single calendar year. However, the family would need a steep refund check to afford that potential $20,000 in paper bonds.
Bottom line
With Americans facing such high inflation, savers are looking for any way to protect themselves from rising prices. Series I bonds can help you do that, although savers are capped at annual limits. Plus, you get the safety of a government-backed asset and a high interest rate, at least for the near future.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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New ETFs targeting Treasuries by maturity -
>>> Newcomers Abound In Recent ETF Filings
ETF.com
Heather Bell
May 25, 2022
https://finance.yahoo.com/news/newcomers-abound-recent-etf-filings-180000858.html
While industry stalwarts have made some interesting filings of note, there’s been a lot of filings from brand-new entrants to the industry, like the filings outlined in yesterday’s roundup (part 1) from Strive Asset Management.
Genoa Asset Management, an Ohio-based fixed income manager, filed for 10 fixed income ETFs tracking specific maturities of U.S. Treasury securities:
Genoa Benchmark US Treasury 30 Year Bond ETF
Genoa Benchmark US Treasury 20 Year Bond ETF
Genoa Benchmark US Treasury 10 Year Note ETF
Genoa Benchmark US Treasury 7 Year Note ETF
Genoa Benchmark US Treasury 5 Year Note ETF
Genoa Benchmark US Treasury 2 Year Note ETF
Genoa Benchmark US Treasury 12 Month Bill ETF
Genoa Benchmark US Treasury 9 Month Bill ETF
Genoa Benchmark US Treasury 6 Month Bill ETF
Genoa Benchmark US Treasury 3 Month Bill ETF
The underlying indexes for the proposed funds could include just one or two U.S. Treasury securities at any given time, according to the prospectus. Each has an expense ratio of 0.15%, though tickers and listing exchanges were not included in the document. Notably, 0.15% is the upper end of the price range for existing domestic Treasury ETFs.
Other Newbie Filings
Neos Investment Management has filed for an actively managed strategy based on the S&P 500 Index. The NEOS S&P 500 High Income ETF (SPYI) will combine exposure to S&P 500 stocks with a call options strategy. The fund will look to achieve its high-income goals through the premiums associated with the options strategy and the dividends issued by the stock portfolio.
The Reverb ETF from Distribution Cognizant will generally hold the securities in the fund’s investable universe, which includes the 500 largest U.S.-listed stocks based on free-float market capitalization. The fund will use a market sentiment strategy based on the firm’s in-house Reverberate App. The app will be publicly available and will record users’ feedback on the stocks in the investable universe, with that feedback influencing the weights of the securities in the fund, according to its prospectus.
The EA Bridgeway Blue Chip ETF will be the resulting fund after the conversion of the Bridgeway Blue Chip Fund (BRLIX), a mutual fund with nearly $400 million in assets under management and a net expense ratio of 0.15%. The fund’s strategy targets blue chip stocks but has an ESG overlay that, among other criteria, includes a screen that removes tobacco companies from consideration. The prospectus notes that stocks are selected using a statistical approach, with a focus on maintaining industry diversification. The mutual fund includes such names as Apple Inc., United Parcel Service Inc. and Visa Inc.
Existing Issuers
Don’t count out the established issuers. Some of them have filed for very interesting products.
Advisor Shares has filed for the AdvisorShares MSOS 2x Daily ETF (MSOX), which will list on the NYSE Arca. The fund looks to provide twice the daily total return of the $715 million AdvisorShares Pure US Cannabis ETF (MSOS) via swap agreements. MSOS is an actively managed fund that provides exposure to the domestic cannabis and hemp industries.
Harbor Capital is looking to roll out the Harbor International Compounders ETF (OSEA), a fund that will target non-U.S. securities that are expected to experience long-term sustainable growth and compounded earnings, the prospectus says. The fund is subadvised by C WorldWide Asset Management, which specializes in sustainable investment strategies. The document notes that the portfolio is likely to include 25-30 securities.
Simplify has filed for another ETF to include in its “Volt” series, which features ETFs that pair a fairly concentrated high-conviction equity portfolio targeting a particular theme with an options strategy. The Simplify Volt Work from Anywhere Digital Nomad ETF (NOHQ) will do the same with “work from anywhere” companies and “work from anywhere” real estate. The former focuses on companies that look to support the remote work trend through their products and services, while the latter targets REITs and real estate companies likely to benefit from remote work trends.
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TBT - >>> 3 ETFs to Avoid for the Next 10 Months
Investor Place
Nicolas Chahine
May 17, 2022
https://finance.yahoo.com/news/3-etfs-avoid-next-10-161016104.html
Wall Street often overshoots, so investors should know these ETFs to avoid.
ProShares UltraShort 20+ Year Treasury (TBT): The Fed’s hawkish rhetoric is not permanent.
Energy Select Sector SPDR Fund (XLE): The theme is long in the tooth.
Financial Select Sector SPDR Fund (XLF): Could be collateral damage in the war on inflation.
Today’s picks of ETFs to avoid is likely going to upset a few readers. Just know that this is a price action thing, not an emotional list. The current state of the equity market is in shambles because of outside factors. The Federal Reserve’s hawkish rhetoric and the war in the Ukraine are the prime reasons for fear. Even Bitcoin is crashing.
However, the price action in all sectors is coming along proper chart technical paths. Nothing has yet gone rogue from that perspective. Eventually this too shall pass, and investors should be doing homework now. Part of it is finding potential pitfalls like in these ETFs to avoid. Those opinions may turn out to be nothing, but it doesn’t hurt to be overly cautious.
A basic premise I have is to seek the lowest hanging fruit. So if I can avoid easy potential mistakes, I hop to it. We have opportunities in so many great company stocks. Therefore I can easily resist the temptations of chasing current hot ETF themes. This is a mere cautionary note to not blindly buy into these popular talking points.
ETFs to Avoid: ProShares UltraShort 20+ Year Treasury (TBT)
Central banks had been in quantitative easing (QE) programs for years. They ratcheted those after the pandemic lockdowns. Now the Fed has deployed its counter measures with a harsh quantitative tightening (QT) stint. The news of it a few weeks ago launched a sharp rally in bond yields. The ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) was the beneficiary of that trend. Conversely, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) corrected hard on the news.
The chart technicals suggest that the TBT stock may have run its course. At least the easy part of the rally has already transpired. From here the upside should be much more difficult. The Fed hawkish rhetoric will soon go stale. These are turbulent tickers, so if it can’t rally then the drop is more likely the next direction. Chasing rallies too late is often the pitfall of most retail investors. This earns the TBT its spot on my list of ETFs to avoid for the next few months.
ETFs to Avoid - Energy Select Sector SPDR Fund (XLE)
When it comes to a hot topic, oil prices is a prime example from Main Street to Wall Street. The recent surge made it a problem for all Americans. I currently pay over $7 per gallon in California and it could rise further. But I bet that there is a limit where the politicians would have to step in. So far they’ve talked about fixing the problem, but they haven’t seriously intervened.
The price of oil has limits especially when supply can change at the drop of a hat. This is a rigged market — pun intended — so logic need not apply. The Energy Select Sector SPDR Fund (NYSEARCA:XLE) is my highest concern on this list of ETFs to avoid. Chevron (NYSE:CVX) and Exxon (NYSE:XOM) comprise 44% of the whole thing. I am always leery of an ETF that is so heavily dependent on just two stocks.
Chevron and Exxon are great companies and I’ve written about buying them on the cheap. But up at these levels the downside risks may easily outweigh the upside potential. I would avoid shorting them or the XLE, but it would be prudent to seek fallen angel stocks instead.
ETFs to Avoid: Financial Select Sector SPDR Fund (XLF)
Ever since the 2008 global financial disaster, bank stocks have turned their metrics around. Banks are now fortresses at least until we discover a new way to break the world. The companies in the Financial Select Sector SPDR Fund (NYSEARCA:XLF) all are on solid footing. My issue with the ETF that represents them is merely cautionary. I fear it could be collateral damage in the war on inflation.
The Fed spent years pumping banks with extra freebies to reflate the economy. Now they are intent on poisoning the heck out of it. This means that the banks could be squarely in its evil sights. For that, I place the XLF on my list of ETFs to avoid for at least 10 months.
Companies in it are great, starting with Berkshire Hathaway (NYSE:BRK.B) and JPMorgan (NYSE:JPM). Clearly these are pristine management teams that rarely are cause for concern. Even though enough steam has come out of the XLF, there is more technical weakness in the chart.
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>>> Fed to begin quantitative tightening: What that means for financial markets
MarketWatch
May 31, 2022
By Vivien Lou Chen
https://www.marketwatch.com/story/feds-quantitative-tightening-is-about-to-arrive-what-that-might-mean-for-markets-11654024143?siteid=yhoof2
So-called QT ‘may add to upward pressure on real yields’: Wells Fargo Investment Institute
The Federal Reserve’s almost $9 trillion asset portfolio is set to be reduced starting on Wednesday, in a process intended to supplement rate hikes and buttress the central bank’s fight against inflation.
While the precise impact of “quantitative tightening” in financial markets is still up for debate, analysts at the Wells Fargo Investment Institute and Capital Economics agree that it’s likely to produce another headwind for stocks. And that’s a dilemma for investors facing multiple risks to their portfolios at the moment, as government bonds sold off and stocks nursed losses on Tuesday.
In a nutshell, “quantitative tightening” is the opposite of “quantitative easing”: It’s basically a way to reduce the money supply floating around in the economy and, some say, helps to augment rate hikes in a predictable manner — though, by how much remains unclear. And it may turn out to be anything but as dull as “watching paint dry,” as Janet Yellen described it when she was Fed chair in 2017 — the last time when the central bank initiated a similar process.
QT’s main impact is in the financial markets: It’s seen as likely to drive up real or inflation-adjusted yields, which in turn makes stocks somewhat less attractive. And it should put upward pressure on Treasury term premia, or the compensation investors need for bearing interest-rate risks over the life of a bond.
What’s more, quantitative tightening comes at a time when investors are already in a pretty foul mood: Optimism about the short-term direction of the stock market is below 20% for the fourth time in seven weeks, according to the results of a sentiment survey released Thursday by the American Association of Individual Investors. Meanwhile, President Joe Biden met with Fed Chairman Jerome Powell Tuesday afternoon to address inflation, the topic at the forefront of many investors’ minds.
Read: Biden pledges adherence to central-bank independence as he meets with Fed chief Powell and Biden’s meeting on inflation with Fed’s Powell seen as ‘good for the president politically’
“I don’t think we know the impacts of QT just yet, especially since we haven’t done this slimming down of the balance sheet much in history,” said Dan Eye, chief investment officer of Pittsburgh-based Fort Pitt Capital Group. ”But it’s a safe bet to say that it pulls liquidity out of the market, and it’s reasonable to think that as liquidity is pulled out, it affects multiples in valuations to some degree.”
Starting on Wednesday, the Fed will begin reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities by a combined $47.5 billion per month for the first three months. After this, the total amount to be reduced goes up to $95 billion a month, with policy makers prepared to adjust their approach as the economy and financial markets evolve.
The reduction will occur as maturing securities roll off the Fed’s portfolio and proceeds are no longer reinvested. As of September, the rolloffs will be occurring at “a substantially faster and more aggressive” pace than the process which started in 2017, according to the Wells Fargo Investment Institute.
By the institute’s calculations, the Fed’s balance sheet could shrink by almost $1.5 trillion by the end of 2023, taking it down to around $7.5 trillion. And if QT continues as expected, “this $1.5 trillion reduction in the balance sheet could be equivalent to another 75 – 100 basis points of tightening,” at a time when the fed-funds rate is expected to be around 3.25% to 3.5%, the institute said in a note this month.
The target range of the fed-funds rate is currently between 0.75% and 1%.
“Quantitative tightening may add to upward pressure on real yields,” the institute said. “Along with other forms of tightening in financial conditions, this represents a further headwind for risk assets.”
Andrew Hunter, a senior U.S. economist at Capital Economics, said that “we expect the Fed to reduce its asset holdings by more than $3 trillion over the next couple of years, enough to bring the balance sheet back in line with its prepandemic level as a share of GDP.” Though that shouldn’t have a major impact on the economy, the Fed might stop QT prematurely if economic conditions “sour,” he said.
“The main impact will come indirectly via the effects on financial conditions, with QT putting upward pressure on Treasury term premiums which, alongside a further slowdown in economic growth, will add to the headwinds facing the stock market,” Hunter said in a note. The key uncertainty is how long the Fed’s rundown will last, he said.
On Tuesday, all three major U.S. stock indexes finished lower, with Dow industrials DJIA, -0.99% sliding 0.7%, the S&P 500 SPX, -1.09% down 0.6%, and the Nasdaq Composite COMP, -0.94% off by 0.4%. Meanwhile, Treasury yields TY00, -0.64% were higher as bonds sold off across the board.
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Link for I-Bonds -
A Treasury Direct account is set up and then payment for the bonds is transferred from there.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
These seem more attractive than TIPS bonds, which have a fluctuating principal amount.
Potential downsides of I-Bonds include the 10 K per person annual limit, and a lack of availability from brokerages. Also, the I-Bond has to be held for at least 12 months, and if the I-Bond is sold sooner than 5 years, you lose the last 3 month's interest.
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TIPS Bonds - >>> 3 Reasons to Maybe Avoid Treasury Inflation-Protected Securities (TIPS)
Investopedia
By SEAN ROSS
March 03, 2022
https://www.investopedia.com/articles/investing/102215/3-reasons-stay-away-tips.asp
Treasury inflation-protected securities (TIPS) are government-issued bonds that are indexed to inflation. Thus, when inflation rises, TIPS can generate greater returns compared to bonds that are not inflation-linked. As inflation rises, TIPS adjust in price to maintain their real value. This makes them popular with investors, particularly when the economy isn't performing well or when the specter of inflation rears its head. For many investors, TIPS seem like an obvious choice when there is above-average uncertainty about inflation and market returns.
Unfortunately, TIPS do not always live up to their billing, primarily because most people don't understand this investment as well as they should.
KEY TAKEAWAYS
Treasury inflation-protected securities (TIPS) are U.S. government bonds that are indexed to inflation.
As a result, many investors look to these securities when inflation heats up.
TIPS, however, frequently underperform traditional Treasuries, particularly when inflation is low.
TIPS rely on the CPI, which may understate inflation for potential TIPS investors because these investors tend to be older and less likely to switch to new goods.
TIPS are considerably more volatile than cash, especially during stock market crashes.
1. TIPS Often Underperform Traditional Treasuries
In many ways, TIPS are similar to other government securities sold by the U.S. Treasury. As with Treasury bonds, they are backed by the full faith and credit of the United States government and pay annual interest. The crucial difference is the face value of a TIPS bond is adjusted according to the official consumer price index (CPI). The higher the CPI, the higher the face value for the TIPS.12
On the surface, this seems like a great deal. After all, inflation eats away at nominal interest payments. With TIPS, an upward adjustment of face value also means that interest payments go up with inflation. TIPS are therefore perceived as safer, which lowers their expected returns because of the risk-return tradeoff. However, TIPS aren't the only securities that price in inflation. Standard Treasury bonds also have an implicit inflation adjustment. (?)
TIPS Performance
If the markets anticipate inflation to be 3% over time, then that expectation is priced into the bond market. Investors make decisions based in part on whether they think inflation will be higher or lower than what the price of a security reflects. That impacts the value of TIPS and standard Treasury bonds, but TIPS are less likely to win this exchange.
Given this scenario, TIPS will only perform better than Treasury bonds if the stated CPI is higher than what the market anticipates. Several prominent economic theories, including rational expectations and efficient markets, suggest that is unlikely.
On the other hand, TIPS have very real issues during periods of financial stress when traditional Treasury bonds shine. The problem is due to the way the government designed the deflation floor for TIPS. The Treasury guarantees that the principal for TIPS will not fall below the original value.
However, later upward adjustments for inflation can be taken back if deflation occurs. Therefore, newly issued TIPS offer much better protection from deflation than older TIPS with the same time to maturity. When deflation becomes an issue, as it did in 2008 and again in March 2020, TIPS ETFs, such as the iShares TIPS Bond ETF (TIP), declined significantly.
Exchange-traded funds (ETFs) are often the most practical way for individual investors to buy TIPS. These include the iShares TIPS Bond ETF (TIP); iShares 0-5 Year TIPS Bond ETF (STIP); Vanguard Short-Term Inflation-Protected Securities ETF (VTIP); and Invesco PureBeta 0-5 Yr US TIPS ETF (PBTP).
2. The CPI May Not Reflect Your True Inflation Rate
There are reasons to believe inflation might be higher than official statistics suggest for older and even middle-aged Americans. These are also the groups more likely to buy TIPS. The CPI originally measured a fixed basket of goods. However, consumers often switch to cheaper new goods, making inflation numbers based on a fixed basket of goods too high. The Bureau of Labor Statistics (BLS) revised the CPI to include these substitutions.
Many people tend to become more set in their ways as they grow older, which means they are less likely to switch to new goods. Some of this reluctance is simply logical, as they have less time to recoup investments in learning new ways to do things. It is precisely the retirees seeking to preserve income with TIPS who are least likely to make substitutions, so they end up with higher inflation.
Substitution seems like a subtle effect, but consider how profound it can be. Some retirees looking to TIPS for protection still use landline phones instead of VoIP or smartphones and cable TV rather than streaming video. These costs can add up. Most critically, retirees may continue to live in locations that have become less affordable.
3. TIPS Prices Are Volatile
Some have called TIPS the only risk-free investment because of their principal safety and inflation protection features. However, one of the major indicators of risk is price volatility, and TIPS often come up lacking in this department.
The wild price swings seen in TIPS ETFs during the 2008 and 2020 stock market crashes show they are not nearly as stable as cash in the short run. What is more, TIPS with substantial accumulated inflation factored into their prices could lose a significant amount if a deflationary depression occurred.
Can the Total Return on TIPS Be Negative?
TIPS work by paying a fixed rate but adjusting the face amount as inflation changes. If interest rates rise enough where a TIPS's price declines enough to offset the CPI inflation adjustment, total returns can, indeed, be negative.
What Is the Difference Between TIPS and I-Bonds?
Both TIPS and I-Bonds are government securities that are indexed to inflation. TIPS have several maturities and trade like ordinary Treasuries and can be bought and sold throughout the day. Series I-Bonds, however, are government savings bonds that mature in 30 years and can only be sold after one year. The amount of I-Bonds purchased by an individual in a given year is limited to $10,000, and a $25 minimum purchase.3
How Are TIPS Taxed?
Interest income on TIPS are taxed as ordinary income. Taxes on any capital gains or losses on the bond itself will be determined based on the holding period (longer than one year subject to long-term capital gains tax). TIPS may be exempt from state and local taxes.4
Where Can I Buy TIPS?
TIPS can be purchased online through an account made with the U.S. Treasury at its TreasuryDirect site. You can also buy mutual funds or ETFs that specialize in holding TIPS through your broker.
The Bottom Line
That is not to say that you should never invest in TIPS. Just be aware of their potential shortcomings. Understanding how TIPS work is the key to using them effectively in your portfolio.
Strategies to Help Maximize Income
A strategic approach to investing can help you maximize your retirement income while minimizing your investment taxes. With no commissions and no financial incentives, Vanguard Personal Advisor Services® can develop a goal-driven plan to help you do just that. You’ll also have access to personal service at a low cost. Learn more about how you can access personal financial advice and start the conversation.
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>>> Series I Treasury Bonds
https://en.wikipedia.org/wiki/United_States_Savings_Bonds#Series_I
Series I bonds were introduced in 1998[8] and have a variable yield based on inflation. The Treasury currently issues Series I bonds electronically in any denomination down to the penny, with a minimum purchase of $25. Paper bonds continue to be issued as well, but only as an option for receiving an individual's federal income tax refund using IRS Form 8888.[9] The paper bonds are currently issued in denominations of $50, $100, $200, $500, and $1,000, featuring portraits of Helen Keller, Martin Luther King Jr., Chief Joseph, George C. Marshall, and Albert Einstein, respectively. Three additional denominations were previously issued but discontinued: $75, $5,000, and $10,000 featuring Hector P. Garcia, Marian Anderson, and Spark Matsunaga.[10]
The interest rate for Series I bonds consists of two components. The first is a fixed rate which will remain constant over the life of the bond; the second component is a variable rate adjusted every six months from the time the bond is purchased based on the current inflation rate. The fixed rate is determined by the Treasury Department; the variable component is based on the non-seasonally adjusted Consumer Price Index for urban areas (CPI-U) for a six-month period ending one month prior to the rate adjustment. Specifically the variable rate is calculated by looking at the percent change over the previous 6-months of available data, and multiplying the percent change by two. New rates are published on May 1 and November 1 of every year.[11][6] For example, on November 1, 2021 the most recent CPI-U data that was available was from September 2021, where the non-seasonally adjusted CPI-U was 274.310. Six months earlier, in March 2021 the CPI-U was 264.877. Thus, the percent change was 3.56%. Multiplying this by 2 yields the variable component of 7.12%. A history of rates is available on the Treasury Direct website: .
As an example, if someone purchases a bond in February, the fixed portion of the rate will remain the same throughout the life of the bond, but the inflation-indexed component will be based on the rate published the previous November. In August, six months after the purchase month, the inflation component will change to the rate that was published in May. During times of deflation, the negative inflation-indexed portion can drop the combined rate below the fixed portion, but the combined rate cannot go below 0% and the bond can not lose value.[11] Like Series EE bonds, interest accrues monthly and is compounded to the principal semiannually. Also like Series EE bonds, Series I bonds have a life of 30 years, and cease accruing interest after maturity.
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Inflation protected I-Bonds - >>> Here's what to know about Treasury I bonds
Yahoo Money
Kerry Hannon
May 26, 2022
https://finance.yahoo.com/news/treasury-i-bonds-204629422.html
Shaken by the double blow of high inflation and the sliding stock market, investors perked up when earlier this month the Treasury Department announced that the inflation-protected I bonds will earn a composite interest rate of 9.62% at least until the end of October.
Investing in Treasury inflation-protected U.S. savings bonds known as I bonds can be a smart strategy when the cost of living soars, particularly with banks paying rock-bottom rates on federally-insured checking, savings, certificates of deposit (CDs), and money market accounts.
But they can’t be a primary way to save or invest because of restrictions, experts say.
“Honestly, while they pay a high, positive rate, you can’t invest much money,” Lisa A.K. Kirchenbauer, a Certified Financial Planner and founder at Omega Wealth Management in Arlington, Va. told Yahoo Money. “I am fine with clients doing this, but it’s not a panacea.”
What are I bonds?
These bonds are government-backed and guaranteed to keep pace with inflation because their return is tied to the Consumer Price Index, and the interest is exempt from state and local taxes.
You can buy I bonds with no fee from the U.S. Treasury’s website, TreasuryDirect, in increments of $25 or more when you purchase electronically. Paper bonds are sold in five denominations; $50, $100, $200, $500, $1,000. They earn interest for 30 years or until they are cashed in, whichever comes first.
There are some restrictions. You must hold I bonds for at least 12 months before redeeming them. Moreover, if they’re cashed in before five years, the interest from the previous three months is lost.
In general, you can only purchase up to $10,000 in I bonds each calendar year. But there are ways to ramp up that amount, such as using your federal tax refund to directly buy an additional $5,000 in I bonds. A couple filing a joint tax return can buy up to $25,000 per year. Purchases that exceed the limit will be returned, but that refund could take up to 16 weeks, according to the Treasury Department.
Why do I bonds have such a good return?
The Treasury Department has a special sauce for the composite rate of return, though how the interest rate is calculated is somewhat confusing.
An I bond composite rate is a combo: a fixed rate set when the bond is issued, which stays the same for its 30-year life, and a variable rate, which is based on the six-month change of the Consumer Price Index and can reset twice a year, in May and November. The Treasury Department uses a formula to combine the two into a composite rate.
For example, if you buy an I bond on July 1, 2022, the 9.62% would be applied through December 31, 2022. Interest is compounded semi-annually. The rate also applies to older I bonds that are still earning interest.
That said, while the composite rate could drop to zero, and it has, it’s guaranteed not to fall below that — so you’ll be certain to get your initial investment back when you redeem the bond.
Not for retirement accounts
These returns are especially appealing given the alternative investment vehicles.
The national average interest rate for savings accounts is 0.06 percent, according to Bankrate’s most recent weekly survey of institutions. Money market account rates are averaging 0.08% and CDs return anywhere from 0.26% to just under a half-percent depending on the type and duration, according to Bankrate.
The stock market’s returns so far this year are even worse.
But I bonds go only so far as a solution. You can't buy I bonds within a traditional IRA, Roth IRA, or employer-sponsored savings plan, such as a 401(k) plan. You'll need to buy I bonds with savings outside of these programs.
“I bonds can help you protect your savings from loss of purchasing power,” Marguerita M. Cheng, a Certified Financial Planner and CEO at Blue Ocean Global Wealth, in Gaithersburg, Md., told Yahoo Money. “But you do want to make sure you have adequate cash reserves for any emergencies or opportunities that arise because there is that interest penalty if the bonds are redeemed in the first five years.”
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>> Bearish Bond Bets Vanish <<
>>> Short Sellers Line Up Against Stocks as Bearish Bond Bets Vanish
Bloomberg
by Katie Greifeld
May 19, 2022
https://finance.yahoo.com/news/short-sellers-line-against-stocks-172712124.html
(Bloomberg) -- High-profile warnings over a possible US recession has investors bracing for a slowdown.
Short interest in the $352 billion SPDR S&P 500 ETF Trust (ticker SPY) as a percentage of shares outstanding is above 7%, close to the highest since March 2020, IHS Markit Ltd. data show. Meanwhile, bets against the $19.5 billion iShares 20+ Year Treasury Bond exchange-traded fund (TLT) have shrunk to just 3.5%, the lowest since September 2020.
The dynamic highlights the building anxiety over the US economy as price pressures boil over. Federal Reserve chairman Jerome Powell said Tuesday that “growth has to move down” for inflation to cool, and as a result, there “could be some pain involved” in restoring price stability. While that environment would likely benefit long-dated Treasuries, equities would struggle, according to Peter Tchir of Academy Securities.
“We are starting to shift from ‘inflation’ fears to ‘recession’ fears, so I think that positioning is consistent with a ‘recession’ outlook,” said Tchir, the firm’s head of macro strategy. “I think ‘recession’ is premature, but it’s something I’m seeing more people talk about and put on trades to reflect.”
SPY has dropped 18% so far this year, with the S&P 500 close to bear-market territory. The hottest inflation readings in four decades has TLT lower by more than 20% in 2022, though a bid has returned to bonds over the past week amid the market turmoil.
More than $32 billion has been pulled from SPY alone this year, putting the world’s largest ETF on track for the worst year of outflows ever. On the other side of the trade, more than $49 billion has flooded into fixed-income funds even though roughly 96% of bond ETFs have posted year-to-date losses.
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>>> Biggest Treasury Buyer Outside U.S. Quietly Selling Billions
Bloomberg
by Michael MacKenzie and Chikako Mogi
May 2, 2022
https://finance.yahoo.com/news/biggest-treasury-buyer-outside-u-220000326.html
(Bloomberg) -- In times of Treasury turmoil, the biggest investor outside American soil has historically lent a helping hand. Not this time round.
Japanese institutional managers -- known for their legendary U.S. debt buying sprees in recent decades -- are now fueling the great bond selloff just as the Federal Reserve pares its $9 trillion balance sheet.
Estimates from BMO Capital Markets based on the most recent data show the largest overseas holder of Treasuries has offloaded almost $60 billion over the past three months. While that may be small change relative to the Japan’s $1.3 trillion stockpile, the divestment threatens to grow.
That’s because the monetary path between the U.S. and the Asian nation is diverging ever more, the yen is plumbing 20-year lows and market volatility stateside is breaking out. All that is ramping up currency-hedging costs and completely offsetting the appeal of higher nominal U.S. yields, especially among large life insurers.
Read more: New Waves of Treasury Selling to Push Yields Over 3%: MLIV Pulse
The upshot: Japanese accounts are contributing to the historic Treasury rout and may not return en masse until the benchmark 10-year yield trades firmly above 3%. In fact, near-zero-yielding bonds at home look ever-more appealing even as U.S. debt offers some of the highest rates in years.
“It’s a significant amount of selling and on par with what we saw in early 2017 from Japan,” said Ben Jeffery, BMO’s rates strategist.
While an aggressive Fed tightening cycle to combat inflation could result in multiple 50 basis-point hikes in the coming months, the Bank of Japan remains locked in endless stimulus. That’s weakening the yen and upending the economics of buying Treasuries even as the 10-year Japanese government bond remains capped around 0.25%.
While 10-year U.S. yields traded a whisker away from 3% in New York trading, buyers who pay to protect against fluctuations in the yen-dollar exchange rate see their effective yields dwindle to just 1.3%. That’s because hedging costs have ballooned to 1.66 percentage points, a level not seen since early 2020 when the global demand for dollars spiked in the pandemic rout.
A year ago the Treasury benchmark was offering a similar yield, when accounting for the cost of protecting against moves in the exchange rate thanks to a modest 32 basis-point hedging expense.
“Hedge costs are the issue for investing in U.S. Treasuries,” said Eiichiro Miura, general manager of the fixed-income department at Nissay Asset Management Corp.
Fed tightening cycles and the associated market volatility have tempered Japanese buying of Treasuries in the past. But in this cycle, the high level of uncertainty surrounding U.S. inflation and interest-rate policy may trigger an extended absence. At the same time, Japanese traders returning from the Golden Week holiday have other offshore options as euro-hedging costs remain near the one-year average.
“In the span of next six months or so, investing in Europe is better than the U.S. as hedge costs are likely to be low,” said Tatsuya Higuchi, executive chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. “Among the euro bonds, Spain, Italy or France look appealing given the spreads.”
Typically, Japanese buying has favored intermediate sectors of the Treasury curve from five- to 10-year notes, while life insurers and pension funds have focused on 30-year bonds. But hopes that the Treasury market would see long-end buying in the new financial year that began in April have been dashed as some big life insurers rethink their exposure to overseas debt, given currency volatility spurred in large part by the hawkish monetary shift at the U.S. central bank.
“The Fed is being super aggressive,” said John Madziyire, portfolio manager at Vanguard Group Inc. “Are you really going to buy when Treasuries will probably get to more attractive levels?”
One broad Treasury index is already sitting on a more than 8% loss so far this year. Much now rests on whether the 10-year can consolidate in a range of 2.80% to 3.10% this month once the upcoming Fed meeting is absorbed by the market along with quarterly debt sales from the U.S. Treasury. It briefly exceeded 3% Monday for the first time since 2018.
“Japanese investors will wait for some stabilization in long-dated yields before they sense a buying opportunity,” said George Goncalves, head of macro strategy at MUFG. “If the 10-year settles during May, that will help attract buyers and at those yield levels you are getting compensated now.”
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>>> Fed Traders Seek an Answer to the 75-Basis-Point Question
The Fed hasn’t hiked by that much in one meeting since 1994
All eyes will be on how Powell performs at press conference
Bloomberg
By Michael Mackenzie and Liz McCormick
May 3, 2022
https://www.bloomberg.com/news/articles/2022-05-03/fed-traders-are-seeking-an-answer-to-the-75-basis-point-question?srnd=premium
A lot is riding on how Federal Reserve Chairman Jerome Powell parries a question he’ll surely be asked after Wednesday’s monetary policy decision: is a 75-basis-point rate hike in the cards at some stage?
The U.S. central bank is expected to raise rates by 50 basis points at this meeting, something it hasn’t done since May 2000. And half-point moves are fully priced in by swaps traders for each of the following three meetings -- June, July and September -- the most aggressive trajectory in three decades. But there might still be room for even more hawkishness, depending on how Powell navigates his upcoming press conference.
Traders will be watching closely to see if the Fed boss green-lights -- or at the very least opts not to red-light -- the idea of a three-quarter point hike, something the central bank hasn’t implemented since the annus horribilis for Treasuries that was 1994. Either way, the shifts in the rates market -- which at one point last week had a 75-basis point move for June close to being a coin toss -- could be swift and merciless.
“Powell will fall back to ‘we are not on pre-set rate hikes’ or something along those lines -- ‘we go in with an open mind each meeting and will talk it over and we’ll see where we go from there,’” said Tony Farren, managing director at Mischler Financial Group. “The market would take that as hawkish. For his comments to seem dovish, he’d have to shut down the talk of 75 basis points. And while I don’t think he’ll endorse it, I don’t think he’ll shut it down.”
Increasingly hawkish rhetoric from Fed officials and signs that inflation may remain elevated for much of the year have already driven significant changes, with traders wagering that the fed funds rate will end this year more than 2.5 percentage points above its current level.
An ambivalent tone from the chairman on Wednesday could push Treasury yields up across the curve, Farren said.
Powell is likely to stick to his plan of being data dependent and non-committal about future rate increases, Mark Cabana, head of U.S. rates strategy at Bank of America told Bloomberg TV on Tuesday, calling the current market pricing for a 75 basis-point hike in June “notable odds.”
St. Louis Fed president James Bullard has already openly articulated a case for a potential 75 basis-point hike this year. Other senior Fed officials have said that a 50 basis-point hike is more appropriate alongside plans to allow the central bank’s balance sheet to start contracting by as much as $95 billion a month.
“I think a 75-basis-point hike is a bridge too far for this committee which is still made up by a bunch of doves,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “And the 50 basis points of hikes for four meetings in a row is hawkish enough, in the eyes of the market” as well.
So far this week, traders have trimmed the odds of a precipitous June hike, with swap contracts for June back at 109 basis points more than the current rate from a recent peak of 111 basis points. That suggests around a one-in-three chance a 75 basis-point hike next month following the 50-basis-point that is widely tipped to be implemented this Wednesday instead of just a half-point bump for June.
The market’s preemptive pricing of a possibly more aggressive rate cycle reflects how the Fed has been forced to up its hawkish mantra all year as inflation expectations have marched higher, particularly after the commodity-price surge sparked by Russia’s invasion of Ukraine.
“If anything can be said about Powell’s Fed during the last six months it is that there is a clear bias to surprise on the hawkish side,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
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>>> Could bonds rally with inflation high and the Fed raising rates? More market-timers are betting on it.
MarketWatch
April 22, 2022
By Mark Hulbert
https://www.marketwatch.com/story/could-bonds-rally-with-inflation-high-and-the-fed-raising-rates-more-market-timers-are-betting-on-it-11650614841?mod=article_inline
The bond market has absorbed an enormous amount of bad news. The tide may soon turn.
Bond market pessimism has become so extreme that a rally is a distinct possibility.
Pessimism about bonds has been at extreme levels for several months now and the market has stubbornly refused to rally. What’s different now is the willingness of a few (though a growing number of) brave advisers to buck the consensus. Rather than falling over themselves proclaiming how awful bonds’ prospects are, more and more bond advisers are beginning to tiptoe in the direction of being less bearish — if not outright bullish.
In focusing on the potential power of this emerging narrative, I have in mind research from Yale University finance professor (and Nobel laureate) Robert Shiller. In his latest book, Narrative Economics, Shiller argues that the stories that we tell ourselves affect not only our individual behavior but our collective behavior as well. By paying attention to these narratives, we can improve our ability to forecast the markets.
The emerging bullish narrative about bonds has hardly gone viral — at least not yet. Most of the bond market headlines in the financial press still focus on how awful the year-to-date period has been for fixed-income investors. Nevertheless, in recent days I’ve noticed a distinct shift among the bond market advisers I monitor.
Their bullish arguments fall into four major categories:
Inflation: A growing number of advisers are now referring to “peak inflation.” Earlier this week, in fact, even Fed chairman Jerome Powell acknowledged that the Consumer Price Index’s trailing 12-month rate of change may have peaked with the U.S. Labor Department’s Apr. 12 report — at 8.5%. If inflation does decline, the Federal Reserve would feel less pressure to raise interest rates as aggressively as the market currently expects.
Economy: The odds of a recession have grown in recent weeks. One of many straws in the wind suggesting a recession is the inversion (or near-inversion) of the yield curve. Goldman Sachs now puts the odds of a recession at 35% within the next 24 months. If a recession were to occur, bonds almost certainly would rally.
Technical: When judged according to past rate-hike cycles, interest rates may have already risen enough, according to Joe Kalish, chief global macro strategist at Ned Davis Research. Since March 16, when the Fed began the current rate-tightening cycle, the 10-year Treasury yield TMUBMUSD10Y, 2.909% has risen 75 basis points, or 0.75%. That exceeds the median increase of 61 basis points during the entirety of previous Fed tightening cycles, according to Kalish’s calculations. Technical analysts Mary Anne and Pamela Aden reach the same conclusion through their analysis of interest rates’ long-term trends. They predict that “long-term interest rates are unlikely to rise much further and they’ll soon turn down.”
Sentiment: Though bond-market timers have been incredibly pessimistic for several months now, it’s important to acknowledge their pessimism since it means that when the bond market turns up, the rally will be resting on a solid sentiment foundation. The chart below plots the average recommended bond-market exposure level among a subset of several dozen bond market timers my firm monitors (as measured by the Hulbert Bond Newsletter Sentiment Index, or HBNSI). Notice that the HBNSI has been low for some time now. For a couple of months straight it has remained in, or close to, the bottom decile of the historical distribution—the range that in previous columns I have used to identify excessive bearishness.
The bottom line? The bond market has absorbed an enormous amount of bad news. The tide may soon turn.
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>>> Muni Bonds Are Down So Much That They’re Buys Again
Barron's
By Randall W. Forsyth
April 16, 2022
https://www.barrons.com/articles/buy-municipal-bonds-51650063058?siteid=yhoof2
A funny thing happened in the past week, as news emerged of inflation hitting a four-decade high. A few strategists started looking a bit more positively on bonds, or at least somewhat less negatively.
March consumer prices were 8.5% above their level a year earlier, while producer prices were up 11.2%. As bad as those numbers were, they essentially confirmed what we knew already and suggested that the pace of price rises might be close to a peak.
But while the major stock averages were down for the second straight week (and the third for the Dow industrials), the price slide in the bond market slowed. The yield on the benchmark 10-year Treasury (which moves inversely to its price) rose by 0.095 of a percentage point, to 2.808%, bringing the two-week increase to 0.434 of a point and the year-to-date rise to 1.312 points.
The sharp run-up in bond yields has changed the calculus between equities and fixed income.
Truist Advisory Services this past week downgraded its recommended stock exposure to neutral, its lowest level since 2010, owing to the drop in the equity risk premium (the extra return from stocks over bonds). The move reflected a downshift in global economic growth, stickier inflation trends, and ongoing geopolitical risks, as well as Federal Reserve policy tightening, which may mean that growth could suffer if inflation isn’t tamed, a research note said.
While such tactical shifts are important to institutional portfolios looking to dampen near-term risks, the absolute yields on government bonds remain relatively unenticing, even though the real yield on the 10-year Treasury inflation-protected security was approaching zero after having been below negative 1% in early March.
Much more attractive are long-maturity investment-grade municipal bonds, with tax-exempt yields hitting 4%, the highest since late 2016, according to John R. Mousseau, CEO and director of fixed income at Cumberland Advisors.
The muni market is going through one of its typical bouts of feast and now famine, he writes in a client note. Tax-free bond funds saw $4.8 billion exit in the week ended on April 6, the most since the financial market meltdown in March 2020, according to Investment Company Institute data reported by the Bond Buyer. Muni fund managers sell what they can to meet redemptions, overwhelming Wall Street dealers with supply, he adds.
The result is a buyer’s market, with those 4% tax-exempt yields equivalent to 6.35% on a taxable security, he writes. Indeed, 20-year double-A munis yield roughly the same as their fully taxable corporate counterparts in the low-4% range.
What Cumberland is trying to buy are bonds issued last year at 2% to 3%, which have suffered a “breathtaking backoff in prices,” Mousseau adds in an email.
Bonds originally offered around par now may be selling around 70 to 75 cents on the dollar with a yield to maturity of 4.15% to 4.25% for 30-year paper. That price plunge isn’t related to credit problems, just higher yields, he emphasizes. To be sure, there are tax complications with discount munis, but they still yield 0.15% to 0.20% more than new-issue par bonds, even after taxes.
If you’re looking to add bond ballast to a balanced taxable portfolio, munis might be your best bet.
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>>> Fed's Evans: half-point hikes likely, shouldn't go too far
Reuters
by Ann Saphir
April 11, 2022
https://finance.yahoo.com/news/feds-evans-half-point-hike-171219935.html
(Reuters) -Chicago Federal Reserve Bank President Charles Evans on Monday signaled he would not necessarily oppose getting interest rates up to a neutral setting of 2.25% to 2.5% by the end of the year, a pace that would require a couple of 50 basis-point rate hikes at upcoming Fed meetings.
"Fifty is obviously worthy of consideration; perhaps it's highly likely even if you want to get to neutral by December," Evans told the Detroit Economic Club.
But, he added, the Fed should not raise rates so fast that it doesn't have enough time to assess inflation pressures and adjust policy in response.
"I think the optionality of not going too far too quickly is important," he said. "I would focus the attention on where do we want to be at the end of the year."
The Fed raised rates last month for the first time in three years, and with inflation accelerating is expected to ramp up its pace of rate hikes with half-percentage-point increases for a couple meetings instead of the usual quarter-point increments.
Evans, long on the dovish end of the Fed policymaker spectrum, said he had thought the Fed should get interest rates up to a 2.25% to 2.5% range over the next year, but on Monday said he doesn't think that speeding that process up by three months will hurt the economy.
"I think there's good momentum for the economy" and vibrant labor markets will continue as rates rise toward neutral, he said. But once rates get there, he said, the Fed needs to be "mindful" of the outlook for the economy and the state of inflation.
A government report on Tuesday is expected to show consumer prices rose 8.4% last month, far above the Fed's 2% inflation goal. Fed policymakers like Evans say they expect pressures to recede this year as supply constraints ease and as higher borrowing costs squeeze demand.
By the end of this year, Evans said, the Fed will know a lot more.
"Is it going to be that some of these pricing pressures have crested, and they start coming down? Or are they going to stay high — or are they going to be higher?" Evans said. "And if it's because of supply concerns, real resource pressures, there's going to be a lot of gnashing-of-teeth angst over the inflation versus the concern for the economy. And I think finding the right balance is going to always be at a premium."
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>>> US recession indicator delivers fresh blow for Joe Biden
The Telegraph
by Tom Rees
March 28, 2022
https://finance.yahoo.com/news/us-recession-indicator-flashes-red-080846881.html
One of the market’s most closely watched harbingers of a US recession has flashed red for the first time in 16 years in a further blow for Joe Biden as his struggling presidency faces a stalling economy.
Signs that central banks will need to act aggressively to clamp down on inflation deepened the global bond rout on Monday morning, sending yields on short-dated government debt soaring.
Usually longer-term bonds have a higher yield than short-term bonds to compensate for investors keeping their money locked in for longer. However, part of the US Treasury yield has inverted, meaning that some short dated government debt has a higher yield than longer-dated sovereign bonds.
This inversion is a sign that investors think a recession in the world’s biggest economy could be close as it predicts that the central bank may need to cut interest rates in response to a downturn.
The five-year Treasury yield rose almost 10 basis points to 2.64pc while the 30-year yield was steady at 2.58pc. It was the first inversion of this part of the yield curve since 2006, shortly before the financial crisis.
The difference between two-year and 10-year Treasury yields, which has predicted every downturn in the last 50 years, is also closing in on inversion. This is the most closely watched recession indicator on markets and typically signals a downturn within the next 18 months.
The Democrats and Mr Biden could be facing difficult midterm elections later this year if the market indicator proves correct.
The sharp moves in the yields on short-term debt reflects investors’ rising expectations of the US Federal Reserve needing to aggressively tighten monetary policy to rein in inflation. The central bank has stoked expectations of a series of interest rate hikes to cool price pressures.
Deutsche Bank analyst Jim Reid said: “Given just how far the Fed is behind the curve it's fair to say that if the post global financial crisis cycle could be erased from people's memory banks, then I think markets might be pricing 300-400 basis points of hikes this year.
“However the fact that the last decade was so moribund from an activity and inflation point of view means that markets still refuse to believe the Fed can get very far.”
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>>> Fed Chair Powell hinted at a mega–rate hike. The markets are banking on more than one
Fortune
by Bernhard Warner
March 22, 2022
https://finance.yahoo.com/news/fed-chair-powell-hinted-mega-091919280.html
With inflation and growth concerns swirling over the markets, Jerome Powell dropped a tantalizing clue on Monday about how the Federal Reserve will approach its next rate-setting meeting in May.
To have spotted the sign, you’d have to be a top-notch Fed-jargon parser.
In a speech yesterday, Powell added a new adverb—“expeditiously”—to his vocabulary about just how aggressively the central bank could hike rates this year. He also signaled being open to a 50-basis–point rate hike, all but closing the door on a 13-year stretch of loose monetary policy and rock-bottom lending rates.
Wall Street pounced on the Powell speech, with a series of new bets that the Fed will be even more hawkish than previously thought.
“Our best guess is that the shift in wording from ‘steadily’ in January to ‘expeditiously’ today is a signal that a 50bp rate hike is coming,” Goldman Sachs chief economist Jan Hatzius wrote in an investor note. “We now forecast 50bp hikes at both the May and June meetings, followed by 25bp hikes at the four remaining meetings in the back half of 2022, and three quarterly hikes in 2023 Q1–Q3.”
Add that up, and the benchmark Federal funds interest rate could move above 3% in 18 months’ time—not great news for aspiring homebuyers or people who have variable-rate mortgages.
How high will rates go?
The Fed’s aggressive ramp-up in rates is looking like nothing we’ve seen in recent years, noted Jim Reid, Deutsche Bank global head of thematic research, a sign the central bank feels it’s behind the curve in keeping inflation—running at a 40-year-high—in check.
“It’s increasingly dawning on investors that this is going to be a very different hiking cycle from its predecessor back in 2015, and yesterday Fed funds futures moved to price in more than 200bps worth of hikes for 2022 for the first time (including the 25bps we saw last week),” Reid wrote on Tuesday.
Following the Powell speech, the yield on the 10-year Treasury note jumped 14 basis points on Monday, and equities sank in afternoon trading. U.S. futures are doing a bit better on Tuesday, with the S&P up 0.4% at 5 a.m. ET.
European bourses were in the green at the open as well, as most risk assets were rebounding. Crypto prices, for example, were gaining with Bitcoin up to $42,500, an increase of more than 3% in the past 24 hours.
Investors are taking heart that the closely watched spread between short- and long-term bonds—measured as the difference between the yield on a two-year Treasury note and that of a 10-year Treasury note—has been widening in recent weeks, a sign that Wall Street sees the chance of a recession is on the wane.
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>>> Bond king Jeffrey Gundlach: The yield curve may be sending a recessionary signal
MarketWatch
by Brian Sozzi
January 4, 2022
https://finance.yahoo.com/news/bond-king-jeffrey-gundlach-the-yield-curve-may-be-sending-a-recessionary-signal-160935243.html
Bond king Jeffrey Gundlach has a lot on his mind as it pertains to markets when Yahoo Finance sits down with the DoubleLine founder at length inside his California estate on the first trading day of 2022.
China isn't a great market to be investing in, contends Gundlach. Stock valuations as measured by the DoubleLine favorite the CAPE ratio appear too rich, says Gundlach.
But it's Gundlach's warning on the path of the U.S. economy — in part caused by looming interest rate hikes by the Federal Reserve — that perhaps warrants the most attention by investors large and small after a strong run-up in equity prices last year.
"We have the highest two-year yield of the past year. We have the highest three-year yield. We have basically a high on the five-year yield. And so what's happening is the yield curve is sending a bonafide recessionary signal. You have interest rates going up at the short end and going down at the long end," explains Gundlach ahead of his third annual 'Roundtable Prime' investing panel at DoubleLine's headquarters.
The basic mechanics of a flattening yield (which could then lead to an inverted curve) as a recession predictor goes a little something like this: markets start to worry the Fed will slowdown an overheated economy by increasing interest rates which in turn triggers an economic slowdown. That then leads to a period of renewed lower interest rates from the Fed as they attempt to stave off a recession.
To wit, a yield curve inversion has preceded every recession of the past 50 years.
Indeed this junction may be where markets are at present as the Fed seeks to turn into an inflation fighter inside of a global health pandemic by 1) winding down its quantitative easing (QE) campaign; and 2) signaling a path of higher interest rates in 2022 and beyond.
As Factset recently pointed out, the spread between the 10-year and two-year Treasury yield narrowed to 79 basis points at the end of 2021. In March of last year — or well before the Fed signaled it would move into a period of tighter policy — that spread tallied 160 basis points. Looked at another way, the yield curve is flattening ... starting the clock on a key recession indicator used by pros such as Gundlach.
Gundlach believes the bond market is suggesting an economic slowdown is in the cards this year. And as such, the yield curve is a must watch for investors right out of the gate.
Adds Gundlach, "I think the bond market is already showing enough of a recession indicator that by 2023 it's seems pretty likely. And I, like I said earlier, I don't think a lot of Fed officials, economists and investors appreciate the fact the economy keeps buckling at lower and lower interest rates. So I think the Fed only has to raise rates four times and you're going to start seeing really a plethora of recessionary signals. I think it's certainly a non-zero probability that you get a recession in the latter part of 2022. That's going to be dependent again on how aggressive the Fed is. One thing that we did notice in 2018 is the Fed stopped QE, they started quantitative tightening — letting the bonds roll off. And then they started raising interest rates and we got an instantaneous bear market."
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>>> 4 Basic Things to Know About Bonds
Investopedia
By ERIC FONTINELLE
Aug 26, 2021
https://www.investopedia.com/articles/bonds/08/bond-market-basics.asp
Want to strengthen your portfolio's risk-return profile? Adding bonds can create a more balanced portfolio by adding diversification and calming volatility. But the bond market may seem unfamiliar even to the most experienced investors. Many investors make only passing ventures into bonds because they are confused by the apparent complexity of the market and the terminology. In reality, bonds are very simple debt instruments. So how do you get into this part of the market? Get your start in bond investing by learning these basic bond market terms.
KEY TAKEAWAYS
Some of the characteristics of bonds include their maturity, their coupon rate, their tax status, and their callability.
Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk.
Most bonds come with ratings that describe their investment grade.
Bond yields measure their returns.
Bond Definition
Basic Bond Characteristics
A bond is simply a loan taken out by a company. Instead of going to a bank, the company gets the money from investors who buy its bonds. In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value. The company pays the interest at predetermined intervals (usually annually or semiannually) and returns the principal on the maturity date, ending the loan.
Bonds are a form of IOU between the lender and the borrower.
Unlike stocks, bonds can vary significantly based on the terms of its indenture, a legal document outlining the characteristics of the bond. Because each bond issue is different, it is important to understand the precise terms before investing. In particular, there are six important features to look for when considering a bond.
Maturity
This is the date when the principal or par amount of the bond is paid to investors and the company's bond obligation ends. Therefore, it defines the lifetime of the bond. A bond's maturity is one of the primary considerations an investor weighs against their investment goals and horizon. Maturity is often classified in three ways:
Short-term: Bonds that fall into this category tend to mature within one to three years
Medium-term: Maturity dates for these types of bonds are normally over ten years
Long-term: These bonds generally mature over longer periods of time
Secured/Unsecured
A bond can be secured or unsecured. A secured bond pledges specific assets to bondholders if the company cannot repay the obligation. This asset is also called collateral on the loan. So if the bond issuer defaults, the asset is then transferred to the investor. A mortgage-backed security (MBS) is one type of secured bond backed by titles to the homes of the borrowers.
Unsecured bonds, on the other hand, are not backed by any collateral. That means the interest and principal are only guaranteed by the issuing company. Also called debentures, these bonds return little of your investment if the company fails. As such, they are much riskier than secured bonds.
Liquidation Preference
When a firm goes bankrupt, it repays investors in a particular order as it liquidates. After a firm sells off all its assets, it begins to pay out its investors. Senior debt is debt that must be paid first, followed by junior (subordinated) debt. Stockholders get whatever is left.
Coupon
The coupon amount represents interest paid to bondholders, normally annually or semiannually. The coupon is also called the coupon rate or nominal yield. To calculate the coupon rate, divide the annual payments by the face value of the bond.
Tax Status
While the majority of corporate bonds are taxable investments, some government and municipal bonds are tax-exempt, so income and capital gains are not subject to taxation.1? Tax-exempt bonds normally have lower interest than equivalent taxable bonds. An investor must calculate the tax-equivalent yield to compare the return with that of taxable instruments.
Callability
Some bonds can be paid off by an issuer before maturity. If a bond has a call provision, it may be paid off at earlier dates, at the option of the company, usually at a slight premium to par. A company may choose to call its bonds if interest rates allow them to borrow at a better rate. Callable bonds also appeal to investors as they offer better coupon rates.
Risks of Bonds
Bonds are a great way to earn income because they tend to be relatively safe investments. But, just like any other investment, they do come with certain risks. Here are some of the most common risks with these investments.
Interest Rate Risk
Interest rates share an inverse relationship with bonds, so when rates rise, bonds tend to fall and vice versa. Interest rate risk comes when rates change significantly from what the investor expected. If interest rates decline significantly, the investor faces the possibility of prepayment. If interest rates rise, the investor will be stuck with an instrument yielding below market rates. The greater the time to maturity, the greater the interest rate risk an investor bears, because it is harder to predict market developments farther out into the future.
Credit/Default Risk
Credit or default risk is the risk that interest and principal payments due on the obligation will not be made as required. When an investor buys a bond, they expect that the issuer will make good on the interest and principal payments—just like any other creditor.
When an investor looks into corporate bonds, they should weigh out the possibility that the company may default on the debt. Safety usually means the company has greater operating income and cash flow compared to its debt. If the inverse is true and the debt outweighs available cash, the investor may want to stay away.
Prepayment Risk
Prepayment risk is the risk that a given bond issue will be paid off earlier than expected, normally through a call provision. This can be bad news for investors because the company only has an incentive to repay the obligation early when interest rates have declined substantially. Instead of continuing to hold a high-interest investment, investors are left to reinvest funds in a lower interest rate environment.
Bond Ratings
Most bonds come with a rating that outlines their quality of credit. That is, how strong the bond is and its ability to pay its principal and interest. Ratings are published and are used by investors and professionals to judge their worthiness.
Agencies
The most commonly cited bond rating agencies are Standard & Poor’s, Moody's Investors Service, and Fitch Ratings. They rate a company’s ability to repay its obligations. Ratings range from AAA to Aaa for high-grade issues very likely to be repaid to D for issues that are currently in default.2?
Bonds rated BBB to Baa or above are called investment grade. This means they are unlikely to default and tend to remain stable investments. Bonds rated BB to Ba or below are called junk bonds—default is more likely, and they are more speculative and subject to price volatility.
Firms will not have their bonds rated, in which case it is solely up to the investor to judge a firm’s repayment ability. Because the rating systems differ for each agency and change from time to time, research the rating definition for the bond issue you are considering.
Bond Yields
Bond yields are all measures of return. Yield to maturity is the measurement most often used, but it is important to understand several other yield measurements that are used in certain situations.
Yield to Maturity (YTM)
As noted above, yield to maturity (YTM) is the most commonly cited yield measurement. It measures what the return on a bond is if it is held to maturity and all coupons are reinvested at the YTM rate. Because it is unlikely that coupons will be reinvested at the same rate, an investor’s actual return will differ slightly. Calculating YTM by hand is a lengthy procedure, so it is best to use Excel’s RATE or YIELDMAT functions (starting with Excel 2007). A simple function is also available on a financial calculator.
Current Yield
The current yield can be used to compare the interest income provided by a bond to the dividend income provided by a stock. This is calculated by dividing the bond's annual coupon by the bond’s current price. Keep in mind, this yield incorporates only the income portion of the return, ignoring possible capital gains or losses. As such, this yield is most useful for investors concerned with current income only.
Nominal Yield
The nominal yield on a bond is simply the percentage of interest to be paid on the bond periodically. It is calculated by dividing the annual coupon payment by the par or face value of the bond. It is important to note that the nominal yield does not estimate return accurately unless the current bond price is the same as its par value. Therefore, nominal yield is used only for calculating other measures of return.
Yield to Call (YTC)
A callable bond always bears some probability of being called before the maturity date. Investors will realize a slightly higher yield if the called bonds are paid off at a premium. An investor in such a bond may wish to know what yield will be realized if the bond is called at a particular call date, to determine whether the prepayment risk is worthwhile. It is easiest to calculate the yield to call using Excel’s YIELD or IRR functions, or with a financial calculator.
Realized Yield
The realized yield of a bond should be calculated if an investor plans to hold a bond only for a certain period of time, rather than to maturity. In this case, the investor will sell the bond, and this projected future bond price must be estimated for the calculation. Because future prices are hard to predict, this yield measurement is only an estimation of return. This yield calculation is best performed using Excel’s YIELD or IRR functions, or by using a financial calculator.
The Bottom Line
Although the bond market appears complex, it is really driven by the same risk/return tradeoffs as the stock market. Once an investor masters these few basic terms and measurements to unmask the familiar market dynamics, they can become a competent bond investor. Once you’ve gotten a hang of the lingo, the rest is easy.
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>>> Former Fed official warns of ‘urgent’ threat of another financial crisis
Market Watch
Aug. 30, 2021
By Chris Matthews
https://www.marketwatch.com/story/former-fed-official-warns-of-urgent-threat-of-another-financial-crisis-11630346930?siteid=yhoof2
Don Kohn calls on Congress to pass financial stability mandates for regulators
Investors cheered Federal Reserve Chairman Jerome Powell’s Jackson Hole speech on Friday, with markets interpreting it to mean that the central bank would not too quickly wind down its support of the economy. But not every speaker at the annual gathering gave cause for optimism.
Don Kohn, the Fed’s former vice chair for financial supervision, used the opportunity instead to warn of imminent risks to the stability of the global financial system, and called on regulators and lawmakers to take swift action to address those concerns.
“Dealing with risks to the financial stability is urgent,” he said during a speech to the Federal Reserve Bank of Kansas City’s annual Jackson Hole Economic Policy Symposium. “The current situation is replete with…unusually large risks of the unexpected, which, if they come to pass, could result in the financial system amplifying shocks, putting the economy at risk.”
Kohn pointed to the minutes of the most recent Federal Reserve meeting, which indicated that members of the bank’s interest-rate setting committee saw there were “notable” vulnerabilities in the financial system as asset values have risen to historical highs and government and private debt have reached near-record levels relative to the size of the economy.
Despite these excesses, investors don’t appear concerned, as evidenced by low interest rates on a wide range of government and corporate debt “even though a disproportionate increase in private debt has been among lower-rated business borrowers,’ he said.
What’s more, Kohn said, the government appears to be in a poor position to respond to an economic downturn that could result from a bursting of an asset bubble or a debt crisis, given that the Federal Reserve is already engaged in aggressive monetary stimulus, while the federal government is maintaining a historically high budget deficit.
Kohn’s wariness about the state of the economy and financial markets is shared among many high-profile investors, with GMO co-founder Jeremy Grantham being one of the most high profile advocates of this point of view. In June, he argued the Fed should “act to deflate all asset prices as carefully as [it can], knowing that an earlier decline, however painful, would be smaller and less dangerous than waiting.”
Unlike such bubble-watchers as Grantham, however, Kohn is not laying the blame for high debt and asset prices at the feet of Fed policy. Rather, he is arguing that the central bank must prepare now for a potential bubble bursting through prudential regulation.
One strategy for insulating the U.S. economy from the bursting of an asset bubble would be to require major banks to fund themselves with less debt and more equity, in the form of retained earnings or money raised from stockholders.
The Fed’s so-called countercyclical capital buffer enables the regulator to modify how much debt banks are able to take on, decreasing the level in good times when banks can afford to do so.
“By raising capital requirements during boom times, that could put a break on runaway asset prices,” Jeremy Kress, a former attorney in the banking regulation and policy group at the Federal Reserve, and a professor at Michigan’s Ross School of Business, told MarketWatch in June. “The Federal Reserve, in contrast to other countries, has never turned on this discretionary buffer. Perhaps now might be a good time to activate it,” said Kress.
Kohn urged the Fed to increase the counter-cyclical capital buffer, something that Randal Quarles, the current Fed vice chairman for financial supervision, has resisted doing, telling an industry audience in June that raising the buffer would “needlessly reduce the ability of firms to provide credit to their customers.” The disagreement could soon become political, as President Joe Biden’s progressive allies have called on him to nominate either a Fed chair or vice chair that is more amenable to tougher rules on bank lending.
Kohn also took aim at two creations of the Dodd-Frank financial reform law instituted in the wake of the last financial crisis: the Financial Stability Oversight Council, which comprises the heads of all the major financial regulatory bodies, and the Office of Financial Research, which was equipped with subpoena power so regulators could demand information needed to maintain financial stability.
“I think most would agree that the performance of these two new entities has been spotty,” Kohn said, arguing that FSOC has proven unable to act quickly while the OFR has never used its subpoena power for fear of ruffling feathers in the industry. He argued that FSOC should be reorganized to give the treasury secretary more power to act unilaterally and that the OFR should be given a new, clear mandate to regularly gather information policymakers need.
Kohn also called on Congress to pass a new mandate for all federal financial regulators to make financial stability a priority.
“Right now, systemic risk is not something they are required to take into account as they carry out their missions,” he said. “They should be required to broaden their perspective to consider the systemic implications of their actions and of the activities and firms they oversee and be held accountable for doing this.”
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>>> Bonds Are Trash, Says Bond King Bill Gross. Stocks Could Be Next Too.
Barron's
By Pierre Briançon
Sept. 2, 2021
https://www.barrons.com/articles/bonds-stocks-trash-bill-gross-51630582073?siteid=yhoof2
Bond yields have “nowhere to go but up,” and the intermediate- to long-term bond funds that invest in them are “new contenders for the investment garbage can,” the former PIMCO head and founder Bill Gross wrote on his blog this week.
Gross calculates that 10-year Treasury yields rising to 2% in the next year from their current 1.3% would hand investors negative total returns of 2.5% to 3%.
Ballooning public debt burdens worldwide, and the probability that “the $120 billion-a-month Federal Reserve deluge will probably end sometime in mid-2022” mean that governments will find it hard to sell their bonds at the current low yields, he explains.
“Cash has been trash for a long time but there are now new contenders for the investment garbage can. Intermediate to long-term bond funds are in that trash receptacle for sure,” Gross writes.
The fund manager also wonders whether stocks will follow. “Earnings growth had better be double-digit-plus or else they could join the garbage truck,” he adds.
And that is not even counting the Afghanistan debacle or “the incessant push of global warming that few investors seem to care about,” he warns.
So what’s an investor to do? Little help there: “Only a Honus Wagner baseball card and of course Salvatore Garau’s NFT may be safe,” writes the man once known as “bond king,” in a reference to the early 20th century baseball player and the Italian artist who recently sold an “Invisible Sculpture” for $18,000.
But behind the lively tone of his missive, Gross is only stating what market investors are considering obvious: the certainty that the world central banks’ massive quantitative easing programs are coming to an end. As he notes himself, the main question isn’t so much whether but how quickly this will happen.
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>>> Corporate bond spreads hit new post 2008 low despite debt boom, inflation concerns
Market Watch
June 16, 2021
By Joy Wiltermuth
https://www.marketwatch.com/story/corporate-bond-spreads-hit-new-post-2008-low-despite-debt-boom-inflation-concerns-11623864594?mod=bonds
Spreads in the biggest part of the roughly $10.7 trillion U.S. corporate bond market hit a post-2008 financial crisis low on Wednesday.
The trend signals the willingness among investors to finance U.S. companies with investment-grade ratings, while getting paid less, despite the record borrowing spree initiated by big businesses in the years since the global financial crisis.
This week, spreads, or the level of compensation investors received on bonds relative to a risk-free benchmark, fell to a post-2008 low of 89 basis points above Treasurys on the ICE BofA US Corporate bond index.
High-yield, or “junk bonds” issued by riskier U.S. companies have trailed not far behind the lows, on a spread basis, over the same stretch.
“We know the economic backdrop is strong,” a team led by Erin Lyons, co-head of U.S. investment-grade research at CreditSights, wrote in a note Wednesday.
Investment-grade companies “are proving they can make it through COVID headwinds, and many are remaining conservative when it comes to their balance sheets,” Lyons’ team wrote, adding that with the global hunt for yield, “it seems investors will take some spread” over Treasurys, “even in light of rising inflation and potential revaluation of their bonds.”
Investors are eager to hear more from Federal Reserve officials Wednesday about the recent spike in U.S. inflation and how that may impact its easy-monetary policy stance as the economy recovers from the pandemic.
This chart shows the downward drift in U.S. investment-grade corporate bonds spreads since 2008, at least until the onset of the COVID pandemic in March 2020, which sparked global shutdowns designed to halt infections.
Sinking bond spreads
The smaller U.S. high-yield, or “junk bond,” segment of the corporate bond market this week also was not far behind its post-2008 record, nearing about 317 basis points above Treasurys, or just 1 basis point above its Oct. 3. 2018, reading, according to BofA Global data.
The forecast from BofA’s credit strategy team, led by Hans Mikkelsen, is for spreads in the high-yield segment to narrow further to 300 basis points above the risk-free rate, given the sector’s “higher exposure to the red-hot U.S. economy.”
The team’s forecast for investment-grade spreads was for a move higher to 125 basis points.
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>>> Bill Gross Surprises With Short Bets on Treasuries, GameStop
Bloomberg
By Erik Schatzker and Daniela Sirtori-Cortina
March 16, 2021
https://www.bloomberg.com/news/articles/2021-03-16/bill-gross-says-he-s-short-treasuries-expecting-3-4-inflation?srnd=premium
Legendary bond investor sees 3-4% inflation in coming months
After making $10 million on GameStop, he’s selling calls again
Onetime bond king Bill Gross has been busy in retirement, shorting Treasury bonds, playing chicken with day traders on Reddit and even making a bundle on energy prices.
The Pacific Investment Management Co. co-founder, who runs money for his charitable foundation, shared some of his trades in an interview Tuesday on Bloomberg Television. Gross said he bet against the 10-year Treasury through the futures market and remains short, anticipating a combination of rising commodity prices, a weaker dollar and stimulus-driven demand will spark inflation.
“Inflation, currently below 2%, is not going to be below 2% in the next few months,” Gross said. “I see a 3% to 4% number ahead of us.”
Treasuries are familiar territory for Gross, 76, who once managed the world’s biggest bond fund. The other wagers are more esoteric, though consistent with the kind of investing he did after leaving Pimco in 2014 following a feud with his partners.
Running the Janus Unconstrained Fund until retirement in 2019, Gross often sold volatility, seeking to make money on mispriced options. That’s what drew him to the January frenzy in GameStop Corp.
Bill Gross Says Another 'Operation Twist' May Be Ahead
Bill Gross, Pimco’s co-founder, says there’s a real possibility of a “taper tantrum” and adds that he’s short the 10-year Treasury future. He speaks with Bloomberg’s Erik Schatzker on “BloombergMarkets: The Close.”
He described selling call options on GameStop, initially at strike prices of $150 and $200, and losing $10 million as retail buying on Robinhood Markets helped drive the stock to almost $400. Gross refused to fold and said he managed to book a profit of about $10 million after exiting the trade when the shares finally tumbled.
Now he’s back in, selling call options at $250 and $300, meaning he could face losses if the stock, now trading close to $210, surpasses those levels.
“The volatility is super high,” he said. “I think this is a perfect opportunity for options sellers, not buyers.“
Gross said he entered his wager against the 10-year Treasury when the yield, now about 1.6%, was about 35 basis points lower. Like others who have grown increasingly bearish on bonds, he predicts pressure on prices to rise as the recently passed $1.9 trillion Covid-19 relief bill finds its way into an economy already primed to accelerate.
“There’s significant demand that is stored up, power that is stored up that can be unleashed if consumers want to go in that direction, and I think to a certain extent they will,” Gross said.
One market proxy for inflation, the 10-year breakeven inflation rate, climbed on Tuesday to the highest since January 2014. Gross noted that commodity prices have surged by almost 40% since bottoming last April.
The Federal Open Market Committee is all but certain to hold interest rates near zero at the conclusion of its two-day policy meeting on Wednesday. Federal Reserve Chairman Jay Powell, meanwhile, has promised to ignore spikes in inflation until the central bank determines that its revised targets for price stability and employment are met.
Gross isn’t sure he’ll have the necessary patience though. Not since the 1960s has the Fed let inflation run deliberately “hot.”
“Three to six to 12 months at 3% to 4% plus inflation will give him pause in terms of his current policy,” Gross said.
Throughout the pandemic, investors desperate for yield have been prospecting in unconventional places. For Gross, one such adventure was natural-gas pipelines. He said he bought some master limited partnership units last year, attracted by tax advantages and yields of 13% to 14%. Gross was also encouraged that Warren Buffett was making a similar bet.
Gas prices have since taken off, buoyed by the oil market and accelerated by the shortages last month during the winter storm that paralyzed Texas. One index of natural-gas MLPs has risen almost 28% this year.
“I caught the ride on energy,” Gross said. “That’s my main focus now.”
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