Displaying items by tag: bonds

Treasury yields were higher following the November jobs report which showed a bigger than expected decline in the unemployment rate. The report suggests that the labor market remains tight which could prolong the Fed’s hiking cycle. However, the bulk of the gain in yields was given up in ensuing sessions as traders remain more focused on weakening inflation and softer economic growth.

According to the Labor Department, the US economy added 199,000 jobs in November which was just above consensus expectations of 190,000 jobs added and an improvement from an increase of 150,000 jobs in October. The unemployment rate dropped to 3.7% below consensus expectations of 3.9%. Some note that the report was helped by auto and entertainment workers returning to work after strikes. 

Some traders are looking for labor market weakness as the next impetus for the Fed to shift its policy. Clearly, this report dispelled notions that the economy is contracting and provides more ammunition for the ‘soft landing’ hypothesis. 

Wage growth also moderated to fall to 0.4% monthly and 4% on an annual basis. In terms of the economy, government and healthcare were the biggest sources of jobs growth, while the retail sector and transportation & warehousing shed the most jobs.

Finsum: Treasury yields were slightly higher following the November jobs report which came in stronger than expectations. 

Charles Schwab is forecasting positive returns for fixed income as the economy slows and inflation continues to fall. However, it expects volatility to linger given uncertainty about the Fed’s policy moves. 

Schwab notes that yields have been unusually volatile as the 10-year yield has ranged between 3.5% and 5% over the past 12 months. Yet, it believes that short and long-term yields have peaked for the cycle. 

It sees downward pressure for inflation given that supply issues have abated, while it sees the impact of tighter monetary policy continuing to materialize, also adding to downward pressure on inflation. Despite this bullish forecast for bonds, it doesn’t see a return to the pre-Covid era of low rates and quantitative easing (QE). 

In terms of economic growth, Schwab notes some risks as high real rates are impacting the economy as they create more incentives for consumers to save rather than spend. Two more  headwinds are tighter lending standards at banks and the Fed continuing to unwind its balance sheet. Another factor contributing to volatility is that the Fed could elect to keep rates higher as it wouldn’t want to squander gains made in the fight against inflation.

Finsum: Charles Schwab sees positive returns for fixed income in 2024 due to slower economic growth and falling inflation. However, it expects volatility to continue given uncertainty over the Fed.

Since the yield on the 10-year inched above 5% in October, we have seen a relentless rally in Treasuries. According to Bank of America, this rally is due to the increasing likelihood of an upcoming Fed rate cut and is just getting started. It eventually forecasts the 10-year yield falling another 200 basis points based on historical precedent of dramatic declines in yield during the interim period between the Fed’s final rate hike and first rate cut. 

There have been five hiking cycles since 1988. Each saw a major rally in Treasuries once the hikes were complete. The largest decline was 163 basis points, while the average decline was 107 basis points. The drop in yields tended to abate once the Fed began cutting rates. This cycle Bank of America sees the 10-year yield dropping to 2.25% by May 2024 which is when the first hikes are expected to take place. 

Such a decline in Treasury yields would have major implications for other asset classes as well. The researchers also warned that this prediction could be impacted by ‘lingering inflationary pressures. Interestingly, the bank’s strategists have a different outlook as they expect the 10-year period to end next year at 4.25%, which indicates minor change from current levels. 

Finsum: Bank of America shared historical research which shows that the 10-year yield tends to experience weakness during the interim between the Fed’s final hike and its first rate cut. 

The last FOMC meeting saw the Fed put a pause on hikes. Recent economic data, specifically softer inflation prints, is also supporting the notion that the Fed’s next move will be to cut rather than hike. Adding fuel to the rally was comments from Fed governor Christopher Waller that Fed policy was ‘well-positioned’ to bring inflation back down to its desired level. Waller’s concession is noteworthy given that he has been among the most hawkish FOMC members.

It’s already resulted in longer-term yields dropping, as the 10-year yield has declined from 5% in mid-October to 4.3%. As a result, equities have surged higher, and bonds posted their best monthly performance in nearly 40 years. The Bloomberg US Aggregate Bond Index was up nearly 5% in November. This performance is likely to attract inflows especially as bonds will further strengthen if the economy does fall into a recession. 

With these gains, the asset class is now slightly positive on a YTD basis. Many investors may also be eager to lock in these rates especially as the ‘higher for longer’ narrative around interest rates seems to be passing. There’s also increasing chatter of a rate cut as soon as spring of next year, while the odds of another hike have diminished. 

Finsum: Bonds enjoyed a strong rally in November. Some of the major factors behind this strength were dovish comments from FOMC members, soft inflation data, and the Fed nearing the end of its hiking cycle.

Northwestern Mutual is expanding its offering of professionally managed investment portfolios. The firm is launching a new category of model portfolios that are accessible to younger and less affluent investors.

The initiative is called the ‘Signature Portfolios Market Pathway’ and requires a minimum investment amount of $5,000. The intention is to create a ‘straightforward approach to investing’ through low cost, diversified and broad ETFs that provide exposure across Northwestern Mutual Wealth Management’s strategic asset classes. There are five types of model portfolios that are available that vary based on risk tolerance. Obviously, the larger goal for the firm is to provide opportunities for advisors to connect with a younger generation of investors who are ready to begin their financial planning journeys.

Northwestern Mutual is positioning itself to appeal to a younger generation and for the major transfer of wealth that is set to take place over the next couple of generations. The company’s average age for an advisor is 39, while it’s 57 through the industry. Currently, it’s the 5th largest independent broker-dealer in terms of revenue, has more than 6,700 advisors, and counts more than $250 billion in assets. 

Finsum: Northwestern Mutual is launching a new initiative which lowers the investment threshold to $5,000 to access the company’s model portfolios.