Displaying items by tag: Treasuries

(New York)

If you could time travel back to December, it would be hard to find anyone in the world that would have thought that six months later, ten-year Treasury yields would be back under 2%. The turnaround has been so stark and so dramatic, that it is hard to fathom. The yield is now at its lowest level since 2016, with investors fearful of the economy and anticipating several Fed rate cuts.

FINSUM: The big question is what this means. Consider that the yield curve has been inverted for over 90 days. This seems like a very clear recession signal, yet economic data continues to hold up.

(New York)

Whether investors like it or not, a recession is coming. One of the key indicators is for a yield curve inversion to last 90 days or more. If it does so, a recession is highly likely in the next 12-18 months. Well, the first point of inversion began in March and we just crossed the 90-day threshold, which means that the strongest indicator of recession has just been triggered. Here are some tips to prepare: clear out garbage holdings from your portfolio (e.g. the stock tip from your brother in law six months ago), set aside cash and come up with a plan to buy stocks when certain thresholds are hit (e.g. a 25% decline in key indexes), pay down debt (it might not be this easy to do so again for awhile).

FINSUM: For all the talk we have heard over the last year about “this time is different”, the reality is that the strongest recession indicator known has just been triggered.

(New York)

You may normally think of it in terms of stocks, but “buy low, sell high” applies to bonds just as much, and that is a good way to think of the market right now. With yields having fallen so far since last year, one strategist said it was time to accept the “the present the Fed has given us”, and swap out bonds for floating rate securities, which have lagged this rally. The scale of returns in the bond market is impressive. For instance, the iShares 20+ year Treasury Bond ETF has risen over 9% since the beginning of the year.

FINSUM: It seems unlikely to us that bond yields are going to drop much further, which means there is little reason to wait for further gains.

(New York)

Deutsche Bank is an uber dove. The bank has just come out saying it expects the Fed to make three full rate cuts before the end of the year. “Over the past month, downside risks to the outlook for the US economy and Fed have built”, said Deutsche Bank, continuing that a mix of different concerns, from the trade war to weak inflation, are pointing to “more negative outcomes”. Pimco thinks the Fed won’t cut this month, but that it may cut by 50 bp in July, saying “we wouldn’t expect Fed officials to wait for the economic data to confirm declining US growth — if they do, they could risk a more meaningful shock to economic activity”.

FINSUM: The odds of a downturn certainly seem higher than an upturn, which means the Fed is much more likely to cut than to hike. That said, three rate hikes in the next six months sounds a bit aggressive to us, especially because the Fed would want to leave some firepower if the economy really heads downward.

(New York)

The market is overly reliant on a rate cut, say UBS and Goldman Sachs. Both banks think investors are banking too strongly on the Fed cutting rates. The market is currently forecasting three 25 bp rate cuts by the end of the year. Treasury markets have surged, but too far says Goldman. UBS believes “Markets now imply that the Fed will cut rates by around 70 basis points this year and 35 bps next year. We find this excessive … We believe it would take a recession to provoke the magnitude of rate cuts currently being priced by the market, and this remains unlikely in our view”.

FINSUM: We do not believe the Fed will cut rates this sharply unless there is a recession, but maybe that is exactly what markets are expecting (just look at the yield curve).