Bonds and Fixed Income

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>>> Fed's reverse repo facility plummets to lowest level in nearly three years

Reuters

Apr 15, 2024

By Michael S. Derby


https://finance.yahoo.com/news/feds-reverse-repo-facility-shrinks-174128320.html


NEW YORK (Reuters) - A key Federal Reserve facility that takes in cash from money market funds and others saw inflows drop sharply on Monday.

The U.S. central bank's reverse repo facility took in $327.1 billion, down $80.2 billion from Friday, marking the lowest level of inflows since the facility took in $293 billion on May 19, 2021.

The Fed's reverse repo facility exists to put a floor underneath short-term rates, taking in cash from eligible firms in loans collateralized with Treasuries held by the central bank. Inflows have been contracting for some time as the Fed withdraws liquidity from the financial system by allowing its holdings of bonds to shrink.

Monday is the deadline for most U.S. tax returns and a key settlement date for Treasury debt auctions, which can influence activity at the reverse repo facility. Scott Skyrm, executive vice president at money market trading firm Curvature Securities, says money is coming out of reverse repos to deal with financing the Treasury's debt issuance.

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>>> America’s bonds are getting harder to sell


The Wall Street Journal

by Eric Wallerstein

Apr 14, 2024


https://finance.yahoo.com/news/america-bonds-getting-harder-sell-093000703.html


A series of weak auctions for U.S. Treasurys are stoking investors’ concerns that markets will struggle to absorb an incoming rush of government debt.

A selloff sparked by a hotter-than-expected inflation report intensified this past week after lackluster demand for a $39 billion sale of 10-year Treasurys. Investors also showed tepid interest in auctions for three-year and 30-year Treasurys.

Behind their caution lies a growing conviction that inflation isn’t fully tamed and that the Federal Reserve will leave interest rates at multidecade highs for months, if not years, to come. The 10-year yield—the benchmark for borrowing rates on everything from mortgages to corporate loans—finished the week around 4.5%, near its highest levels since touching 5% in October.

At the same time, the government is poised to sell another $386 billion or so of bonds in May—an onslaught that Wall Street expects to continue no matter who wins November’s presidential election. While few fear a failed auction—an unlikely scenario that analysts said could potentially trigger prolonged turmoil—some worry that a glut of Treasurys will rattle other parts of the markets, raise the cost of government borrowing and hurt the economy.

“There’s been a big shift in the market narrative. The CPI [consumer-price index] report changed everybody’s view of where Fed policy is headed,” said James St. Aubin, chief investment officer at Sierra Mutual Funds.

The government funds its operations by selling the world’s safest bonds to investors and dealers at regular auctions. And issuance of Treasurys has exploded since the pandemic began. In the first three months of 2024, the U.S. sold $7.2 trillion of debt, the largest quarterly total on record. That surpasses the second quarter of 2020, when the government was financing a wave of Covid-19 stimulus. It also builds on a record $23 trillion of Treasurys issued last year, which raised $2.4 trillion of cash, after accounting for maturing bonds.

The size of the sales has expanded along with the market for U.S. debt. After poor demand at a series of auctions late last year jarred investors, the Treasury Department eased concerns by shifting to financing America’s deficit mostly with short-term debt. That helped, in part, because the Fed simultaneously signaled a pivot to easier monetary policy: Hopes that interest-rate cuts would come soon helped reassure investors about the Treasury’s strategy.

Now, those hopes are dwindling, and the Treasury is expected to announce its third-quarter borrowing plans at the end of April. The nonpartisan Congressional Budget Office forecasts that the deficit will increase from 5.6% of U.S. gross domestic product to 6.1% in the next decade. Debt held by the public is set to expand from $28 trillion to $48 trillion in that time, up from $13 trillion 10 years ago.

Wall Street doesn’t expect the Treasury to raise auction sizes of longer-term notes and bonds until next year. But the government must also contend with refinancing a chunk of its bonds. A record $8.9 trillion of Treasurys, roughly a third of outstanding U.S. debt, is set to mature just in 2024, according to Apollo Global Management’s chief economist, Torsten Slok.

Investors are also watching how revenues from tax season boost America’s coffers in the coming weeks.

“We’ve been losing liquidity as people and companies pull out money to pay taxes,” said Thomas Tzitzouris, head of fixed-income research at Strategas. “We’re in a bit of an air pocket that’s letting the bond market float more freely and yields rise.”

One line of support is likely to come from the Fed. Minutes from the Fed’s March meeting, released last week, showed that policymakers are looking to slow the pace of running down the central bank’s large holdings of bonds accumulated to prop up the economy. They would likely reduce the rate at which they let Treasurys mature to $30 billion a month, half of the current $60 billion pace.

Balance-sheet runoff, known as quantitative tightening, is meant to drain the banking system of reserves and increase the market’s share of the sovereign-debt pile. With the Fed paring back that program, and prepping to stop it sometime in the future, investors will have to absorb a smaller net share of Treasury securities. That could support bond prices and remove some upward pressure on yields.

Another factor supporting Treasuries: Global investors have a lot of savings and few viable options to place them. The eurozone and Japan both run current-account surpluses, meaning they take in more money from trade than they spend on imports. Treasurys provide them a safe place to stash their cash and pick up more than 4% of yield. They also offer an easy way to invest dollar-denominated income from trading with America.

The euro and yen are both sinking relative to the dollar, in part because the Bank of Japan is still holding rates low and investors expect the European Central Bank to slash them soon. That could increase demand for U.S. debt, with Treasury yields remaining elevated relative to global alternatives.

That leaves many investors hopeful that as long as inflation continues to trend toward the Fed’s 2% target, Treasury yields will remain under 5%. But some worry the influx of new Treasurys will exacerbate already-volatile markets, particularly if inflation stays sticky. After the CPI report and weak auction Wednesday, the 10-year yield posted its biggest one-day rise since 2022, jumping nearly 0.20 percentage point.

“If we continue to see hot inflation prints, it’s going to keep a lot of people on the sidelines,” said Sierra’s St. Aubin.

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>>> Why the Fed is wading into uncharted waters: Morning Brief


Yahoo Finance

by Jared Blikre

April 4, 2024


https://finance.yahoo.com/news/why-the-fed-is-wading-into-uncharted-waters-morning-brief-100027194.html


Wall Street is all but convinced the Federal Reserve will cut rates this year.

Most sell-side desks are penciling in one 25-basis-point cut in June, with another two to three similar cuts by year-end. Fed Chair Jerome Powell has telegraphed rate cuts are coming since his pivot late last year.

Even the bond market agrees, though that confidence is waning.

But recent hotter-than-expected data in the US is prompting questions of whether rate cuts are advisable for an economy that is finally coming off the inflation boil — and is even showing nascent signs of reacceleration in certain areas.

Tuesday's release of the March ISM Manufacturing PMI is a good example. It was stronger than analysts estimated and, more importantly, topped 50 for the first time since late 2022. This indicates the manufacturing sector is in an expansion phase once again (though additional data points are needed to confirm).

Meanwhile, the unemployment rate sits well below the historical average at 3.9%, GDP is humming at 3.4%, and progress to bring inflation to heel remains slow and "bumpy."

Powell's big headache right now is an economy that reaccelerates, requiring further rate hikes. This is the so-called no landing scenario.

An economy that ran too hot and stayed there was the fate of Paul Volcker, who led the Fed in the late 1970s and early 1980s. Volcker presided over a "double-dip" recession as he tamped down inflation that at one point spiked to 15% annually.

It would be supremely ironic if the same fate befell Powell, forcing another round of uncomfortable rate hikes — just as rate cuts are on the horizon.

Yahoo Finance crunched the numbers, and over the last 50 years, the Fed has presided over 22 rate-cutting cycles. Most were short-lived — especially during the period of high inflation in the US that persisted through the 1970s and 1980s.

But what's clear from the chart is that the Fed didn't change directions nearly as often as during those inflationary decades. And inflation is only one of many factors that have changed in the intervening decades.

Volcker was a bit of a maverick who famously targeted the money supply as opposed to interest rates or the size of the Fed's balance sheet. And it wasn't until his successor Alan Greenspan that we even got an official monetary policy statement after each Fed meeting that said what the Fed intends to do.

Clearly, the Fed is a different animal than it was decades ago — as is the US economy — as is the world writ large.

It's tempting to read the Wall Street reports that can handicap rate cut odds to three decimal places and tell you where the S&P 500 will land on the final trading day of the year.

But the safe bet is to remember that, at best, history only rhymes. And when it comes to the US economy, perhaps it's not "this time is different." Arguably, each time is different.

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>>> The Fed’s massive economic upgrade: Chart of the Week


Yahoo Finance

by Ethan Wolff-Mann

Mar 23, 2024


https://finance.yahoo.com/news/the-feds-massive-economic-upgrade-chart-of-the-week-123035274.html


Ahead of the Fed’s meeting this week, everyone was focused on dots.

But the most important number offered by Fed officials was the FOMC’s surprisingly bullish expectations for economic growth, revised upward, as our Chart of the Week shows.

In December, the market cheered after hopes for rate cuts were restored following pleasing inflation numbers. But economic growth projections for 2024 had fallen to 1.4% from September’s 1.5% projection for 2024 GDP growth.

Now, though disinflation may have stalled in comparison to December, the FOMC projects 2024 growth at 2.4%, almost double forecasts from just three months ago. And with an optimistic Fed holding its expectations for three cuts this year — the most important old number — this confirmation that the economy is expected to stay strong has helped push stocks to new highs.

There’s an old market saw that says lower rates are good for stocks. But so too are a strong job market and a healthy consumer, which are good for profits and, in turn, good for stock prices. Throw in a long-awaited boost in worker productivity and things look even better.

The Fed’s bullish growth projections, even with an expectation that 2025 growth moderates, are a certification from the central bank that the market is right.

While breathless AI energy has boosted the S&P 500, very real earnings buttress these high prices across the index. The job market remains healthy. The consumer is spending. And as a bonus, the Fed doesn’t see these trends as inflationary.

“If what we're getting is a lot of supply and a lot of demand … that supply is actually feeding the demand, because workers are getting paid and they're spending,” Fed Chair Jay Powell said during his press conference this week, likening the economic situation to last year when inflation fell as the economy grew. A strong economy — and strong stock market — are by no means incompatible with Powell’s mandate and mission.

The only fly in the ointment, then, is that money is expensive as long as rates are high, pushing companies towards efficiency (earnings!) rather than chasing growth and continuing the housing market’s frustrations.

So as reporters tried to coax out hints to the Fed’s plans during the press conference, Powell consistently channeled Patrick Swayze in “Roadhouse” in his responses. How will we know when the Fed will cut? “You won't. I'll let you know.”

By now, we all know what we’re waiting for: convincing inflation data, full stop.

And the fact that neither we nor Powell have seen it yet underscores the fact that obsessing over when the next cut will be may not be the best use of our time.

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>>> The great central bank policy reversal kicks off


Reuters

by Balazs Koranyi and Howard Schneider

March 22, 2024


https://finance.yahoo.com/news/analysis-great-central-bank-policy-061353930.html


FRANKFURT/WASHINGTON (Reuters) -The world's biggest central banks are on the starting line of reversing a record string of interest rate hikes but the way down for borrowing costs will look very different from the way up.

There will be no floodgates or fireworks. Instead, banks on opposite sides of the Atlantic are likely to move in the smallest increments with periodic pauses, fearing that ultra-low unemployment could rekindle inflation rates still above their targets.

The eventual bottom for interest rates is also set to be far higher than the historic lows of the last decade and mega-shifts in the structure of the global economy could put borrowing costs on a higher path for years to come.

Central banks started to jack up rates from late 2021 as post-pandemic supply constraints and surging energy prices on Russia's war in Ukraine sent inflation into double-digit territory across much of the world.

This seemingly synchronized response tamed prices and inflation will be just above or already at target - 2% for most big economies - this year.

"The bottom line is that across the OECD, central banks... are softening up again, or are about to do so," investment bank Macquarie said in a note to clients.

Indeed, the Swiss National Bank became the first major central bank (to) ease policy on Thursday with a surprise 25 basis point cut to its key rate as inflation is already in the 0% to 2% target range.

The move also ends rampant investor speculation that policymakers will be hesitant to move before the U.S. Federal Reserve since any rate cut is certain to weaken a currency and push up imported inflation.

The European Central Bank is bound to be next in June after incessantly repeated references to that meeting painted the bank into a corner.

The Fed and the Bank of England both hinted they could be next but have kept their language sufficiently vague to make moves in either June or July possible, provided data do not upset plans.

Still, investors expect the Fed, the ECB and the BoE to each deliver only 75 basis points of cuts by the end of this year, in three 25 basis point moves, tiny changes compared to rate hikes in 2022 when they sometimes increased rates by that much in a single day.

The pricing also suggests cuts at just three out of the five meetings each will hold between June and the end of the year, so pauses are also on the cards.

To be sure, these banks are not the first to cut rates. Some emerging market economies, like Brazil, Mexico, Hungary and the Czech Republic have all cut rates already, but financial markets take their cue from the major central banks, so their influence on financial instruments is oversized.

OUTLIER

The Federal Reserve could in fact end up being the outlier this time.

The U.S. economy is chugging along and the Fed even upgraded its growth projections this week, meaning it may end up cutting rates when growth remains strong, or delaying cuts if inflation proves stubborn. In Europe, data continues to paint a bleak picture, with activity stabilizing at a low level.

The U.S. election in November adds to the Fed's dilemma.

Policymakers do not want to be seen interfering with the vote, so if they cut, they need to do it well clear of November.

"Traditionally, the Fed would not pivot rates policy to cushion inequality," Societe Generale strategist Albert Edwards said. "But growing inequality has been a key issue ever since the 2008 Global Financial Crisis triggered a backlash against ‘The Establishment’ - most evident in the rise in popularism."

"Might the unfolding inequality crisis force the Fed to bow to intense political pressure to cut rates faster and deeper? I think that is entirely plausible," Edwards said.

Fed Chair Jerome Powell in congressional testimony earlier this month said policymakers would "keep our heads down and do our jobs" ahead of the elections.

All the while Europe continues to struggle. Germany is in recession, Britain is barely growing after a recession, and the rest of the continent is staying in positive territory mostly from unexpectedly strong data out of Southern Europe, traditionally the euro zone's weak spot.

Where rate cuts could end in either 2024 or 2025 remains far too uncertain but policymakers appear confident that the ultra low rates - negative in some cases - will not be revisited.

In fact, some argue that the world is undergoing such profound changes that the historic downtrend in the so-called neutral rate, which neither stimulates nor slows growth, could reverse.

"We may now be facing such a turning point," ECB Executive Board member Isabel Schnabel said this week.

"The exceptional investment needs arising from structural challenges related to the climate transition, the digital transformation and geopolitical shifts may have a persistent positive impact on the natural rate of interest."

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>>> January economic data challenges soft landing narrative


Yahoo Finance

by Josh Schafer

February 19, 2024


The growing economic consensus has hit a bump in the road.

Over the past several months a string of stronger-than-expected data had many investors embracing a possible soft landing, in which inflation would fall to the Federal Reserve's 2% goal without a severe economic downturn.

Recent data over the past week has challenged that narrative. January inflation reports from the Consumer Price Index (CPI) and Producer Price Index (PPI) showed prices increased more than economists projected in the last month. And the January retail sales report showed sales dropped by more than economists had expected. In other words, neither inflation nor consumer strength improved.

To some, one month's prints could be points of concern, but not necessarily game changers.

"Let's not get amped up when you get one month of CPI that was higher than what you expected," Chicago Fed President Austan Goolsbee said during a question-and-answer session hosted by the Council on Foreign Relations in New York on Wednesday. "It is totally clear that inflation is coming down."

While Goolsbee may have a point that one print might not change a trend, the recent string of January data is notable because it's largely the first chunk of data to challenge the soft landing narrative since Federal Reserve Chair Jerome Powell hinted the US economy may be headed to the ideal outcome during the December Fed meeting.

"The data is stacking up against investors in a way that's making people more nervous," SoFi head of investment strategy Liz Young told Yahoo Finance Live.

Prior to the readings in the past week, the data hadn't worked against investors. Fourth quarter economic growth had come in higher than expected. The January jobs report shocked economists. And the December retail sales print came in better than anticipated, all while wage increases continued to provide a positive outlook for consumer spending and inflation continued to moderate.

After this week though, economists are cutting their projections for first quarter gross domestic product (GDP), a popular economic growth measure. Goldman Sachs has shifted its forecast from 2.9% annualized growth in the first quarter entering the week down to 2.3%. The Atlanta Fed's GDP tracker moved down to 2.9% from a 3.4% projection on Feb. 8. Not auspicious for the economic growth component of a soft landing.

The data is also moving projections for Personal Consumption Expenditures (PCE), the Fed's preferred inflation gauge, ahead of its release later this month. Goldman now projects core PCE, which excludes the volatile food and energy categories, increased 0.43% in January, an increase from its prior forecast of 0.35%. Bank of America's economics team also sees a reading near 0.4%.

Notably, this would bring the six- and three-month annualized rates, which had been celebrated recently as tracking below the Fed's 2% target, back above the 2% level. Not auspicious for the second component of a soft landing.

"While January data are often noisy, the inflation data do suggest that disinflation took two steps back in January," Bank of America US economists Stephen Juneau and Michael Gapen wrote in a note to clients on Friday.

Juneau and Gapen wrote that the January inflation data vindicates the Fed's "wait-and-see approach" to cutting interest rates, and that they agree with the new market consensus that the first interest rate cut will come in June rather than March or May.

This marks a stark shift in investor sentiment on Fed cuts. Investors are now pricing in a roughly 35% chance the first cut comes in May, per the CME FedWatch Tool. A month ago, investors had placed a 97% chance that the first cut would come by the end of the May meeting.

With the Fed rate cut question mostly answered for now, the looming question remains whether the twin inauspicious data points of inflation and consumer strength have upended hopes for a soft landing.

Gapen noted in a weekly economic roundup that it's still too early to tell.

"Our (perhaps unsatisfying) take is that investors should remain in wait-and-see mode," he wrote.

"The surprises in jobs, inflation, retail sales, and [industrial production] were all probably a combination of signal and noise. ... we need to see a few more weeks' worth of data before drawing strong conclusions on the trajectory of the economy."

Consumers, for their part, are still saying they're doing great.

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Bar, With bonds, the best time to load up in our lifetime was back in the early 1980s. Not only were the rates extremely high, but with the capital gains component figured in, by the late 1990s the total return on those bonds purchased in the early/mid 1980s actually matched or exceeded the return of the stock market plus dividends. That was an anomaly though, but I remember kicking myself for not keeping those 15% bonds that my dad and I both had back in the mid 1980s. Their prices eventually went up so much I couldn't resist taking profits at some point, but actually holding them to maturity would have equaled to the total return of the stock bull market over that long period, without taking on the risks of owning stocks.

Also, I remember reading that long ago (pre WW 2), the typical dividend rate on a large cap stock was higher than what bonds were paying in interest at the time. So the reverse of today. It was reasoned that the higher stock dividend rate was necessary in order to compensate for the higher risk of owning stocks vrs bonds.

But the problem with owning too many bonds now is that the dollar reserve system is approaching the end of its run. Not imminent, but not too many years off. The 34 tril debt bomb will reach 40 tril in just a few short years, and then 50 tril won't be far off, and eventually there will be a loss of confidence in the dollar globally. Bretton Woods collapsed in 1971, but the Petrodollar arrangement arrived to save the day (Kissinger / Rockefellers), and it worked brilliantly for decades. Globally, oil could only be purchased with dollars, which maintained strong continuous demand for dollars and Treasuries. But the Petrodollar is ending, and global de-dollarization is in full swing. First countries stop using the dollar for trade, then the central banks reduce their use of dollars as a reserve currency, and down the slippery slope we go toward a dollar crisis, with our bonds eventually becoming toilet paper. It's not imminent, but I figure it could happen within 5-10 years. Anyway, something to consider when looking at the juicy bond yields. In a debt based money system like we have (where money is lent into existence, at interest), money is actually a debt instrument. The system ultimately drowns in debt.


The Money Masters -

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[bar1080]

I was just reading this learned article in the Financial Analysts Journal

"Stocks for the Long Run? Sometimes Yes, Sometimes No"

Analyzing historical data for 19th century US stock and bond returns, this study challenges Jeremy Siegel’s “Stocks for the Long Run” thesis. Evidence indicates that 20th century US asset returns cannot be generalized out of sample.

"Abstract

When Jeremy Siegel published his “Stocks for the Long Run” thesis, little was known about 19th-century stock and bond returns. Digital archives have made it possible to compute real total return on US stock and bond indexes from 1792. The new historical record shows that over multi-decade periods, sometimes stocks outperformed bonds, sometimes bonds outperformed stocks and sometimes they performed about the same. New international data confirm this pattern. Asset returns in the US in the 20th century do not generalize. Regimes of asset outperformance come and go; sometimes there is an equity premium, sometimes not.

https://rpc.cfainstitute.org/research/financial-analysts-journal/2023/stocks-for-the-long-run
https://www.linkedin.com/in/edward-mcquarrie-8a08a515/

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Bar, Looks like NJHowie only had 148 posts on I-Hub since 2007. Not very many bond guys here on I-Hub. Bond yields were so low for so long, there just wasn't much reason to own them, although it's a different ballgame with yields at 4-5%. But with a bull market in stocks, bonds are once again on the back burner.



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[bar1080]

GFP, Whatever happened to the guy who loved muni bonds, NJHowie? Actually bonds have outperformed stocks for many periods but not often in the last century.

[bar1080]

No one talks about another BRK group, the_employees. About 400,000 of them!

[bar1080]

Munger's death didn't affect BRK noticeably but of course he's just 2nd banana. If BRK sags, they can always institute a small dividend. The original group of Omaha billionaires are almost all gone now. Those, along with Buffett and Munger, are the shareholders who opposed dividends. They didn't need the cash and they didn't want to pay taxes on something they didn't want.

My *guess* is BRK won't move much if Buffett passes away and if his death causes the stock to underperform for awhile, the company has options for propping things up, Including splitting the A shares. Perhaps 100 for one but not much more They want to keep the riff raff out. Both Charlie and Warren would agree on that.

It'd be a cryin' share for bunches of day traders to target the annual meetings to pump the stock for short term flips.

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Bar, With Berkshire, I wonder what will happen when Buffett is gone? They have solid plans in place, but considering the cult like stature of Buffett, plenty of investors can be expected to leave. And what will happen tax-wise, I wonder (?) That's why I decided to not own Berkshire itself, although I have a bunch of Buffett stocks. Hard to imagine a world without 'The Oracle', but unfortunately it's inevitable.



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[bar1080]

The Bulletshares aren't in treasuries. They hold very widely diversified portfolios of investment grade corporate bonds. Hundreds of issues from many issuers.

Did you notice that BRK.a has touched $600,000? My class B shares can't quite break $400. Their ATH is $399!

Buffett's having a fantastic year with BRK up 29% even with all the cash!

Notice how well megacap stocks have done compared with smaller caps. 2023 wasn't good for the average IHUB microcap "player."

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Bar, I see the Bulletshares do have a .10% expense ratio, so that could explain part of the lower yield compared to Treasuries.

Fwiw, for the bond allocation I went with a monthly Treasury ladder going out 3 years. No commissions to buy, and no state income taxes, and being retired the Federal tax aspect isn't too big a deal. But I can see where the muni route can make a lot of sense for people like you in the higher tax brackets. Locking in some longer maturities is looking like a good move (like your 7 year corporates), since it won't be long before these high rates are no longer available.

Btw, on the stock side I moved the allocation up to 30%, mostly in the S+P 500, but some small positions in individual stocks. The individual stocks provide a fun aspect, and are meant to be long term buy / holds (link below). Got a little carried away though, lol. I also got back into 3 of Buffett's Japanese stocks, with small positions (ITOCY, MARUY, SSUMY). Never should have sold those last year, but from what Buffett and Munger have said, these are still bargains -


https://investorshub.advfn.com/Great-Stocks-37555



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[bar1080]

One other thing: I've never sold one. I've just held them to maternity which is probably what most investors do. Their bid/ask spreads are small and they trade actively on the Nasdaq so they should be easy to turn into cash if need be. Again I don't know how that would go amid panic selling.

Both of my sons have a lot of money sitting in cash, Been trying to get them to test Bulletshares.

[bar1080]

I own several Bulletshare bonds, each with a different maturity, ranging from a year out to three years. Now, I've had two or three mature. Have yet to discover any drawbacks. Easy to buy; easy to hold thru maturity. Very easy to ladder. I wouldn't put a ton in them. I also have bank CDs and Vanguard muni bond funds for fixed income diversification.

Happily I haven't tested mine in a terrible recession (like 2008) or in a period of raging inflation, but they should be pretty safe in tough times.

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Bar, Even if the recent bond rally was overdone, % rates should be way lower by year end, so the exact timing shouldn't matter too much, unless you are actively trading BSCR for the bounce potential.

With BSCR, it looks like the yield on the 7 year Treasury note is a little higher, so the main advantage for using the corporate BSCR route would have to be from it's greater upside bounce potential. A lot more variables with corporates though, compared to Treasuries, and also Treasuries aren't taxed at the state level, so that's another aspect.



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[bar1080]

I hope rates don't rise much. Just today I bought a large slug of BSCR Bulletshare ETFs that mature in 2027. They yield about 4%.

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>>> Uncertainty creeps back into US Treasury market after Fed, blockbuster data


Reuters

Feb 7, 2024

By Davide Barbuscia


https://finance.yahoo.com/news/analysis-uncertainty-creeps-back-us-060557038.html


NEW YORK (Reuters) - A rethink on when the Federal Reserve will cut interest rates is reverberating through the fixed income market, heightening risk for those betting the explosive rally that took bonds higher at the end of 2023 will continue this year.

Investors piled into Treasuries late last year on expectations that the Fed will cut rates as soon as the first quarter of this year, sending government bond prices roaring back from 16-year lows.

Many are now recalibrating those bets following a blowout U.S. jobs number and a cautious message from the Fed, which last week said the strong economy could spur an inflationary rebound if rates are cut too soon. Yields on the benchmark 10-year Treasury, which move inversely to price, have surged in recent days and now stand 20 basis points above December’s lows.

While investors still expect the Fed to deliver a number of rate cuts this year, they are now less certain of when the central bank will begin lowering borrowing costs and how far rates will fall. Worries over an expected surge of bond supply resulting from government issuance are also sapping bulls’ enthusiasm.

“The combination of the jobs numbers and the Fed press conference has really caused a splintering in the potential outcomes,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, which manages $794 billion in assets.

He believes 10-year yields this year could approach last year’s high of around 5%, from their current level of about 4.1%.

Futures tied to the Fed’s policy rate late Tuesday showed investors assigning about a 20% chance of the Fed cutting interest rates in March, down from 64% a month ago, CME Group data showed.

Fed Chair Jerome Powell shot down expectations of a March cut at the end of last week's monetary policy meeting, saying officials needed greater confidence that inflation is moving towards its 2% target. He reiterated his views during an appearance on CBS’ "60 Minutes" on Sunday.

The probability of a first rate cut coming in May, meanwhile, has increased to 55% from 37% a month ago. Investors are now pricing in a total of 122 basis points in cuts in 2024, from around 150 in mid-January.

John Madziyire, head of US Treasuries and TIPS at Vanguard, the world’s second-largest fund manager, said that prior to the Fed’s policy meeting last week he expected to “buy the dip” if 10-year yields hit 4.25%.

“Now maybe we'll start scaling in at 4.25% on the view that we could potentially go to 4.5%, pricing a ... higher-for-longer scenario," he said.

For others, the pullback in Treasuries confirmed suspicions that last year’s rally was overdone.

Spencer Hakimian, CEO of Tolou Capital Management, a New York-based hedge fund, has been reducing exposure to long-term Treasuries in recent weeks and added shorter-term ones on expectations of rates remaining elevated for longer than markets had expected.

“We are more exposed to the front end of the curve because we believe there's a lot less interest rate risk there,” he said. The risk of high interest rates reducing the value of a bond's payout is greater for long-duration bonds.

Nearly $2 trillion in expected new U.S. government bond issuance this year is also keeping investors wary, as many believe yields will have to rise in order to attract buyers. U.S. fiscal worries exacerbated the Treasury selloff in October, and rating agencies Fitch and Moody's warned last year about the burden of higher interest rates on state coffers.

Matt Eagan, portfolio manager at Loomis, Sayles & Company, sees 10-year yields at 4.5%, partly because of the expected large government issuance.

So far, the rise in yields hasn’t had much effect on stocks, in contrast with the equity selloff surging Treasury yields set off in September and October. The S&P 500 is up over 4% for the year and stands near a record high.

At the same time, many still believe the direction of travel for rates is lower, as long as inflation remains on a cooling trend. Fed officials in December projected three quarter-point rate cuts this year, forecasts that Powell recently said were still likely in line with policymakers' views.

Strong economic data changes the Fed's timing but not its direction, said Jason Pride, chief of investment strategy at Glenmede.

"It doesn't mean they can't cut rates, it just means their pace is a little slower," he said.

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Timiraos - >>> Plummeting Inflation Raises New Risk for Fed: Rising Real Interest Rates

Central bank feels pressure to cut interest rates as falling inflation raises real cost of borrowing

The Wall Street Journal

By Nick Timiraos

Jan. 28, 2024


https://www.wsj.com/economy/central-banking/plummeting-inflation-raises-new-risk-for-fed-rising-real-interest-rates-fd2a4f37?siteid=yhoof2


Federal Reserve officials start the year with a problem they would ordinarily love to have: Inflation has fallen much faster than expected.

It does, nonetheless, pose a conundrum. The reason: If inflation has sustainably returned to the Fed’s 2% target, then real rates—nominal rates adjusted for inflation—have risen and might be restricting economic activity too much. This means the Fed needs to cut interest rates. The question is, when and by how much?

The Fed won’t cut at its two-day meeting ending this Wednesday because the economy has been growing solidly. While inflation excluding food and energy on a monthly basis has been at or below 2% in six of the last seven months, the Fed wants to be sure that can be sustained before cutting rates.

Instead, Fed officials are likely to take a symbolically important step this week by no longer signaling in their policy statement that rates are more likely to rise than fall. Ditching this so-called tightening bias would affirm that officials are entertaining lower rates in the coming months.

Normally, the Fed cuts interest rates because economic activity is slowing sharply. Not this time: Growth remained surprisingly robust through the end of last year. Rather, they are mulling whether softening inflation means real interest rates will be unnecessarily restrictive if they don’t act.

Militating against a rate cut soon: Bond yields have fallen and stocks have risen, which could bolster economic activity and consumer spending. For that reason, officials could wait until May or even later to cut, said William English, a former senior Fed economist who is a professor at Yale School of Management.

On the other hand, “if they get genuinely reassuring inflation numbers and the real economy seems to be slowing a bit, I could see them getting comfortable with a cut in March,” he said.

The case for cutting later

Policymakers might want to move carefully to lower rates because they are not sure if the recent inflation cooling will last or if the economy will rev up in a way that sustains somewhat higher inflation. Several officials have said they want to avoid at all costs cutting rates only to have to raise them again.

Dean Maki, chief economist at hedge fund Point72 Asset Management, thinks the Fed will wait until June to cut interest rates because growth and hiring will exceed its expectations this year.

Concerns that lower inflation will raise real rates are misplaced because it will also boost purchasing power, consumer confidence and spending, said Maki. “Growth strengthens when inflation falls. I can’t think of examples in the last several decades where growth weakens after inflation falls,” he said.

It is also possible the economy can tolerate higher rates than before. In December, most officials thought the neutral rate, which balances supply and demand when the economy is operating at full strength, was 2.5%, well below the actual rate, which has been between 5.25% and 5.5% since July. That implies rates are highly restrictive, yet the economy hasn’t behaved that way.

Officials “have tended to let the data tell them they’re overly restrictive rather than rely” on estimates of neutral, said Maki.

The case for cutting sooner

Others warn that waiting for the data to signal the Fed is too restrictive will require the type of aggressive cuts reserved for an economy falling into recession, as occurred in 2001 and 2007. They point to latent risks from heavily indebted companies, especially in real estate, which locked in lower interest rates earlier in the pandemic. Those borrowers might struggle as that debt is refinanced at higher rates.

The argument for lowering rates sooner goes like this: Fed officials raised rates rapidly to a 22-year high and telegraphed plans to keep them there for a while because they worried it would take years for inflation to fall back to their target. But inflation has fallen much faster than they expected. Prices excluding food and energy rose at a 1.9% annualized rate between July and December, down from 4% in the previous six-month period.

“We made a very aggressive tightening. Look not only at the supply that came back but also the demand that came down last year,” said Esther George, who served as president of the Kansas City Fed from 2011 until last year. There is potentially “a lot of room” to cut rates before they are in neutral territory again.

Officials are also shrinking their $7.7 trillion asset portfolio—sometimes called “quantitative tightening” or QT—faster than they did five years ago. “They’ve got QT going on steroids, still,” said George.

Policymakers are right to worry that cutting rates then raising them again would blemish their credibility, said George. But she said the greater risk now is that taking too long to cut rates causes damage to the labor market that is hard to repair.

In November, for example, the hiring rate in the U.S. dropped to its lowest level in 10 years, a sign more companies might feel they are overstaffed. “The labor market is such a tricky one,” said George. Before a downturn, “it always looks like it’s not too bad, and then it goes south quickly.”

Officials raised rates because they worried high inflation would lead businesses and consumers to expect high prices to persist, creating a self-fulfilling cycle and a rerun of the 1970s. But it increasingly looks as if a series of shocks generated a one-off surge in prices across successive sectors—goods, housing, services and labor, said Dario Perkins, an economist at GlobalData TS Lombard in London. That gave the impression inflation’s increase was persistent when in fact it wasn’t.

“You should be able to cut interest rates quite rapidly if that scary 1970s dynamic isn’t happening, and it isn’t happening,” he said. “The lesson of the last 12 months is that we don’t really need pain to get inflation down to tolerable levels.”

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>>> The Fed got the inflation reading it wanted. When cuts begin is still a tossup.


Yahoo Finance

by Jennifer Schonberger

January 26, 2024


https://finance.yahoo.com/news/the-fed-got-the-inflation-reading-it-wanted-when-cuts-begin-is-still-a-tossup-151221930.html


The Fed's preferred inflation measure — a "core" Personal Consumption Expenditures index that excludes volatile food and energy prices — clocked in at 2.9% for the month of December, beating estimates.

That marked the first time the gauge fell below 3% since March 2021 — well before the central bank began its most aggressive rate-hiking campaign since the 1980s.

What is even more encouraging for central bankers is that the core PCE inflation rate fell to 1.5% on a three-month annualized basis, its lowest since late 2020. On a six-month basis it was 1.9% for the second month in a row.

Both of those marks are below the Fed's 2% target.

The question now is whether the data is enough to justify a cut in rates that aligns with the expectations of investors who began the year predicting that a loosening would start in March.

Policymakers have been pushing back on that optimism, cautioning that they need more data to be sure about such a pivot. Some have even suggested it may not happen until the second half of the year.

Traders as of Friday morning are now pricing in a 46% chance that central bankers will lower rates at the meeting in March. That’s down from about 56% a week ago, and a long way down from last month’s 88%.

Investors still by a slight margin expect the first cut to arrive in May, with the chance of that happening now at 51%.

While inflation continues to fall, hotter-than-expected economic growth could support an argument for pushing any cuts beyond March.

The advance estimate of fourth quarter US gross domestic product (GDP) released Thursday showed the economy grew at an annualized pace of 3.3% during the period. It blew out consensus forecasts that the number would come in at 2%.

If economic growth continues to surprise to the upside and inflation pops back up, the Fed may be forced to hold rates at current levels for longer. It last raised rates in July, to a 22-year high.

During the December Fed press conference, Fed Chair Jay Powell signaled the central bank had likely reached the peak on rate hikes and would turn attention to rate cuts looking ahead.

He also told Yahoo Finance's Jennifer Schonberger that the Fed would want to be "reducing restriction on the economy" well before inflation hits 2%.

Fed officials at that December meeting did predict three cuts this year, without saying when exactly they could happen.

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>>> Aon Agrees to Buy NFP for About $13.4 Billion in Cash, Stock


Bloomberg

by Josyana Joshua and Allison Nicole Smith

December 20, 2023


https://finance.yahoo.com/news/aon-agrees-buy-nfp-13-213641576.html


(Bloomberg) -- Aon Plc agreed to buy NFP Corp. for about $13.4 billion in cash and stock as part of a push into the middle-market segment of the insurance brokerage and wealth-management business.

Funds affiliated with Madison Dearborn Partners and HPS Investment Partners are the sellers, the companies said in a statement Wednesday. The transaction will be funded by $7 billion of cash and $6.4 billion of Aon’s stock.

Aon expects to fund the cash portion with around $7 billion of new debt, according to a filing. It plans for $5 billion of it to be raised in 2024 and $2 billion raised when it completes the transaction. The new debt will span a range of maturities, subject to market conditions. NFP Chief Executive Officer Doug Hammond will continue to lead the business as an independent, connected platform within Aon, reporting to Aon President Eric Andersen.

Aon said it expects about $400 million in one-time transaction and integration costs. The combination is expected to dilute adjusted earnings per share in 2025, and break even in 2026. It will add to earnings starting in 2027, according to the statement. The deal is expected to be completed in the middle of next year.

The sale is welcome news for holders of the NFP’s high-yield debt. The company’s 6.875% bond due 2028 rose more than 8 cents on the dollar, making it Wednesday’s biggest gainer, according to Trace data.

“Every now and then Santa Claus visits the high yield market in the form of investment grade M&A,” David Knutson, senior investment director at Schroder Investment Management, said in an interview. “Not something you plan for, but it is a nice surprise.”

From Aon’s perspective, “investment-grade spreads are very compelling right now for issuers,” said Bloomberg Intelligence’s Noel Hebert, “so the funding market is as compelling as it’s been in a while.”

Similarly, the high-yield bonds of United States Steel Corp. rallied after Nippon Steel Corp., an investment-grade company, agreed Tuesday to buy the Pittsburgh-based firm for $14.1 billion.

However, the sudden wave of investment-grade M&A won’t necessarily last, said Knutson.

“The market has embraced the ‘soft landing’ narrative. This has fueled an ‘everything rally,’” said Knutson. “If future data doesn’t support this narrative, the market and buyers will lose their appetite for risk.”

UBS Group AG served as financial adviser to Aon, and Cravath, Swaine & Moore and McDermott Will & Emery were external legal counsel. Evercore Inc. acted as lead financial adviser to NFP, while Skadden, Arps, Slate, Meagher & Flom and Ropes & Gray were external legal counsel.

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>>> US government debt is on track to surpass $50 trillion by 2033. That means $5.2 billion is piling up every day.


Business Insider

Matthew Fox

Nov 7, 2023


https://markets.businessinsider.com/news/bonds/us-debt-50-trillion-2033-federal-deficits-treasury-bond-crash-2023-11


The US government's public outstanding debt is on track to surpass $50 trillion by 2033.

The increase comes out to roughly $5.2 billion every day or $218 million every hour, Bank of America estimated.

"Central banks may simply bail out governments in coming years via QE," BofA said.


The US government's debt is on track to surpass $50 trillion by 2033, Bank of America said in a Tuesday note, citing data from the Congressional Budget Office.

US public debt outstanding currently sits at $33.6 trillion and is expected to surge by $20 trillion to $54 trillion within the next decade amid "fiscal excess in the 2020s," Bank of America investment strategist Michael Hartnett said.

"US public debt is... more than the combined GDPs of China, Japan, Germany, and India," he wrote, adding that the outstanding debt is set to surge by $5.2 billion every single day, or $218 million every hour, for the next 10 years.





The surge in debt has coincided with an explosion in the federal deficit, which jumped by $320 billion to $1.7 trillion in 2023. That's forced the Treasury Department to auction trillions of dollars of fresh bonds.

Adding to the burden is the surge in annual interest payments caused by spiking bond yields. Those payments are taking up a bigger slice of the federal budget and widening deficits. Estimated annualized debt interest payments surpassed $1 trillion in October.

And as long as US policymakers continue to borrow more heavily and add to the government's outstanding debt, investors are poised to worry about the lingering risks of inflation, bond defaults, and currency debasement, according to BofA.

"Likely central banks may simply bail out governments in coming years via quantitative easing and the introduction of yield curve control (policies that would be US dollar negative)," Hartnett said.

A separate measure of US debt that's more closely followed by economists is "debt held by the public," which is less daunting but still on a steep uptrend. At the end of fiscal 2023, it stood at $26.3 trillion, or 98% of projected GDP, and the CBO sees it climbing to 115% by 2033.

But even if interest rates do fall and the federal deficit is contained, don't expect the federal government to ever stop borrowing money. US debt will always rise because it fuels economic growth and helps drive the circulation of money.

Besides, the one time the government did pay off all of its interest-bearing debts in 1835, a two-year depression shortly followed.

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Rickards - Petrodollar - >>> Kissinger Created the Doomsday Deal


BY JAMES RICKARDS

DECEMBER 4, 2023


https://dailyreckoning.com/kissinger-created-the-doomsday-deal/


Kissinger Created the Doomsday Deal

As I’m sure you know by now, Henry Kissinger died last week at the age of 100. He leaves a complex legacy, which is certainly understandable because he operated in a complex geopolitical environment.

But Henry Kissinger was a master strategist and political scientist. With his recent passing, I thought I’d retell the story of one of his most brilliant plans, and explain how it relates to the demise of the dollar.

In February 1974, I was asked by Professor Robert W. Tucker of the Johns Hopkins School of Advanced International Studies to join him and four other foreign policy experts for a meeting at the White House.

At the time, confidence in the dollar was on shaky ground because President Nixon had ended gold convertibility of dollars in 1971.

The price of oil was skyrocketing, partly due to inflationary policies pursued by the Federal Reserve, and partly due to an Arab oil embargo in response to U.S. aid to Israel in the Arab-Israeli Yom Kippur War of 1973.

Saudi Arabia was receiving dollars for their oil shipments, but they could no longer convert the dollars to gold at a guaranteed price directly with the U.S. Treasury. The Saudis were secretly dumping dollars and buying gold on the London market. This was putting pressure on the bullion banks receiving the dollar.

Confidence in the dollar began to crack. Anyway, back to my meeting at the White House…

Should We Invade Saudi Arabia?

We were ushered through the security gate on Pennsylvania Avenue near West Executive Avenue, closest to the West Wing. We were then escorted to the office of Dr. Helmut Sonnenfeldt, Secretary of State Henry Kissinger’s deputy on the National Security Council.

There, we engaged in a strategy discussion. Our focus that night was debating a full-scale military invasion of Saudi Arabia.

The idea was we’d then secure their oil fields, pump enough oil to supply Western and Japanese needs and price it however we wanted. We debated the pros and cons of this plan, including potential supply disruptions and international reactions until well into the evening.

Now, it may not be covered in the history books, but a military takeover of Saudi Arabia was very much on the table. In fact, the planning was well underway. But the Nixon administration under Henry Kissinger decided to try one other approach first. And what they came up with was absolute genius.

A few months after my meeting, in June 1974, President Nixon met with King Faisal in Saudi Arabia. A month later, he sent his representatives to offer a new deal. The deal was as straightforward as it was brilliant.

Birth of the Doomsday Deal

The Saudis would agree to sell their oil only for U.S. dollars. These dollars for oil were called “petrodollars.” And the Saudis would then reinvest these petrodollars in U.S. Treasury securities and deposits in U.S. banks.

In return, the U.S. would sell advanced weapons and military hardware to the Saudis and we’d promise U.S. military support to protect Saudi oil fields and the royal family.

This would effectively guarantee the House of Saud long-term rule over the country.

The final twist was that U.S. banks would then “recycle” the petrodollars deposited by Saudi Arabia as loans to emerging markets in Latin America, South Asia and Africa.

In turn, those developing countries would purchase U.S., European and Japanese exports. That would ignite global growth. And, of course, to do that they’d need lots of oil. That meant oil demand would grow endlessly as would demand for dollars. It was the ultimate win-win.

And the 1974 “Petrodollar Accord” was born. Or as I call it, the Doomsday Deal. Behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force, which I was invited to the White House to consider.

BRICS and the End of the Doomsday Deal

Now, almost 50 years later, the wheels are coming off. The world is losing confidence in the dollar again, and the cracks in the dollar are already getting larger.

It’s important to understand all of this concerning BRICS.

If you’re unfamiliar with BRICS, I’m talking about the economic alliance between Brazil, Russia, India, China and South Africa. I wrote a lot about it this past summer and fall. I explained the changes in the global monetary system that will send shock waves throughout markets.

The BRICS nations represent almost one-third of the entire global GDP. Their economies are bigger than the United States, Germany, Japan, the U.K., France, Canada and Italy combined.

And thanks to Biden’s weakness and foreign policy failures our enemies — and even our allies — are emboldened and the Doomsday Deal is cracked wide open.

The BRICS countries have been running circles around blundering Biden lately.

Blunders

Here’s a quick rundown of some of Biden’s recent failures. On Jan. 17 of this year, shots were fired when Saudi Arabia humiliated Biden and thumbed its nose at America by announcing it is considering accepting other currencies for its oil.

And that announcement opened the floodgates.

On March 8, 2023, Reuters reported another massive blow as India and Russia are now ditching the dollar and trading oil in non-dollar currencies. On March 28, Brazil and China announced an agreement to conduct all future trade transactions using their own currencies.

And it gets even worse. Even our so-called allies saw the writing on the wall.

That same day, French oil giant Total Energies announced they had bought liquefied natural gas from a Chinese oil company using the Chinese currency, the yuan.

Now, other U.S. allies like India, Pakistan and the United Arab Emirates have made deals with Russia or China to buy oil or other commodities in their own currencies.

With Biden in the White House, they’re laughing at us now.

The Beginning of a Seismic Shift

Iraq announced earlier this year they’re now trading their oil for Chinese yuan. Recently it’s only gotten worse…

In August of this year, it was announced Saudi Arabia — our old partner in the Doomsday Deal — will be joining the BRICS group of nations starting in 2024.

And more recently, China and Saudi Arabia agreed to a currency swap deal.

Our enemies were already salivating, and now with this most recent news they are ready to pounce.

In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift.

Eventually a tipping point will be reached where the dollar collapse suddenly accelerates as happened to the British pound sterling last century.

My background inside the U.S. intelligence community, investment banks and global currency markets has shown me how smart investors could profit from the failure of the Doomsday Deal.

One of the best ways investors can anticipate this monetary earthquake is by buying gold.

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>>> Is China really dumping Treasury bonds and sending yields higher? A former US official explains the mystery


Business Insider

by Filip De Mott

November 25, 2023


https://finance.yahoo.com/news/china-really-dumping-treasury-bonds-002534002.html


China is not dumping its stockpile of US bonds, Brad Setser, a former Treasury official, wrote.

A large part of China's holdings is not accounted for in official US data, he said.

While it has sold some Treasurys, Beijing has bought up US debt in the form of agency bonds.


China isn't fueling the bond-market rout with a large sale of its Treasury holdings but is instead reshuffling its US debt assets, Brad Setser, a former Treasury official, wrote for the Council on Foreign Relations.

After US Treasury yields surged to highs not seen in 16 years, economists have looked for explanations for what is now one of the worst market crashes in history.

Apollo Global Management's Torsten Sløk also pointed to China recently, citing official US data that showed the country had sold $300 billion worth of Treasurys since 2021. And in August, a $21.2 billion dump of US assets by China was largely made up of Treasurys.

But Setser said such data presented an incomplete picture. Drawing on other sources, he estimated that China's overall US-bond holdings had been relatively stable since 2015.

Though China's holdings appear to be slipping in official US Treasury International Capital data, the metric reflects only foreign holdings in US custodians, or the financial institutions that safeguard the assets, Setser said.

"If a simple adjustment is made for Treasuries held by offshore custodians like Belgium's Euroclear, China's reported holdings of US assets look to be basically stable at between $1.8 and $1.9 trillion," he wrote.

Added to that, the US data fails to capture US asset holdings that were handed over to third-party management. China's State Administration of Foreign Exchange is known to hold accounts at global bond and hedge funds, as well as private-equity firms, Setser said.

He added that even where China had reduced its Treasury holdings, the sales were much smaller than other data suggested and purchases of US debt in other forms, such agency bonds, had increased.

Agency bonds are issued by government-sponsored enterprises, and some of the top issuers are US-backed firms such as Fannie Mae and Freddie Mac.

In fact, Beijing's agency bonds once outpaced its Treasury assets, Setser said. Though it moved away from that market during the Federal Reserve's quantitative-easing era, soaring yields on agency debt have brought back China's buying habit.

In 2022 and the first six months of 2023, China purchased over $100 billion in agency debt and sold just $40 billion in Treasurys, he estimated.

"Bottom line: the only interesting evolution in China's reserves in the past six years has been the shift into Agencies," he wrote. "That has resulted in a small reduction in China's Treasury holdings — but it also shows that it is a mistake to equate a reduction in China's Treasury holdings with a reduction in the share of China's reserves held in US bonds or the US dollar."

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>>> $7.6 trillion of US government debt will mature in the next year, adding pressure on rates


Business Insider

by Filip De Mott

November 26, 2023


https://finance.yahoo.com/news/7-6-trillion-us-government-040643412.html


A whopping $7.6 trillion in interest-bearing US public debt will mature within a year, Apollo's chief economist said in September.

That represents 31% of all outstanding US government debt, adding upward pressure on rates.

That's still below 2020, when debt maturing within a year made up a significantly larger share.

Nearly a third of all outstanding US government debt is set to mature in the next 12 months, according to an analysis from asset management firm Apollo.

A chart shared by Chief Economist Torsten Sløk in September showed that the share of US public debt set to mature in a year or less has steadily risen toward pandemic-era levels and is now at 31%.

In terms of dollar amount, that's $7.6 trillion, a high not seen since early 2021, and is a source of upward pressure on US rates, he added.

In addition, public debt maturing in the near term accounts for more than a quarter of US GDP. However, this is below its 2020 peak, when it made up a significantly larger share.

The estimate comes as federal deficits have exploded in recent years, sharply elevating the trajectory of US debt. The Treasury Department auctioned $1 trillion in bonds just within the third quarter.

The US debt coming due next year could keep rising, after the Treasury issued its latest quarterly refunding statement in early November. Against expectations, the department elected to lean more on T-bills issuance moving forward, and slow the sale of longer-dated bonds.

Meanwhile, borrowing costs have soared in the last year and a half as the Federal Reserve embarked on an aggressive tightening campaign, raising the government's debt-servicing costs. Despite coming down sharply in November, they remain well above year-ago levels.

Rates have also been under pressure from the Fed's quantitative tightening program, which removed a top buyer from the bond market. The central bank has allowed about $1 trillion of its debt holdings to run off its balance sheet.

The Treasury has hit some snags trying to find enough buyers for the surge of fresh debt. Recent auctions have been met with weak demand while others saw normal uptake.

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Bar, Yes, bonds prices are finally starting to rebound after the worst bond bear market in decades. I'm figuring bonds can rally for the next several years from their oversold levels, so bonds could produce some nice capital gains for a while, assuming the interest rates have in fact peaked. For corporates and munis, I figure the diversification aspects make owning a fund better than owning the individual bonds. While the bond funds lack the protection of having a definite maturity date, with rates at/near their peak that shouldn't be an issue.

But I'm leery of the longer maturities for other reasons. The recent 30 year Treasury auction was a disaster, with few buyers, and this is probably not just a one off, but could dog Treasury auctions from here on out. Despite QT, the Fed is still actively buying the longer term Treasuries, since few others want them. Not exactly a ringing endorsement when your own central bank has to buy its own debt due to lack of demand. So I'm wary of going out much past 5 years, and for the bond allocation I set up a monthly Treasury ladder going out only 3 years. I may add an interim bond fund like VGIT for the capital gains aspect, since % rates should trend lower over the next few years. But that's the basic strategy.

The bigger picture is deteriorating as the US debt continues to balloon exponentially. This debt bomb will hit the fan eventually, we always knew it would happen 'someday', but that day is getting a lot closer. I figure we're OK for 3 years, but beyond 5 years who knows. The US debt hitting $40 tril (2026) might be the pivotal 'confidence' point where other countries simply lose faith in the US dollar system and then the dumping turns into a flood. Already the main buyers of US debt (China, Saudis, etc) are not showing up at the Treasury auctions. And increasingly, countries are abandoning the dollar for trade, and with the Saudis joining BRICS (officially in Jan), the Petrodollar system will soon be history, thus removing the key underpinning for the dollar system that has maintained demand for US dollars for over 4 decades. In a few years the new gold linked BRICS currency will become a viable alternative to the dollar system.

So the handwriting is on the wall, with the timeline being the big unknown. Luckily the strong global demand for short term T-Bills should continue for an extended period of years (link below), so the end of dollar hegemony isn't imminent, though the clock is clearly ticking. Fwiw, my plan with the 3 year Treasury ladder (currently a 40% allocation) is to gradually move out of bonds into more 'hard asset' type investments over the next 3 years, a little each month. I figure in 3 years the US debt should be closing in on $40 tril, so getting close to the 'confidence' tipping point where the global community gives up on the US dollar system. Let's hope not, but projecting out 5 years, the US debt could then be approaching $50 tril. Anyway, it looks like this 'sinking Titanic' viewpoint is no longer far off in the future, but most likely within 5 years (yikes)..


>>> Rickards - >>> Why’s the Dollar So Darn Strong?

https://investorshub.advfn.com/boards/read_msg.aspx?message_id=173197642

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My bond funds have done darn well lately... for a change.

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>>> The Federal Reserve Broke The Budget. Buckle Up For What Comes Next.


Investor's Business Daily

by JED GRAHAM

11/24/2023


https://www.investors.com/news/economy/federal-reserve-broke-the-budget-what-budget-deficits-mean-for-the-economy-and-sp-500/?src=A00220





The 10-year Treasury yield set off roaring alarms about the U.S. budget when it surged to 5% last month. Now those warnings look like a fire drill. Federal Reserve rate hikes seem to be over for now, giving the bond market a reprieve and allowing a powerful S&P 500 rally to resume.

Enjoy it while it lasts. The next debt scare may be the real thing, and it could rock the U.S. economy and stock market.

Here's why: The Fed's historic turnabout, from enabling massive budget deficits to directing the sharpest rate hikes in 40 years, has seemingly broken the budget. Treasury market stress is almost certain to return.

The era of Fed quantitative easing and near-zero interest rates promoted carefree fiscal policies that led the U.S. to rack up $20 trillion in federal debt since the 2008 financial crisis.

Federal Reserve Fuels Red Ink

Exhibit A in the case of the broken federal budget is the deficit's surge in fiscal 2023, which ended Sept. 30. Unemployment was near a record low and GDP growth was strong. Under those conditions, the budget deficit usually shrinks. But it essentially doubled to $2 trillion, if you ignore accounting for Biden's student loan forgiveness that was struck down by the Supreme Court.

The Federal Reserve's fingerprints are all over the red ink. After the Fed sent more than $100 billion in interest on its bond portfolio to the Treasury in fiscal 2022, it had to halt those payments last year as bond prices fell. Having let inflation get out of the bag, an 8.7% cost-of-living adjustment stoked a $134 billion increase in Social Security checks.

Another roughly $100 billion went to FDIC bailouts, as banks like Silicon Valley Bank that loaded up on Treasuries when rates were ultralow became insolvent when Treasury yields surged. To top it off, the Fed hiking its key rate past 5% forced Uncle Sam to pony up an extra $177 billion in interest on the debt. That problem is destined to keep growing by leaps and bounds.

Debt Service Costs Skyrocket

With the Federal Reserve reversing its easy-money policies, the expense of servicing the national debt is exploding. Interest on the debt vaulted to $711 billion in fiscal 2023. That's up from $534 billion in 2022 and $413 billion in 2021. This month, debt service is running at an $825 billion rate. That's about what the U.S. spends on national defense.

US debt servicing costs chart





"The misjudged confidence that we had entered a brave new era of low interest rates is costing us dearly now — first through a period of high inflation and now through persistent pressure on a government budget that already has precious little room for maneuver," wrote Sonal Desai, chief investment officer at Franklin Templeton Fixed Income.

While a debt spiral isn't inevitable, almost no one thinks that Washington will act to avoid one. Fitch Ratings, in August's U.S. credit rating downgrade, bemoaned "a steady deterioration in standards of governance." When Moody's cut its U.S. rating outlook to negative this month, it warned of "rising political risk to the US' fiscal position and overall sovereign credit profile" as political polarization thwarts budget deficit reduction.

The catalyst for another bond-market rout — and possibly another U.S. credit-rating downgrade — could be the coming debate over the $3.3 trillion cost over 10 years to renew parts of the 2017 Trump tax cuts. Those cuts are due to expire at the end of 2025.

Bond Vigilantes

That tax debate won't get serious until after the 2024 election. But you can expect to hear plenty from "bond vigilantes" — a term coined by Wall Street strategist Ed Yardeni in the 1980s for the bond traders who made Washington pay for fiscal excess by driving up Treasury yields.

"At that point we can have renewed pressure on the bond market to the extent that nothing is being done to alleviate the reckless path the deficit is on," Yardeni, president of Yardeni Research, told IBD.

The "unsettling" thing, Yardeni said, is that "the bond vigilantes may be more powerful than ever because there's more debt than ever and it's compounding at a faster rate because of higher interest rates."

The Congressional Budget Office's latest projections show that under current law — meaning all of those 2017 tax cuts sunset on schedule — public debt as a share of the U.S. economy would rise from 98% to 119% by 2033. The Committee for a Responsible Federal Budget estimates that extending all of the tax cuts would raise that share by 10 percentage points. Under that scenario, the projected annual budget deficit in 2033 would exceed $3 trillion, or 8% of GDP. That's unheard of, except during war or in the wake of a recession.

No Plan To Rein In Budget Deficits

For reserve-currency countries like the U.S., for which default isn't a real risk, Moody's is less concerned about a high debt-to-GDP burden. Instead, it's focused on another metric reflecting its willingness to take action to curb escalating debt costs.

US budget gap chart

In 2022, the government spent 10 cents of every dollar in tax revenue on servicing the national debt. CBO projections show interest expense doubling to 20 cents on the dollar by 2033. But Moody's sees that as too optimistic. It sees 26 cents of each dollar in taxes going to debt service. Moody's says that would be the kind of fiscal stewardship consistent with a C-type credit rating.

America's unique strengths, including the central role of the dollar, solid productivity growth and technological leadership, afford Washington more leeway, Moody's says. But the lack of any plan to improve the fiscal outlook "is fundamentally different" from most "Aaa"-rated peers, such as Germany and Canada.

A credit-rating downgrade, if it comes to that, would signal that fiscal weakness will erode Treasuries' "preeminent safe-haven status."

Wall Street barely flinched after Moody's shot across the bow on Nov. 10 because the bond market had already flashed its own warning.

"The Bond Vigilantes may be saddling up," Yardeni wrote Aug. 3, heralding their return after a 16-year hiatus.

Federal Reserve QE Era

Bond vigilantes' long absence was marked by ultralow rates, low inflation and tepid demand ushered in by the 2008 financial crisis.

The Fed began its quantitative easing as an emergency market stabilization tool in late 2008. The central bank bought up government-backed mortgage securities to keep housing finance flowing. Yet with its key interest rate already at zero and the recovery unusually subdued, the Federal Reserve announced a second round of asset purchases — this time Treasuries — and then a third.

Joe Gagnon, senior fellow at the Peterson Institute for International Economics, argues that the Fed "really should have been even more aggressive," saying it took too long to achieve its full-employment mandate. The unemployment rate wouldn't fall to 5% until late 2015.

'Crazy' Not To Swell Budget Deficits

Yet QE, which held market interest rates low despite massive federal deficits, made a mockery of fiscal responsibility.

Conventional wisdom came to hold that "governments would be crazy not to deficit-spend more, since they could borrow pretty much for free," wrote Franklin Templeton's Desai. And for a while, it seemed to work.

Federal Reserve's 'Massive Mistake'

Even as public debt nearly tripled as a share of the U.S. economy from 2007 to 2021, net interest outlays actually dipped. That's because the average interest rate on debt held by the public fell from 4.7% of GDP to 1.4%.

US Treasury yields chart





Then came the Federal Reserve's "massive mistake," as Gagnon sees it, of keeping its pedal to the metal in 2021, despite gargantuan fiscal stimulus to speed Covid recovery. The biggest inflation outbreak in 40 years ensued, spurring rapid-fire Fed rate hikes to stem it. The interest rate hikes steadily lifted the Treasury's average borrowing rate to 2.3% by the end of 2022 and 3.1% as of October.

About $8 trillion worth of debt held by the public is set to mature over the next year. The Treasury will have to reissue that sum. The key question is at what interest rate.

Fed Rate Cuts Won't Be Enough

Following soft recent jobs and inflation data, markets expect the Federal Reserve to cut its key rate a full point in the coming year to 4.25%-4.5%. That would reduce the risk of a near-term fiscal derailment over runaway debt-service costs.

Yet it won't take sky-high rates to blow up the budget. Moody's projection of soaring debt-service costs assumes that the 10-year Treasury yield will settle back to around 4%. But the high stock of national debt is only about half the reason the budget deficit may hit 8% of GDP in a decade. The other half is a structural fiscal gap, with tax revenue insufficient to pay for the rising cost of Social Security and Medicare.

National defense, income-security and health care programs will continue to take up close to 100% of tax revenue, CBO 10-year projections show. That's even if most Trump tax cuts expire. Almost all the rest of federal spending will go on the government's credit card. That includes government salaries, veterans' health, border security, Pell Grants, National Institutes of Health research, infrastructure projects and more.

Fiscal Responsibility? Not Yet

Could fiscal responsibility make a comeback, now that the bond vigilantes have awakened? Not as long as big budget deficits are a realistic alternative to tax hikes on the right and spending cuts on the left. That will take significantly higher 10-year Treasury yields than we have today.

Consider this litany of reasons not to worry about the deficit from Dean Baker of the liberal Center for Economic and Policy Research. The inflation surge is fading. Addressing climate change will do a lot more for future generations than cutting the budget deficit while ignoring climate change. Japan has a far higher debt load than the U.S. and it's getting by OK. And artificial intelligence could ignite a productivity boom that spurs faster growth and makes our debt more manageable.

Treasury Yield Fire Alarm

The 10-year Treasury yield's surge to 5% in October — up 1.5 percentage points over three months — set off alarm bells that the scale of government debt issuance was overtaking the market's willingness to absorb it. That seemed to raise a risk of still-higher yields ahead.

News that Treasury will borrow less than expected in Q4 and further signs of easing inflation pressures have sent government bond yields tumbling over the past month. Yet it appears that the bond vigilantes are biding their time, rather than going back into hibernation.

Real Treasury Yields At Pre-2008 Levels

Confirmation of bond vigilantes' return came in September. That's when the yield on 10-year TIPS, or Treasury Inflation-Protected Securities, made a clear break above 2% for the first time since 2007. Though off its October high of 2.5%, the 10-year TIPS yield is holding at 2.20%. That's after spending most of the QE era below 1% — and below 0% for some of it.

The TIPS yield subtracts the inflation rate, making it synonymous with the real 10-year interest rate. The challenge the federal government will face in paying its bills is that real Treasury yields have largely reverted to pre-financial-crisis levels.

A number of factors help explain the reversion. Federal Reserve bond buying that squelched market signals has given way to reducing its assets. Baby boomers have gone from saving for retirement to living off their savings. Offshoring of production has turned to onshoring, with massive investment in chip manufacturing, electric vehicle supply chains, artificial intelligence and more. In general, funding has been scarcer relative to the demand for it.

What's unknown is where real interest rates will settle. Franklin Templeton's Desai thinks the neutral Fed policy rate — neither accommodative nor restrictive — may be at least 4%. That implies at least a 2% neutral real rate.

The term premium for holding bonds longer could add another 1 percentage point to the 10-year Treasury yield, putting it around 5%, she says.

If that's right, then the fiscal outlook is even worse than Moody's thinks.

What does all this mean for the U.S. economy, Fed policy and the S&P 500?

Jurrien Timmer, Fidelity's director of global macro strategy, envisions a scenario in which U.S. Treasury yields stretch, not to the breaking point, but enough to create "choppier seas" for the economy and financial markets.

Over the past several decades, the ongoing fall in interest rates and inflation, with little volatility, produced "elongated cycles, with a recession every 10 years, if that," Timmer told IBD.

The Federal Reserve could pivot quickly and pull out all the stops, if needed, without worrying too much that inflation would take off.

Federal Reserve May Not Ride To Rescue

But going forward, Timmer says, the Fed "might have to be much more muted in its reaction" to economic weakness. Higher rates might be quicker to choke off growth, leading to shorter expansions.

What if the 10-year Treasury yield shoots to 6%, threatening runaway interest costs and an economic slump, as bond vigilantes rebel?

In that case, Wall Street shouldn't necessarily expect the Fed to ride to the rescue with rate cuts, Gagnon says. That's especially true if massive and growing fiscal deficits prove inflationary, as he expects they will.

"The bottom line is inflation is going to be at 2% and the Fed is going to make sure that happens. It doesn't matter what interest rate Treasury has to pay," said Gagnon, who served in various Fed roles over two decades.

Even if the economic toll from a rise in Treasury yields sends inflation below 2%, the Federal Reserve might not be quick to roll out the heavy artillery. The Fed's modus operandi still treats QE as a last line of defense — after interest rates are cut to zero. In the new old normal, in which a 4% fed funds rate is neutral, that might take a while.

Fed End Game?

Still, some see that QE end game as inevitable, with the Federal Reserve essentially carrying some of the debt it enabled. "We will need QE in some form again, and in big size, in the future to control the rise in debt," Deutsche Bank strategist Jim Reid said.

Others think the Fed might eventually resort to yield curve control, dictating interest rates on the debt rather than influencing them with bond purchases. That's the approach it used to finance World War II, before the Fed got its independence in 1951. It's what the Bank of Japan uses today.

"The real acid test will only come if Treasury bond prices fail to rally on bearish economic data, such as a sudden collapse in payrolls or, for that matter, a stock market crash," wrote Jefferies strategist Christopher Wood. "This is the context where it becomes much more likely that Washington will end up resorting to Japanese-style yield curve control policies."

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[gfp927z]

>>> Prime Time for Bonds

In our 2024 outlook, bonds emerge as a standout asset class, offering strong prospects, resilience, diversification, and attractive valuations compared with equities.


Asset Allocation Outlook

BY ERIN BROWNE, GERALDINE SUNDSTROM, EMMANUEL S. SHAREF

NOVEMBER 14, 2023


https://www.pimco.com/en-us/insights/economic-and-market-commentary/global-markets/asset-allocation-outlook/prime-time-for-bonds/


The global economic outlook along with market valuations and asset class fundamentals all lead us to favor fixed income. Relative to equities, we believe bonds have rarely been as attractive as they appear today. After a turbulent couple of years of high inflation and rising rates that challenged portfolios, investors may see a return to more conventional behavior in both stock and bond markets in 2024 – even as growth is hindered in many regions.

In this environment, bonds appear poised to perform well, while equities could see lower (though still positive) risk-adjusted returns in a generally overvalued market. Risks still surround the macro and geopolitical outlook, so portfolio flexibility remains key.

Macro outlook suggests a return of the inverse stock/bond relationship

In PIMCO’s recent Cyclical Outlook, “Post Peak,” we shared our baseline outlook for a slowdown in developed markets (DM) growth and, in some regions, the potential for contraction next year as fiscal support ends and monetary policy takes effect (after its typical lag). Our business cycle model indicates a 77% probability that the U.S. is currently in the “late cycle” phase and signals around a 50% probability of a U.S. recession within one year.

Growth has likely peaked, but so has inflation, in our view. As price levels get closer to central bank targets in 2024, bonds and equities should resume their more typical inverse relationship (i.e., negative correlation) – meaning bonds tend to do well when equities struggle, and vice versa. The macro forecast favors bonds in this trade-off: U.S. Treasuries historically have tended to provide attractive risk-adjusted returns in such a "post-peak" environment, while equities have been more challenged.

Valuations and current levels may strongly favor fixed income

Although not always a perfect indicator, the starting levels of bond yields or equity multiples historically have tended to signal future returns. Figure 1 shows that today’s yield levels in high-quality bonds on average have been followed by long-term outperformance (typically an attractive 5%–7.5% over the subsequent five years), while today’s level of the cyclically adjusted price/earnings (CAPE) ratio has tended to be associated with long-term equity underperformance. Additionally, bonds have historically provided these return levels more consistently than equities – see the tighter (more “normal”) distribution of the return outcomes. It’s a compelling statement for fixed income.

Delving deeper into historical data, we find that in the past century there have been only a handful of instances when U.S. equities have been more expensive relative to bonds – such as during the Great Depression and the dot-com crash. One common way to measure relative valuation for bonds versus equities is the equity risk premium or "ERP" (there are several ways to calculate an ERP, but here we use the inverse of the price/earnings ratio of the S&P 500 minus the 10-year U.S. Treasury yield). The ERP is currently at just over 1%, a low not seen since 2007 (see Figure 2). History suggests equities likely won’t stay this expensive relative to bonds; we believe now may be an optimal time to consider overweighting fixed income in asset allocation portfolios.

Price/earnings (P/E) ratios, are another way that equities, especially in the U.S., are screening rich, in our view – not only relative to bonds, but also in absolute.

Over the past 20 years, S&P 500 valuations have averaged 15.4x NTM (next-twelve-month) P/E. Today, that valuation multiple is significantly higher, at 18.1x NTM P/E. This valuation takes into account an estimated increase of 12% in earnings per share (EPS) over the coming year, an estimate we find unusually high in an economy facing a potential slowdown. If we assume, hypothetically, a more normal level of 7% EPS growth in 2024, then the S&P today would be trading even richer at 18.6x NTM P/E, while if we are more conservative and assume 0% EPS growth in 2024, then today’s valuation would rise to 19.2x NTM P/E. Such an extreme level, in our view, would likely drive multiple contraction (when share prices fall even when earnings are flat) if flat EPS came to pass.

We note, however, a crucial differentiation within the equity market: If we exclude the seven largest technology companies from this calculation, then the remainder of the S&P trades close to the long-term average at 15.6x NTM P/E. This differentiation could present compelling opportunities for alpha generation through active management.

Overall, we feel that robust forward earnings expectations might face disappointment in a slowing economy, which, coupled with elevated valuations in substantial parts of the markets, warrants a cautious neutral stance on equities, favoring quality and relative value opportunities.

Equity fundamentals support cautious stance

Our models suggest equity investors appear more optimistic on the economy than corporate credit investors. We use ERP, EPS, and CDX (Credit Default Swap Index) spreads to estimate recession probability implied by different asset classes, calculated by comparing today’s levels with typical recessionary environments. The S&P 500 (via ERP and EPS spreads) is currently reflecting a 14% chance of a recession, which is significantly lower than the estimates implied by high yield credit at 42% (via CDX).

Such optimism is underscored by consensus earnings and sales estimates for the S&P 500, which anticipate a reacceleration rather than a slowdown (see Figure 3). We’re concerned about a potential disconnect between our macro outlook and these equity earnings estimates and valuations. It reinforces our caution on the asset class.

Managing risks to the macro baseline

We recognize risks to our outlook for slowing growth and inflation. Perhaps the resilient U.S. economy will stave off recession, but also drive overheating growth and accelerating inflation that prompts into much more restrictive monetary policy. There’s also potential for a hard landing, where growth and inflation fall quickly.

In light of these risk scenarios, we believe it’s prudent to include hedges and to build optionality – and managing volatility, especially in equities, is attractively inexpensive (see Figure 4). For example, one strategy we favor is a “reverse seagull” – a put spread financed by selling a call option.

Investment themes amid elevated uncertainty

Within multi-asset portfolios, we believe the case for fixed income is compelling, but we look across a wide range of investment opportunities. We are positioned for a range of macroeconomic and market outcomes, and we emphasize diversification, quality, and flexibility.

Duration: high quality opportunities

At today’s starting yields we would favor fixed income on a standalone basis; the comparison with equity valuations simply strengthens our view. Fixed income offers potential for attractive returns and can help cushion portfolios in a downturn. Given macro uncertainties, we actively manage and diversify our duration positions with an eye toward high quality and resilient yields.

Medium-term U.S. duration is particularly appealing. We also see attractive opportunities in Australia, Canada, the U.K., and Europe. The first two tend to be more rate-sensitive as a large portion of homeowners have a floating mortgage rate, while the latter two could be closer to recession than the U.S. given recent macro data. Central bank policies in these regions could diverge, and we will monitor the bond holdings on their balance sheets for potential impact on rates and related positions.

In emerging markets, we hold a duration overweight in countries with high credit quality, high real rates, and attractive valuations and return potential. Brazil and Mexico, where the disinflation process is further along and real rates are distinctly high, stand out to us.

By contrast, we are underweight duration in Japan, where monetary policy may tighten notably as inflation heats up.

While we recognize cash rates today are more attractive than they’ve been in a long time, we favor moving out along the maturity spectrum in an effort to lock in yields and anchor portfolios over the medium term. If history is a guide, duration has significant potential to outperform cash especially at this stage of the monetary policy cycle.

Equities: relative value is key

Although the S&P 500 appears expensive in aggregate, we see potential for differentiation and opportunities for thematic trades. From a macro perspective, there’s also the potential for economic resilience (such as a strong U.S. consumer) to support equity markets more than we currently forecast. Accordingly, we are neutral in equities within multi-asset portfolios. An active approach can help target potential winners.

In uncertain times, we prefer to invest in quality stocks. Historically, the quality factor has offered an attractive option for the late phase of a business cycle (see Figure 5). Within our overall neutral position, we are overweight U.S. equities (S&P 500), which present more quality characteristics than those in other regions, especially emerging markets. Also, European growth could be more challenged than in the U.S., so we are underweight the local equity market despite its more attractive valuation.

We also favor subsectors supported by fiscal measures that may benefit from long-cycle projects and strong secular tailwinds. The U.S. Inflation Reduction Act, for example, supports many clean energy sectors (hydrogen, solar, wind) with meaningful tax credits.

On the short side of an equity allocation, we focus on rate-sensitive industries, particularly consumer cyclical sectors such as homebuilders. Autos could also suffer from higher-for-longer interest rates; as supply normalizes, we think demand will struggle to keep up.

Credit and securitized assets

In the credit space we favor resilience, with an emphasis on relative value opportunities. We remain cautious on corporate credit, though an active focus on individual sectors can help mitigate risks in a downturn. We are underweight lower-quality, floating-rate corporate credit, such as bank loans and certain private assets, which remain the most susceptible to high rates and are already showing signs of strain.

In contrast to corporate credit, attractive spreads can be found in mortgages and securitized bonds. We have a high allocation to U.S. agency mortgage-backed securities (MBS), which are high quality, liquid, and trading at very attractive valuations – see Figure 6. We also see value in senior positions of certain securitized assets such as collateralized loan obligations (CLOs) and collateralized mortgage obligations (CMOs).

Key takeaway

Looking across asset classes, we believe bonds stand out for their strong prospects in the baseline macro outlook as well as for their resilience, diversification, and especially valuation. Given the risks to an expensive equity market, the case for an allocation to high quality fixed income is compelling.



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[gfp927z]

NJHowie, Thanks again. Sounds like you could be running your own muni bond fund :o) And you actually are, via your own personal portfolio.

Fwiw, the only individual bonds that I purchased were some corporates, and I went with AA and AAA rated. Some of these (MSFT, JNJ) now have higher ratings than the US govt, lol. But there's actually nothing funny about the US debt rating being downgraded, and this is one reason to worry about the future of bonds in general. The US will not default, since they can just keep on printing more, but at some point the money itself becomes worthless, ala the Weimar Republic. And even without a crisis, the purchasing power of the dollar will just continue to erode over time, so having everything in fixed income / bonds, while 'safe' in the short term, can be a big loser in the long run. So I figure 'moderation in all things' -- some bonds, some stocks, some gold/silver, some real estate, etc.




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[NJHowie]

emma.msrb.org is for municipal bonds the equivalent of what sec.gov is for stocks - most importantly a repository for all the filings.

msrb.org has online training topics available which are good for gaining an understanding of municipal bonds and the market.

https://www.msrb.org/Education-Center

[bar1080]

Thanks NJ, that was a dandy fact-filled post. I've read it (twice), GFP too no doubt. But ihubbers only want to hear fairy tales about what's gong to make them rich, preferably before the week is out. IHUB is mostly for slobbering stock gambling addicts, not prudent investors.

Have bookmarked emma.msrb.org which I didn't know about.

[NJHowie]

Right - so general obligation bonds are usually best, because the municipality is pledging full faith and credit, meaning they will pay the bonds by whatever means necessary which they have at their disposal - pulling from any accounts they have, and including raising fees, general/sales taxes and property taxes. So, aside from the risk of bankruptcy, the general obligation bonds are going to be paid. Although nobody can predict the future, it is rare that bankruptcy will come in to play. And, in general you can get a good feel for the financial strength simply by reviewing the financial statements - income, balance, cash flow which they are required to have audited and report annually, and made available through emma.msrb.org. Weak municipalities are going to have a weak balance sheet and weak cash flow.

Revenue bonds can be higher quality or lower quality depending on what the security is backing them. Available in the offering statement, again, loaded at emma.msrb.org. If you've never reviewed an offering statement, just look up any municipal bond currently offered at your brokerage, jump over to emma.msrb.org, plug in the CUSIP, download and review the offering statement. In general, they all follow the same format. Which is nice, because after you've reviewed a few, you immediately know where to go in the document for the important information when doing your research.

As far as 6%-7% taxable munis - do you have an account with Fidelity? If so, copy/paste this in to your address bar and it will run a query I do daily:
https://tinyurl.com/2wpmbp5r

It uses min yield=5.7%. If you don't put some kind of bound on it, it will return over 3000 bonds, which is Fidelity's display limit.

Obviously the highest yielding are going to be lower quality. As I mentioned in prior comment, if you stick to A-rated or better, as shown in the Moody's report, the chances of default is well below 1%. So, in the list scroll down until you begin to start seeing A's. I have no problem taking BBB+, sometimes a BBB, and once or twice even a BBB-. To me, at the lower ratings, it boils down to if I believe Moody's/S&P are rating them correctly. Since I'm reviewing the financial documents, I'm gathering my own readings. If something is BBB-, but there is a backstop in case they run in to trouble, that is a benefit which the rating agencies may not be giving enough weight to. Or, maybe the finances have strengthened but they just haven't re-rated in a while?

Anyhow, water/sewer/electric revenue bonds are generally very strong - right up there close behind the GO bonds. They have very strong cashflow, as folks/businesses need/want their utilities. Additionally, if you read through a few of the offering statements, you'll see additional "covenants" that they are usually agreeing to - like their debt coverage will remain at/above some minimum, maybe something in the 1.1x to 1.25x range. They generally also stipulate that they will charge rates sufficient to maintain those debt coverage ratios. Most school district bonds are GO, so in general, they are also very safe. Those that are insured come with that extra level of safety, but at the same time should alert you that the issuer may be so strong - requiring them to get the insurance to allow them to issue the bonds at the original rate.

Chicago bonds are problematic. It's a very public issue how bad their finances are. Find the CUSIP for a Chicago bond, again go to emma.msrb.org and pull up the latest audited financial statements. You can see how terrible the balance sheet looks.

Now, the majority of folks will avoid Chicago bonds. But, there are always exceptions. Many smaller municipalities around Chicago get lumped together with it, some simply because they are in Illinois, but have strong financials. So, you'll see very weak pricing in the secondary market for the bonds - and this creates opportunity. However, it does take time to do the research, so if you don't want to get your hands dirty, it is easier to avoid it, and again, stick to A-rated or better.

I can go on and on if you like - just keep asking, I'm more than happy to share.

[gfp927z]

NJHowie, Thanks. Concerning your preference for taxable munis, since avoiding taxes isn't a primary concern, I assume you like these more than Treasuries because of the munis' higher yields? Just curious if you mainly get general obligation bonds, or do you include some revenue bonds also? And do you have a preference for particular US states or cities? Chicago is one that is often mentioned to avoid.

Thanks for any insights. I decided to mainly stick with Treasuries, since my Fed tax rate is fairly low, and Treasuries aren't taxed at the state level. I remember my dad had a fair number of munis, mostly GOs but some revenue bonds (water + sewer), and some school district bonds. Just curious where you are finding the 6-7% taxable munis you mentioned? Thanks.




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[NJHowie]

Again, happy that funds work for you. For me, they are not an option, except for the case where funds are the only option available - like DW's 401k. When I invest, I am the fund manager. I don't delegate that to anyone. Funds have different objectives than I do. (Bond) Funds will sacrifice quality in exchange for yield to boost their reported yields - I will not. I can go on and on. We're not going to come to agreement on this.

I'm quite familiar with every flavor of fund you want to discuss - mutual, index, ETF, closed-end, and so on. I will not trust my investments to a fund manager or the whims of an irrational market. I like certainty, just as everyone else does. I have the ability to create certainty, and so I do.

[NJHowie]

Hey there.

I have been redeeming my I-Bonds as they pass the 1 year mark and are resetting to the lower 3.38%. I did my first redemption on Oct 1 and will do another on Nov 1. I think I may leave $10k or $20k with Treasury Direct to be an emergency savings fund of sorts. My bank is one that only pays 0.01% on savings, so I don't want to keep it there. I don't have the restraint to simply leave the funds in a money market account at the brokerage - I've tried that, and it's just too close and easy to access and buy more things. Treasury Direct took care of my redemption very quickly, so I'm comfortable with my ability to access the funds should I need to in an emergency situation. At the same time, it's out of sight in that I don't see the cash sitting in my brokerage account daily, begging me to invest it.

All that being said, I have continued purchasing municipal bonds and CDs as the maturities, interest payments, and redemptions/calls take place. I have focused on longer maturities with the municipal bonds, 7, 10 years and more is certainly the case. I regularly scan the secondary market for CDs and it's almost like a game. I have gotten some incredible deals for 6 months to 5 years depending how lucky I get.

Most things I have maturing over the coming 14 months is in the 2% to 3% range so locking in 6% to 8% for up to 20 to 30 years is really something else - upping our future retirement income in real time. It is extremely easy to purchase high quality taxable municipal bonds right now in the 6% to 7% range with very little research. Yesterday I noted over 400 available. I pray that things stay like this over the next year to give me the opportunity to continue raising our future income/returns.

[gfp927z]

Bar, Thanks for the info on Bulletshares. They do look like an interesting alternative to individual bond ladders. Invesco points out that during the maturity year for the particular Bulletshare ETF, it may tend to have a reduced yield as the various bonds mature and the proceeds go into the $ market for varying periods of time. But these days the money market rate is at/near the bond's rate, so it currently wouldn't be an issue.

The diversification and simplicity of the Bulletshare would more than make up for any downside aspects, and it sure sounds simpler than the laddering approach using individual bonds. With a Treasury ladder there are no commissions, but with corporates, many discount brokerages still charge a commission (Vanguard charges $10 for a $10 K corporate or muni bond purchase). So Bulletshares avoid that problem. Seems like a great way to go, and having a maturity date removes the big disadvantage / unknown with regular bond funds and ETFs - ie what if rates go up and stay up for years (1970s), then you are locked in and unable to sell the fund without taking a loss.





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[gfp927z]

NJHowie, Just curious if you are holding on to your I-Shares? The rates went from 9.62% last year, to 6.48% in Jan, and now to 3.38% in July, so I decided to sell this month and pay the 3 month interest penalty. Those rates were too good to last, but at least inflation itself has come back down.

Also, I'm curious if you are extending the maturities on your new muni bond purchases? Analysts are recommending extending out to 7, 10 years or more, in order to capture the expected capital gains when rates finally start coming down. But I decided to only extend out from 2 year maturities to 3 years with my Treasury ladder, with the idea of holding until maturity. But are you favoring the longer term bonds? Thanks for any insights :o)




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[bar1080]

YT has several videos on Bulletshares. Seeking Alpha had some good info on them too.

[bar1080]

In the last year or two, I've mainly bought Invesco BulletShare ETFs which have just been around for several years. Those are taxable bond ETFs available in almost any maturity out to 2033. Recently they yielded (YTM) about 6.2% in maturities of a few years out. For instance BSCP matures in 2025. Each Bulletshare contains about 300-500 issues. Each is available in either Investment Grade, High Yield or Muni flavors. I've only bought the IG ones. They trade actively on the NASDAQ just like stocks. Clean and simple. At maturity, the proceeds are dumped into my brokerage account and the issue disappears from my account.

I've used them for several years and have yet to encounter any unexpected drawbacks. Expense ratios are around 0.10%

https://www.invesco.com/us/en/solutions/invesco-etfs/bulletshares-fixed-income-etfs.html

https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Advisor&productId=ETF-BSCP

[NJHowie]

Yes, nursing homes and enterprises that are really not "municipalities" but can issue municipal bonds are things to stay away from. Key is always what is the security, and what do the financial statements look like? All of the information is readily available at emma.msrb.org.

Puerto Rico was a disaster that most everyone saw coming, even those who were speculating.

The problem with the funds is that there are no guarantees. No guarantees of income, no guarantees of when you'll be able to sell and get your original principal back - these are things which are all guaranteed when you buy the individual bond. You are paying Vanguard more than the 0.09% for research and paperwork, because you are likely sacrificing yield and performance. I can appreciate that most folks have a fear of purchasing municipal bonds directly, especially since minimum purchase is 5 bonds and it takes a decent size portfolio to purchase enough municipal bonds to be meaningful. But history and the data speaks for itself.

Anyhow, if it works for you, that's all that matters in the end.

[bar1080]

Heck, I've had one fail, a nursing home revenue bond but it was an insured bond if you're counting that as a failure. Didn't lose a cent. That was about 8 years ago. I didn't buy that bond. I inherited it. Revenue bonds are riskier, I know.

Puerto Rico tax exempts all crashed together a few years back. Bankrupted many people down there.

I'm more than willing to pay Vanguard 0.09% to do the paper work and research for me.

BTW, like you, I almost always hold to maturity. I can't recall ever selling a bond. I hold most of my stocks -- they're all blue chips -- for ages. Have owned some index funds for >30 years.

[NJHowie]

I do not believe in mutual funds, especially when it comes to municipal bonds. If you are interested in investing in equities, but do not want to take the risks associated with individual stocks, I can appreciate gravitating towards those mutual funds.

However, when it comes to municipal bonds, a mutual fund offers almost no benefits in my view. Municipal bonds are extremely safe. Those that default are extremely rare, though the detractors can always point to their favorite headline-grabbing muni default. Out of the tens of thousands of municipal bond issues over the past 50 years, they can point to the 2 or 3 they know of. Warren Buffett is such a proponent of the safety of municipal bonds that he once proclaimed that the municipal bond insurers were really not necessary, because the defaults were so rare. He loved the business model so much, Berkshire began offering muni bond insurance, because Buffett claimed it was basically free money.

Moody's puts out a bi-annual report on defaults in the muni bond sector. Here is the latest version:
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/moodys-investors-service-data-report-us-municipal-bond.pdf

The most important information is Exhibit 7, Page 11. Basically, if you stick to A-rated or better, the total historical default rate is on the order of 5 in 10,000. It's practically impossible to invest in one that will default.

I can write a novel on why folks with significant holdings should opt for individual municipal bonds over municipal bond mutual funds. The reasons are numerous, the mutual fund isn't really doing anything for you. The number of bonds/issues they hold is not beneficial - it hurts performance.

Let me know if you want me to lay out some of the points.

[bar1080]

Should point out that I've actually owned both of those funds before their listed Creation Dates which is because they weren't converted to Admiral funds until about 25 years ago. I was a very early client of Vanguard and a huge fan of Vanguard's founder John Bogle, the creator and main promoter of the modern index stock fund. Vanguard dates back to 1975. I owned Fidelity funds, and individual investments prior to then. Bought my first share of stock when I was age 19 and my first [corp] bond a few years later.

[bar1080]

This discussion is forcing me to tackle some much-delayed research on my muni holdings which are concentrated in two Vanguard Admiral funds I've owned for many decades going back before interest rates peaked at 21.5% in December 1980. From Morningstar:

Vanguard Limited Term Tax Exempt Adm Fund: VMVMLUX
"VMLUX seeks current income that is exempt from federal personal income taxes, with limited price volatility. The fund has no limitations on the maturity of individual securities, but is expected to maintain a dollar-weighted average maturity of 2 to 6 years. At least 75% of the securities held by the fund are municipal bonds in the top three credit-rating categories."
https://www.morningstar.com/funds/xnas/vmlux/quote

------
Vanguard Intermediate Term Tax Admiral Fund VWIUX
"VWIUX seeks a moderate and sustainable level of current income that is exempt from federal personal income taxes. The fund has no limitations on the maturity of individual securities but is expected to maintain a dollar-weighted average maturity of 6 to 12 years. At least 75% of the securities held by the fund are municipal bonds in the top three credit-rating categories."
https://www.morningstar.com/funds/xnas/vwiux/quote

Both funds currently have expense ratios of 0.090% and hold >10,000 issues of bonds!

[NJHowie]

Yeah, it's pretty lonely in my world. I've run across 2 or 3 other folks in one forum that share my passion for purchasing individual municipal bonds.

Right now is a really great time to be purchasing. Lock in long-term very high yields today, kick back and relax. When interest rates eventually go back down, those bonds will jump higher in value and can either keep holding to collect the original high yield, or sell and take profits. It's really a no lose situation at this point. As my maturities, interest, and redemption payments come in, I just roll them out to new long term higher yielding bonds.

Personally, I prefer purchasing the individual bonds versus going with a fund for numerous reasons. The past two years has solidified my thinking as my portfolio has far outpaced the muni bond fund benchmark indexes.

I have mostly all taxable munis as the majority are inside of my tax-deferred retirement accounts. Even for my taxable accounts, I primarily have taxable munis because they were yielding better than the tax free on an after tax basis at the time of purchase.

Best regards.

[bar1080]

NJHowie, I think yours are among first posts I've read in 30+ years online that touched on muni bonds. I've long had funds in Vanguard short and Intermediate term muni bond funds and some individual bonds, usually BBB-rated or better. Often from my own state for the state tax benefits.

I'm a retired lawyer, and one son is a Big Four CPA.

[gfp927z]

>>> Corporate America Is Ignoring Jay Powell and Bingeing on Debt


Bloomberg

by Olivia Raimonde

October 6, 2023


https://finance.yahoo.com/news/corporate-america-ignoring-jay-powell-230002368.html


(Bloomberg) -- For the past 18 months, Federal Reserve Chair Jerome Powell has frantically been trying to break Americans' borrow-and-spend habits. It’s critical to his fight against inflation.

In C-suites across the country, though, CEOs and CFOs aren’t getting the message.

Not only have they displayed little desire to pay down debt that's become more expensive after 11 interest-rate hikes, but many of them have heaped more of it on their books, borrowing cash in bond markets to upgrade their operations, expand their businesses and fund share buybacks. (The surge in hiring in September, reported Friday morning, was just the latest evidence of this.)

Since the first rate increase back in early 2022, companies with investment-grade credit ratings — powerhouses like Pfizer and Meta Platforms that play an ever-growing role in driving the US economy — have added more than half a trillion dollars of net debt, according to data compiled by Bloomberg Intelligence. Even companies with shakier finances — those rated sub-investment grade, or junk — have been ratcheting their borrowing back up this year after scaling it back in 2022.

To Edward Altman, finance professor emeritus at New York University’s Stern School of Business, this is a reflection of just how ingrained the borrow-and-spend model became in Corporate America during a two-decade period in which Fed policymakers kept benchmark rates pinned near zero for long stretches.

Many of the executives managing balance sheets today began their careers during those easy-money years, which, Altman notes, makes it even more difficult to undo the mindset.

For them, this is “Corporate Finance 101,” he says.

And so while all the chatter on Wall Street has been that the Fed's hiking campaign is essentially over, the debt boom has signaled that Powell may have to keep pushing rates higher to break the fever and curb the behavior. Or at least maintain them elevated for longer than anticipated. The spike in benchmark 10-year bond yields over the past two weeks, which has cooled the debt-sale push for the moment, is a sign that investors could now be waking up to this fact.

The risk, of course, is that Powell winds up going too far and sinks the economy into a recession that's felt most acutely by the companies that piled on the debt.

Indicators of the financial health of investment-grade companies have begun to deteriorate, according to BI data. As their leverage ticked up between the end of March 2022 and mid-2023, a key gauge of their ability to make payments — known as interest coverage — edged lower, the data show.

And for less-creditworthy businesses, the strain is building even faster. Defaults have risen in some corners of speculative-grade debt markets, like real estate and retail. Household names Bed Bath & Beyond and Party City are among more than 150 companies with at least $50 million of debt that have filed for bankruptcy this year, according to data compiled by Bloomberg.

While it’s exceedingly rare, corporate upheaval is even possible among investment-grade companies. Silicon Valley Bank failed in March after the surge in interest rates triggered a run on deposits at the regional lender.

Given the extreme nature of the borrowing spree over the past decade, it's likely that other meltdowns are lurking in ordinarily safe corners of the market, said Hans Mikkelsen managing director of credit strategy at TD Securities. “It has to be that there will be things that blow up,” he said. Years of easy monetary policy meant that “the amount of risk-taking was extreme.’’

The corporate borrowing binge during these past 18 months is, for the most part, a North American phenomenon. Investment-grade borrowers in Europe added a much smaller amount of net debt over that time — $150 billion — while in Asia, their net borrowing declined by about $70 billion, BI data show.

To be clear, the Fed has had some success in reining in Americans' spending in certain sectors of the economy. There’s been a pullback in the leveraged loan market that finances mergers and acquisitions and a decline in mortgages and other consumer loans.

But in general, the urge to take on debt shows few signs of wavering. Even after a spike in long-term bond yields triggered a slowdown in debt sales the last couple weeks, September was still one of the busier months of the year. Companies raised a gross $124 billion in the bond market.

Higher-for-longer interest rates are, of course, little fuss to industry behemoths that are rich enough to borrow no matter the cost. Pfizer and Meta, for instance, increased their net debt by a combined $45 billion since the first rate hike, according to BI data. Representatives for the two companies declined to comment.

More noteworthy is the way mid-investment-grade businesses — those deemed a little less financially stable — have continued to tap debt markets. The average annual interest cost to borrow $1 billion in the US high-grade bond market has climbed to $62.7 million, from $17.4 million at the end of 2020.

Dozens of such companies in North America have increased overall debt while buying back shares on the open market, according to BI data, a signal they have ample cash and a confident outlook.

“Interest rates are higher, but still attractive as a means to raise capital,” said NYU’s Altman, who's best known for the Altman Z-score, a popular tool for predicting bankruptcies that he created decades ago. “The boards see it as a way to increase their return on equity to their shareholders.”

Drugstore chain CVS Health, which is scored BBB by major credit assessors, borrowed $11 billion this year to boost spending and acquire Signify Health and Oak Street Health. CVS’s board also approved an increase of its stock-buyback program by $10 billion. CVS’s debt load, meanwhile, has risen to 3.3 times a key measure of earnings as of the end of June, compared to 2.8 times in mid-2022, according to BI data.

A representative for CVS declined to comment.

And even firms that have historically taken a more conservative approach, like financial conglomerate Marsh & McLennan Cos., have been willing to keep tapping the market. “Look, interest rates are high, but we don’t get paid to time the market,” Mark McGivney, the firm's chief financial officer, said after selling $1.6 billion of bonds ahead of debt maturities next year. “We get paid to fund the company.”

Powell acknowledged last week the challenges that come with using interest rates to try to change behavior and steer the economy in the direction he wants. “One of our goals is to influence spending and investment decisions,” he told a group of teachers in Washington. “That will only be the case if people understand what we are saying and what it means for their own finances.”

The Fed, in other words, needs people to hear — and heed — its message.

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