Displaying items by tag: rates

(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).

(New York)

Retail investors have often had trouble accessing the corporate bond markets. Bond are traded in $1,000 increments and usually move in multi-million Dollar transactions, putting the asset out of the reach of most (new corporate bond ETFs aside). However, there is an easier way to directly own bonds—so-called baby bonds, or bonds sold on stock exchanges like the NYSE in $25 increments. The total market size for the bonds is around $20 bn and the securities are usually senior unsecured. Issuers like them because they are callable after just five years. Frequently the bonds have higher yields than their convention counterparts. Finally, they pay interest four times a year rather than twice.

FINSUM: This is an interesting if niche asset class, but there is some appeal in the unique terms these “baby bonds” have. There are also some big name issuers like AT&T and eBay.

(New York)

The US real estate market has seen a string of bad news over the last few months, but many were hoping July housing starts would see a rebound. New data out shows that such a boost did not materialize, with housing starts underperforming expectations. The previous month’s reading was also downgraded by 13%. “Housing is the sole weak spot in the economy right now, and that’s probably not going to change”, according to one economist.

FINSUM: There is no near-term recovery in sight. We wonder if housing might be a leading indicator of a looming recession.

(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.

(New York)

Those hoping the current turmoil in the technology sector may turn around the fate of gold will be upset by new data. Gold has suffered its worst start to a year in almost a decade despite the fact that the US equity market was in a correction for much of it. Now, economic data shows that demand for the shiny metal is at its lowest since 2009. The big drop in drop demand did not stem from industry, but instead from investment markets, with ETFs buying ~60% less gold in the last year than the year prior.

FINSUM: Gold is in a tough and interesting spot. On the one hand, it is easy to see why rising rates have depressed gold prices. But on the other, it seems gold have should have benefitted from all the geopolitical and market instability of this year.