Displaying items by tag: fed

(New York)

There has been a lot of focus, including both worry and skepticism, surrounding the potential inversion of the yield curve. The two and ten-year Treasury are now just 20 bp apart. Because yield curve inversions have been a very reliable indicator of recession, many are worried. However, some are skeptical that the current near-inversion means much because of how distorted long-term bond prices have become because of quantitative easing. The reality though, according to the FT, is that it doesn’t matter if long-term yields are artificially low. Because the market believes in the predictive power of inversions, companies, consumers, and investors will act as though we are headed into a recession, and thus create one in a self-fulfilling prophecy.

FINSUM: This is an interesting argument that relies strongly on the concept of herd mentality amongst investors. We tend to agree that an inversion may cause an adverse reaction in the economy and markets.

(Washington)

Investors may not realize it yet, but the Fed is in a quite pickle: damned if they keep hiking, damned if they don’t. In what is being dubbed a potential “Dollar doom loop”, the Fed might create a cycle of excessive Dollar strengthening if it keeps hiking. This may cause an overseas debt crisis as many foreign borrowers, especially EMs like Turkey, have issued excessive Dollar-denominated debt. This would in turn put stress on Europe. Additionally, the strong Dollar strengthening would start to hurt US corporate earnings and exports, in turn weakening the economy and possibly causing the Trump administration to move to artificially weaken the Dollar. That said, if the Fed quits hiking, it risks the economy, which is already hot, quickly overheating.

FINSUM: This situation is very real, but luckily we think there is a pretty simple solution—only proceed slowly with hikes. It should be enough to keep the economy in check (given inflation is not high), but not so much as to send the Dollar surging (imperiling foreign borrowers).

(Washington)

Trump spooked currency and Treasury markets yesterday. Speaking in the context of the US’ trade tussle with China and others, Trump said he wasn’t thrilled with the Fed’s interest rate hikes. He said that in the trade battle with China, the Fed should be accommodative with its policy. Trump called Beijing a currency manipulator, and said the Euro was being manipulated also. Speaking on Trump’s comments and his new consistency in criticizing the Fed, one analyst said “This is now a serious headwind to the dollar”.

FINSUM: It is true that a constantly strengthening currency is difficult to deal with in a trade war, but that the same time, the Fed’s job is to look at US economic fundamentals. That said, how rate decisions would affect the economy via a trade war do seem like they would be within the Fed’s purview.

(New York)

With all of the bearish stories swirling around lately (us included), it was refreshing to find an alternative view today. Bloomberg has put out an argument that there will be no bear market in store for Treasuries. The story is from the top ranked bond strategist in the world, who points out that a decline in structured credit and related products means that Treasuries are a much higher component of overall fixed income indexes these days. This concentration is likely to keep rising over the next decade, which means indexes and benchmarks will need to buy Treasuries, a critical factor which will keep demand high. Another important point is that the stock market is losing its appeal compared to short-term Treasuries, as the yield of the latter is way ahead of the former and likely to stay that way.

FINSUM: This is excellent analysis from a highly reputably source. Our only addition would be to point out that US and global demography also reinforces the key points, as the aging of the world means there will be a higher demand for income investments over the next decade.

(New York)

Investors be warned, JP Morgan has just issued an ominous warning—that ten-year Treasury yields will jump to 5%. JP Morgan’s CEO, Jamie Dimon, has long argued that yields would rise to 4%, but now says the figure might be 5%. “I think rates should be 4 percent today … You better be prepared to deal with rates 5 percent or higher - it’s a higher probability than most people think”. Dimon sees a recession on the horizon, but he does admit there may be time for the bull market to continue, saying it could “actually go for 2 or 3 more years”.

FINSUM: Ten-year yields are currently having trouble sustaining 3%, so it is hard to imagine them going to 5% any time soon. Still we thought the warning was worth sharing.