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HomeHoisington: The Case for Lower Long Term Rates
Posted by Larry Doyle on July 24th, 2013 7:08 AM |
When the herd on Wall Street is moving to one side of the boat, I am inclined to start thinking about moving to the other. Or at the bare minimum, I want to consider getting to the middle.
I make that point as many strategists and Wall Street savants are playing the momentum card and recommending that people overweight equities and underweight bonds because rates are assuredly headed higher.
The vicious sell off in bonds over the last two months on the heels of Fed chair Bernanke’s comments about tapering is clear cut evidence that the savants are right and that rates will continue their move higher, correct? (more…)
Financial Repression Kicks the Can and Our Butt
Posted by Larry Doyle on March 21st, 2012 8:36 AM |
More and more we see central bankers around the world — but especially here at home and within the EU — engaged in financial repression as THE means to solve our economic woes.
What is financial repression?
A term that describes measures by which governments channel funds to themselves as a form of debt reduction. This concept was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. Financial repression can include such measures as directed lending to the government, caps on interest rates, regulation of capital movement between countries and a tighter association between government and banks.
What are the challenges faced by investors in an era of financial repression? (more…)
Invisible Taxes = Loan Sharking = Usury
Posted by Larry Doyle on August 24th, 2010 8:27 AM |
Why is it that the very people who saved and invested to finance a lot of the growth in our nation are now the very ones being penalized by the exceptionally low interest rate policy of the Federal Reserve? While Ben Bernanke and his Washington cronies maintain that our economy needs these artificially induced government driven interest rates, the very fact is these anemic rates are crushing those citizens in our country who live on fixed incomes and rolled their CDs. While savers are getting waxed on one side of the coin, the banks are sticking it to our brethren who rely on credit lines from their credit cards on the other side. That’s business, you say? No, that is not purely business. In the midst of an economy dominated by the government, our current interest rate and credit card policies are nothing more than invisible taxes on both savers and consumers alike.
There are two sides to this coin and on both sides banks are squeezing American citizens. Savings rates have plummeted while borrowing rates via credit cards move higher. Both these points are highlighted in recent commentaries. (more…)
The Reflation Bill Is Outstanding and Growing
Posted by Larry Doyle on April 5th, 2010 11:13 AM |
If we are to believe the markets are predicting a rebound in the economy (I do not blindly accept that to be the case), then it is high time we address the next enormous question facing our country. That is? The bill that has been accruing for the ‘so-called’ saving of our economy.
Whether the economy has been saved or not is a relative question. Please be careful as to how to use that phrase in light of the fact that there are 6.5 million people out of work now for at least 27 weeks (long term unemployed) and close to 17% of our labor force is underemployed.
The biggest question facing our country now is how do we pay for cleaning up this mess that was created over the last number of years? (more…)
Why Would China and Japan Stop Buying Our Debt?
Posted by Larry Doyle on February 17th, 2010 12:19 PM |
Our wizards in Washington should not be so naive to think foreign buyers, especially from Asia, will continue to finance our debt at current rates and at current levels. News yesterday that China is no longer the largest holder of our Treasury debt should not be discounted.
What are the ramifications for our nation if China and other foreign buyers decline to purchase our debt or – even worse – actually start selling even more of their current holdings? A quick and violent move higher in our domestic interest rates.
Don’t think it could happen? Think again. (more…)
What’s the Market Telling Us?
Posted by Larry Doyle on December 11th, 2009 9:38 AM |
In the face of generally positive economic news the last two days, (Retail Sales this morning rose 1.3% and the improving Trade Deficit), the price action in the market is very interesting. What is it telling us? Let’s navigate.
With the U.S. Dollar Index having firmed over the last week, money does not appear to be coming out of the equity markets. The major equity averages are up anywhere from .5 to 2.5% on the month. What market segments are feeling the bulk of the pain? Government bonds and commodities, primarily oil and gold.
Interest rates on U.S. government bonds have continued to move higher as Treasury supply this week has not been well received. With rates on 10yr U.S. Treasurys higher by .35% over the last ten days, it would appear that market participants continue to believe the Fed will be forced to raise rates or make other moves to lessen the support and stimulus provided to the economy.
If rates are to move higher, our dollar should find support . . . and it is, as the U.S. Dollar Index remains above the 76.00 level. While dollar strength had been a harbinger of general weakness across almost all risk-based asset classes, the commodity sector is bearing the brunt of the pain currently.
The DJ-UBS Commodity Index has declined by 2.5% on the month led lower primarily by oil (down approximately 10% on the month) and gold (down 4% on the month).
Add it all up and what does it mean? If our domestic economy is in fact stabilizing, then the public at large and investors will compel the Grand Old Man, that is Uncle Sam, to back away from continuing to provide stimulus. As that occurs, the market may begin to normalize to levels at which private investors care to put money to work. At this juncture, investors are saying interest rates are not attractive at current levels. As interest rates rise, that may actually temper an economic rebound, especially in housing.
So be it. It is not realistic for market participants “to have their cake and eat it too.”
LD
U.S. Markets Play “Follow the Leader”
Posted by Larry Doyle on October 7th, 2009 9:40 AM |
Yesterday’s rise in rates by the Australian central bank is a bellweather sign of the global shift in the balance of economic power. While the rise in rates by the Aussies is the first central bank move, it certainly will not be the last. Why did the Aussies raise rates and what does it mean both in the short term and for the long haul? Let’s navigate.
The Australian economy did not have near the level of debt that burdens the U.S. and Europe and thus they did not need near the amount of monetary stimulus to weather this global recession. Additionally, Australia has benefited from extensive trade in the Asian hemisphere.
The knee jerk reaction in the markets was focused primarily on a selloff in the greenback which supported a move higher in commodities and global equities via the ‘positive carry trade.’ The commodity which garnered the greatest focus was gold, which moved toward $1040/ounce.
What do these moves mean? I see cross currents on the economic landscape, including:
1. The dollar may not necessarily continue to weaken, but given its current weakness it will support those companies which garner a greater degree of sales overseas.
2. A weak dollar is usually affiliated with inflation. I do not think we are in a position to look at prices in terms of one overall index. Why? Given the technical and fundamental factors in our economy, certain price components will likely project increased inflation while others will not.
To be more specific, given the labor situation in our country, I do not see any appreciable increase in wages anytime soon. In fact, I think it is likely wages will trend lower.
Given the glut of supply and vacancies in both the residential and commercial real estate markets, I have a tough time believing these prices will move appreciably higher anytime soon.
Commodities may very well move higher. Why? High five to MC for sharing with me that there is increased dialogue in the international trade community to move oil away from trading in dollars. In fact, that story likely had a big impact in yesterday’s trading. Even if there is not an immediate shift in this market dynamic, the mere fact that it is being discussed will support oil specifically, oil-based products broadly, and other commodities as well.
Given that these commodities are primarily inputs, the prices for the outputs will likely move higher. This development is clearly inflationary.
3. What happens to interest rates here in the United States? While on one hand we have some deflationary forces at work which would keep rates low, we have the tug of other factors pushing them higher. How does it play out? My gut instinct tells me that overall pools of capital will be flowing away from the United States and, as such, people and private corporations will have to pay more to attract capital here in our country. I think those entities which focus the bulk of their economic activity here in the United States will be forced to pay higher rates to attract funding.
4. What about our equity markets and the Fed? While the Fed will want to keep our rates low for an ‘extended period,’ they may not have that luxury. If other nations follow Australia in raising rates, the U.S. may need to withdraw some liquidity sooner rather than later. Kansas City Fed chair Thomas Hoenig made this very assertion yesterday.
What would higher rates mean or even the thought of higher rates mean? Slower growth and a tough road for equities going forward.
Thoughts, comments, questions always appreciated.
LD
Related Sense on Cents Commentary
Dollar Carry Trade Drives Global Equities (September 16, 2009)
About Those Interest Rates
Posted by Larry Doyle on June 6th, 2009 9:49 AM |
A sharp move higher in interest rates has received a lot of attention lately. In fact, I now believe the focus on interest rates will move to center stage in our Brave New World of the Uncle Sam Economy. Allow me to comment.
I spent my entire career on Wall Street within the bond market, so my professional life has been consumed by interest rates. I don’t know if that is necessarily a good thing, but that’s for another day.
What are interest rates?
Very simply, the interest rate – for whatever financial product – is the “price of money.”
What are the components of interest rates for respective financial products?
Interest rates are determined by three factors:
1. a general level of rates of return in the economy and market: this level is typically viewed by focusing on the shorter maturity U.S. government securities. Uncle Sam is viewed as the benchmark from which all other interest rates are compared. Uncle Sam’s own creditworthiness is coming into question, but that can be a topic for a separate post.
2. a risk component: this factor addresses the creditworthiness of the borrower (be it a global government, a corporation, a municipality, or an individual). Additionally, while most bonds focus on the risk component as being a function of creditworthiness, there are other risk factors as well, including prepayment risk for mortgages.
3. inflation/deflation: this factor addresses how fixed future returns on bonds are impacted by the general change of prices in the economy. The presence of inflation (a rising level of prices) erodes the value of fixed future returns. In a similar fashion, the presence of deflation (a declining level of prices) increases the value of fixed future returns.
Utilizing these three factors, one is prepared to more effectively understand the nature of interest rates, both from a static standpoint and in a dynamic environment.
Utilizing these components, how and why do interest rates change in a dynamic economy?
Let’s recall that the valuation of any financial product (a stock, bond, currency, commodity) is determined in a dynamic market setting by buyers and sellers assessing three variables:
1. fundamental analysis: from our trusty Investing primer (right sidebar), we see this variable defined as:
an investor can perform fundamental analysis on a bond’s value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings.
2. technical analysis: again using our Investing primer:
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
3. market psychology: the Investing primer educates us on this variable as well:
The overall sentiment or feeling that the market is experiencing at any particular time. Greed, fear, expectations and circumstances are all factors that contribute to the group’s overall investing mentality or sentiment.
While conventional financial theory describes situations in which all the players in the market behave rationally, not accounting for the emotional aspect of the market can sometimes lead to unexpected outcomes that can’t be predicted by simply looking at the fundamentals.
Utilizing these tools, let’s review the prevailing level of interest rates in our economy from a chart provided on a daily basis at the WSJ Market Data page linked here at Sense on Cents.
We can assess how all the short term interest rates have come down over the last three years in response to the recession. We are now faced, though, with a move higher in rates given the increased risks of inflation, along with massive demand by global governments, corporations, municipalities, and individuals for credit. That demand, like any demand, is driving the price of money (the interest rate) higher. Is this demand being generated by improvements in the economy, the need to refinance existing debt, or a combination of the two?
Welcome to the word of interest rate analysis for fixed income investments (bonds).
Please share your thoughts, questions and concerns so we can all most effectively navigate the economic landscape.
For more on this topic:
Is The Government Bond Bubble Getting Ready to Burst?
May 21, 2009
Mortgage Refi Activity Is Driving Rates Higher
May 26, 2009
The Wheels Have Come Off Barack’s Bond Bus
May 27, 2009
I will also address the dynamics driving interest rates extensively during my NQR Sense on Cents radio show Sunday evening June 7th from 8-9pm.
LD
P.S. If you like what you see here at Sense on Cents, please add the site to your favorites, share with your friends, and visit/comment often!! Thanks!!
The Wheels Have Come Off Barack’s Bond Bus
Posted by Larry Doyle on May 27th, 2009 5:56 PM |
Despite what market analysts, media mavens, and government officials may assert, from an investment standpoint, the price action in the bond market can only be defined as “THEY’VE LOST CONTROL!!”
Who’s they? Bernanke, Geithner, Summers, Obama, and team. How so? The weight of the massive deficit spending along with the embedded costs of the Fed’s quantitative easing program are pressuring the bond market and driving interest rates dramatically higher. (10yr U.S. Treasury moved higher by almost 20 basis points today to 3.75%, a full 55 basis points higher over the last week. This is an ENORMOUS move.)
The knock on effect is increased anxiety in the equity markets (down 2% today) and a highly likely further slowing in the economy. I am not surprised. Given the programs and approach put forth by Obama, along with the economic turmoil, there was little doubt we would experience very high levels of deficit spending. Prior to the inauguration (January 4th to be precise), I surmised:
I also believe that despite the Fed and Treasury purchasing government and mortgage debt, these rates will end up much higher at the end of this year than they are now simply due to the growing deficit. A move higher in these rates will potentially cause further anguish within the equity markets.
I have tried to proactively highlight why I thought the government bond bubble was bursting (Is The Government Bond Bubble Getting Ready To Burst?) and just yesterday broached the negative impact on interest rates of all the mortgage refinancing activity (Mortgage Refi Activity Is Driving Rates Higher).
For those involved in trading or investing, successful calls are measured by direction, magnitude, and time. This call on rates has been a fairly patient development, but given the dramatic shift higher in rates over the last week, the implications of this move can now be embraced. Those implications include a revaluation of the equity markets (lower) and the economy (forestalled recovery). Beware of people who discount this move in interest rates. The fact is it has more to run. In my opinion, the move higher in rates is not only a reflection of the supply of bonds (both government and mortgage) but also an indication of further deterioration in our currency precipitating inflation.
Can the Federal Reserve do anything to defend the currency? Increase short term interest rates. Does anybody think our economy can afford an increase in short term rates at this juncture? NO WAY! There truly is very little the Fed or Treasury can do at this juncture. Thus, in my opinion, they’ve truly lost control as “the wheels have come off the bus.” Welcome to the Brave New World of the Uncle Sam economy 2009.
LD
Is the Government Bond Bubble Getting Ready to Burst? UPDATE>>
Posted by Larry Doyle on May 7th, 2009 2:59 PM |
I have tried to highlight my concerns on interest rates for the entire year. Despite the Federal Reserve “cutting checks” to buy hundreds of billions in U.S. Treasury bonds and mortgage-backed securities, the global demand for credit (meaning global governments, companies, and municipalities issuing MASSIVE supply of bonds) is driving rates higher.
As I wrote in my post from April 30th, the U.S. Treasury market has been faced with underwriting tens and now hundreds of billions in government debt on a regular basis. The 30yr government bond auction today was not well received and interest rates have moved higher by 10-20 basis points (.10 to .20%).
What are the implications of higher rates?
1. Increased cost of financing the deficit.
2. Upward pressure on other rates, primarily mortgage rates.
3. Longer time for economy to improve given higher interest costs.
4. Given the massive global government deficits, the access to credit for private enterprise is negatively impacted. This is known as crowding out.
As I referenced the other day, “We Still Have To Pay The Bill.”
Bloomberg reports, Treasuries Tumble as Bond Sale Draws Higher Than Forecast Yield.
From my piece at the end of April:
The equity markets have rebounded significantly over the last seven weeks. The Dow and S&P are now down approximately 4-6% on the year. The tech heavy Nasdaq has distinguished itself and is up approximately 10% on the year.
At this juncture, if the equity markets are implying that the economy will not slip into Depression, then the bill for the stability in equities is being transferred to participants in the bond market. Government bonds are facing an almost weekly avalanche of tremendous supply. This week the market is absorbing over $100 billion in 2yr, 5yr, and 7yr Treasury securites. Take a deep breath and next week the market is faced with over $75 billion in 3yr, 10yr, and 30yr government securities. The Treasury is likely going to sell 30yr government debt on a monthly basis!!
The Federal Reserve has been the biggest buyer of Treasury and mortgage-backed securities. The Fed’s balance sheet may be large but it is not endless. What have 10 yr. Treasury securities done on the year? Even in the face of massive buying of these securities by the Fed, the 10yr has backed up almost 1% to a current level of 3.1%. That rise in rates is very significant.
I have maintained and continue to maintain that interest rates will move higher given the overwhelming demand for funds by global governments to pay for deficit spending. Central banks around the world may try to hold the respective bond markets up and interest rates down but investors will continue to demand a higher rate of interest in the process.
As government rates move higher, mortgage rates, and other corporate rates will likely move higher as well. If we get a whiff of early signs of inflation which I believe is coming these rates could ratchet higher and the bubble in the government market would not merely burst but would actually explode.
LD
