Tag Archive: Interest rates

Living In The Present

It’s that time of year again, time to cast the runes, consult the iChing, shake the Magic Eight Ball and read the tea leaves. What will happen in 2019? Will it be as bad as 2018 when positive returns were hard to come by, as rare as affordable health care or Miami Dolphin playoff games? Will China’s economy succumb to the pressure of US tariffs and make a deal?

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Insane Repo Reminds Us

It was only near the quarter end, that’s what made it so unnerving. We may have become used to these calendar bottlenecks over the years, but they still remind us what they are. Late October 2012 was a little different, though. On October 29, the GC repo rate for UST collateral (DTCC) surged to 52.6 bps. The money market floor, so to speak, was zero at the time and IOER (the joke) 25 bps. We also have to keep in mind the circumstances of that...

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Monthly Macro Monitor – November 2018

Is the Fed’s monetary tightening about over? Maybe, maybe not but there does seem to be some disagreement between Jerome Powell and his Vice Chair, Richard Clarida. Powell said just a little over a month ago that the Fed Funds rate was still “a long way from neutral” and that the Fed may ultimately need to go past neutral.

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Monthly Macro Monitor – October 2018

Stocks have stumbled into October with the S&P 500 down about 6% as I write this. The source of equity investors’ angst is always hard to pinpoint and this is no exception but this correction doesn’t seem to be due to concerns about economic growth. At least not directly.

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We Need a Free Market in Interest Rates

We do not have a free market in interest rates today. We have not had one since the creation of the Fed in 1913. The Fed began buying bonds almost immediately, which pushes up the price and hence pushes down the interest rate. However, as I discuss in my theory of interest and prices, the Fed creates a resonant system with positive feedback loops.

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Monthly Macro Monitor – September

This has already been one of the longest economic expansions on record for the US and there is little in the data or markets to indicate that is about to come to an end. Current levels of the yield curve are comparable to late 2005 in the last cycle. It was almost two years later before we even had an inkling of a problem and even in the summer of 2008 – nearly three years later – there was still a robust debate about whether the US could avoid...

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Illicit Arbitrage Cut by Tax Cuts and Jobs Act, Report 3 Sep 2018

This week, we are back to our ongoing series on capital destruction. Let’s consider the simple transaction of issuing a bond. Party X sells a bond to Party Y. We will first offer something entirely uncontroversial. If the interest rate rises after Y buys the bond, then Y takes a loss. Or if the interest rate falls, then Y makes a capital gain. This is simply saying that the bond price moves inverse to the interest rate.

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Global Asset Allocation Update

The risk budget is unchanged again this month. For the moderate risk investor, the allocation between bonds and risk assets is evenly split. The only change to the portfolio is the one I wrote about last week, an exchange of TIP for SHY.

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Global Asset Allocation Update

Note: This will be a short update. We are shifting the timing of some of our reports. The monthly Global Asset Allocation update will now be published in the first week of the month, aiming for the first of each month. I’ll put out a full report next week. The Bi-Weekly Economic Review is shifting to a monthly update, published on the 15th of each month.

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Great Graphic: US 2-year Premium Grows and Outlook for G3 Central Banks

A cry was heard last week when President Trump expressed displeasure with the Fed's rate hikes. Some, like former Treasury Secretary Lawrence Summers, claimed that this was another step toward becoming a "banana republic." Jeffrey Sachs, another noted economist, claimed that "American democracy is probably one more war away from collapsing into tyranny."

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Bi-Weekly Economic Review

This will be a fairly quick update as I just posted a Mid-Year Review yesterday that covers a lot of the same ground. There were, as you’ll see below, some fairly positive reports since the last update but the markets are not responding to the better data. Markets seem to be more focused on the trade wars and the potential fallout. I would also note that at least some of the recent strength in the data is related to the tariffs.

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Great Graphic: Two-year Rate Differentials

Given that some of the retail sales that were expected in June were actually booked in May is unlikely to lead to a large revision of expectations for Q2 US GDP, the first estimate of which is due in 11 days.  Before the data, the Atlanta Fed's GDPNow projects the world's biggest economy expanded at an annualized pace of 3.9% in Q2. 

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Global Asset Allocation Update

The risk budget is unchanged this month. For the moderate risk investor the allocation to bonds and risk assets is evenly split. There are changes this month within the asset classes. How far are we from the end of this cycle? When will the next recession arrive and more importantly when will stocks and other markets start to anticipate a slowdown?

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Bi-Weekly Economic Review: As Good As It Gets?

In the last update I wondered if growth expectations – and growth – were breaking out to the upside. 10 year Treasury yields were well over the 3% threshold that seemed so ominous and TIPS yields were nearing 1%, a level not seen since early 2011. It looked like we might finally move to a new higher level of growth. Or maybe not.

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Bi-Weekly Economic Review: Growth Expectations Break Out?

There are a lot of reasons why interest rates may have risen recently. The federal government is expected to post a larger deficit this year – and in future years – due to the tax cuts. Further exacerbating those concerns is the ongoing shrinkage of the Fed’s balance sheet. Increased supply and potentially decreased demand is not a recipe for higher prices. In addition, there is some fear that the ongoing trade disputes may impact foreign demand...

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Bi-Weekly Economic Review: Interest Rates Make Their Move

How quickly things change in these markets. In the report two weeks ago, the markets reflected a pretty obvious slowing in the global economy. In the course of two weeks, what seemed obvious has been quickly reversed. The 10-year yield moved up a quick 20 basis points in just a week, a rise in nominal growth expectations that was mostly about inflation fears.

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Bi-Weekly Economic Review: Investing Is Not A Game of Perfect

The market volatility this year has been blamed on a lot of factors. The initial selloff was blamed on a hotter than expected wage number in the January employment report that supposedly sparked concerns about inflation – although a similar number this month wasn’t mentioned as a cause of last Friday’s selling. The unwinding of the short volatility trade exacerbated the situation and voila, 12% came off the market in a matter of days.

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Bi-Weekly Economic Review: Embrace The Uncertainty

There’s something happening here What it is ain’t exactly clear There’s a man with a gun over there Telling me I got to beware I think it’s time we stop, children, what’s that sound Everybody look what’s going down There’s battle lines being drawn Nobody’s right if everybody’s wrong Young people speaking their minds Getting so much resistance from behind It’s time we stop, hey, what’s that sound Everybody look what’s going...

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Bi-Weekly Economic Review: The New Normal Continues

There has been a lot of talk about the economic impact of the recent tax reform. All of it, including the analyses that include lots of fancy math, amounts to nothing more than speculation, usually informed by little more than the political bias of the analyst. I am guilty of that too to some degree but I don’t let my personal political views dictate how I view the economy for purposes of investing.

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FX Weekly Preview: Changing Fortunes in the Capital Markets or Long Overdue Correction?

The chief development in the capital markets has been the sharp drop in equities after a significant rally since late last year and the rise in yields. The dollar had fallen alongside the exuberant appetite for risk assets. Anecdotal evidence supports the idea that the greenback was used as a funding currency to purchase those risk assets.

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