Displaying items by tag: fed

Money has been pouring into fixed income and money markets as investors look to take advantage of high rates and protect their portfolios from inflation and market volatility. While the advantages are clear, investors should also understand the tax implications especially since there are more complications than equities. 

For one, taxes on interest income must be paid. However, there are some caveats. For instance, an investor can avoid state taxes by investing in a US government security such as Treasuries although federal taxes must be paid. In contrast, no state or federal taxes are paid on interest income from municipal bonds. 

Some investors choose to keep their fixed income investments in a tax-free retirement account. Despite taxes on interest income, fixed income continues to deliver positive, inflation-adjusted returns for investors. However, the tax bill should be considered prior to making these investments especially in high-tax states.

Ultimately, fixed income offers many benefits which investors are eager to capture. In this frenzy and focus on yield, many investors are losing sight that these expectations should be tempered given that the income is taxed. But the challenge is that this ‘penalty’ differs based on every owners’ geography and financial situation. 

Finsum: Fixed income has exploded in popularity due to high rates and recession risk. Yet, many investors are overly focused on the income and taking into account tax considerations.

Most of the attention and chatter in the energy sector have been focused on issues like the price of oil, a potential renaissance for nuclear energy, and whether electric vehicles (EV) will displace gas-powered vehicles. 

However, the proliferation of solar energy is less discussed but in many ways, it could be more impactful in the long-term. According to the Solar Energy Industries Association, there were an additional 12 gigawatts of installations in the first-half of 2023. This is a 20% increase from last year’s first-half.

A major factor is the Inflation Reduction Act (IRA) which boosted subsidies for home and corporate solar projects. It’s also boosting the domestic production of solar panels. In 2022, there was production of 10.6 gigawatts of domestic capacity, but this is projected to increase to 108.5 gigawatts by 2026. It’s also notable that capital expenditures in the solar industry were bigger than that of oil & gas last year. 

According to the industry group, the solar industry in the US is projected to grow 15% annually. It sees the full-scale benefits of the IRA to start hitting the industry by late 2024. In terms of challenges, it identifies interconnection of grids and cost-prohibitive batteries as bottlenecks for future growth. 

Finsum: A trend in the energy sector is the boom in solar due to lower costs and the Inflation Reduction Act. In particular, domestic manufacturing is a major beneficiary.. 

In a strategy piece for BNP Paribas, Daniel Morris and Olivier de Larouziere share some thoughts on the fixed income market and recent developments over the last couple of months which has resulted in them revising their outlook for the near and intermediate-terms.

The biggest surprise has been the resilience of the US economy in 2023 despite the Federal Reserve’s aggressive rate hikes. In essence, the odds of a ‘soft landing’ continue to tick higher as inflationary pressures continue to ebb in key areas. Recent weakness out of China is another indication that the global economy is decelerating, but it also has positive implications for inflation.

However, the Fed has not pivoted in terms of its policy given that inflation remains uncomfortably high in certain areas like services and wages. This, in concert with an economy that continues to expand, is the major reason why a Fed pivot is unlikely till sometime next year. 

BNP remains unsure about the terminal rate this cycle. But, it believes it will be higher than what they were forecasting a few months ago. One factor in this incorrect forecast is that the bank failed to account for the impact of higher government spending and large deficits which is also contributing to economic strength. 

Finsum: BNP Paribas shared its fixed income outlook for the rest of the year. Overall, the bank remains bullish but believes that any pivot in terms of Fed policy is not near. 

One of the biggest surprises of 2023 has been the resilience of the economy and inflation despite the Fed embarking on the most aggressive rate hike campaign in decades. For fixed income investors, it’s been a challenging environment. 

Inflows have been strong and sustained given higher rates and expectations that a recession was imminent. Yet, returns have been mixed especially with there being no change in the Fed’s stance despite some encouraging data on the inflation and economic fronts. Specifically, shorter duration bonds have outperformed, while longer duration bonds have underperformed.

According to Vanguard, it’s simply a case of short-term pain equating to longer-term gains. The selloff in fixed income will lead to higher returns over the intermediate and long-term while generating decent income for investors. Ironically, it’s an inverse of what we experienced over the past decade when bonds were in a decade-plus bull market due to the Fed’s dovish policies. In this environment, there was no value and limited income opportunities in the asset class. 

The firm recommends that investors have exposure to a mix of short and long-duration bonds. The factors that resulted in shorter duration outperformance are unlikely to continue especially given that the labor market is rapidly cooling and yields are at historically attractive levels. 

Finsum: Fixed income has been particularly challenging in 2023 due to the Fed continuing to hike rates. Here are Vanguard’s thoughts on how to navigate the market.

A recent challenge for the market and economy has been the surge in long-term Treasury yields. It implies higher costs for borrowers and corporations and if it persists, would certainly lead to a spike in defaults at some point.

Some key factors behind the ascent are resilience in the economy and inflation, rate cut odds in 2023 being priced out, and expectations of increased Treasury supply in the coming months due to large deficits. 

Yet, there has been some relief in the fixed income market due to a series of dovish economic data. This includes the August nonfarm payrolls report, jobless claims, inflation, and consumer spending data. In essence, there were some who believed that the economy may have been entering a re-acceleration period as evidenced by the 10-year Treasury yield rising from 3.2% to 4.4% between April and August. 

Yet, this week’s economic data undermines this narrative. The August employment data shows that hiring is clearly slowing, wage gains are decelerating, and the unemployment rate ticked higher. The 10-year Treasury yield declined from 4.4% to 4.1% as the breakout gets faded. 

Just as those who were confident about a recession have continually been frustrated over the last couple of years, those who are looking for a re-acceleration of the economy are likely to be as well. 

Finsum: There was some relief for the fixed income market this week due to a series of dovish economic data which support the notion of continued economic deceleration.