It’s quite funny to see the expectations of folks – they really, really want Jay Powell to say during his 1:30 p.m. (central) press conference that they have a target date for lowering interest rates. Surprise–it ain’t going to happen. While much economic data shows that we might have a tiny bit of softening–employment in particular is hanging tough.
So today we have the conclusion to the FOMC meeting with an announcement of policy changes at 1 p.m. (central). The decision is ‘no change’ in the Fed Funds rate–the statement will be ‘we still have work to do’. Yesterday we essentially had no change in the consumer price index (CPI) –why would Powell announce ‘victory’. Last weeks employment numbers showed unemployment falling to 3.7% from 3.9% and we still continue to create plenty of new jobs month after month.
Also today we have the producer prices index (PPI) being released in 45 minutes which will add a little intrigue to the mix.
Right now equity markets are slightly green and the 10 year treasury is trading right around 4.18%–down a couple basis points from yesterdays close. Honestly markets have been trading in a goldilocks fashion – we’ll have to see how long this continues before the ‘tension on the tape’ breaks hard one way or another.
As I mentioned I bought a small starter position in PennyMac 8.50% Senior Notes (PMTU) with a short maturity date. This fits right in my wheelhouse (a balance of safe issues with modest yields and mid level quality with high coupons and yields)–at 8.5% it provides a lift in the portfolio toward my 7% overall target–and share price movement should be minimized with the shorter maturity date.
I have my eye on a mid level quality security this morning with a 8%+ yield to maturity–if I can get it at ‘my’ price I will be a buyer this morning–more to come on this one.
So now including after today’s meeting run the 10 yr Treas has moved down almost 100 basis points from it highs while at the same time short rates, not unexpectedly, are essentially unchanged. And the banks are rallying like crazy? Don’t get me wrong, glad to see it, but don’t they need a more normalized yield curve to truly benefit bigtime?
2wr
Yes and No.
Mr Market is energized by the substantial reduction in the mark-to-market losses in the long tail bonds amassed by the banks during COVID. The loss in value of the bonds was, in many cases, close to/equal/greater than the banks’ equity.
BofA is the largest offender – at the end of the 2nd quarter, it had an unrealized bond loss of $105 billion (papered over by the Fed).
The loss in profitability caused by the inverted yield curve is less visible and will only be realized in the future..
thanks, Westie – I almost mentioned that as the other positive for banks in general with the Fed statement…. To generalize, I would think its impact on the downside had been understated to some degree, so would expect understated impact on the upside, but Mr. Market always loves an excuse to rally I guess…
Hmmmmm. maybe I should write for WSJ – “The Fed’s Yield-Curve Problem”
The Fed’s Yield-Curve Problem
Central bank might ease rates sooner rather than later
By
Justin Lahart
Dec. 13, 2023 4:07 pm ET
Federal Reserve Chairman Jerome Powell. Photo: Mark Schiefelbein/Associated Press
For some forecasters, the inversion of the yield curve has been a sure sign a recession is coming. For the Federal Reserve, it could turn into a different kind of problem.
Fed policy makers on Wednesday left their target on overnight rates at a range of 5.25% to 5.5%, holding it at its highest level in more than 20 years. But a dovish postmeeting statement that acknowledged inflation’s cooling trend—and policy maker forecasts of lower rates by the end of next year—suggested easing might be coming sooner rather than later.
Fed Acknowledges Inflation Has Eased This Year
The rate-hiking campaign the Fed, helmed by Chairman Jerome Powell, commenced last year has pushed a constellation of other short-term rates higher, too, such as Treasury bill yields and the prime rate that commercial banks charge. Longer-term rates—especially after Wednesday’s Fed decision—haven’t been quite so elevated. The yield on the 10-year Treasury note, which briefly breached 5% in late October, was at 4.03% Wednesday. It has been below the yield on the 2-year note, lately at 4.48%, since July 2022—a so-called inversion that has often been a harbinger of recessions. This time, though, it looks as if it might not be such a handy forecasting tool for an economy still wringing out distortions caused by the pandemic.
Other long-term rates have also fallen. According to Moody’s, the average rate on long-term Baa-rated corporate debt was about 5.8% as of Tuesday—a percentage point lower than the October high. The Mortgage Bankers Association on Wednesday said that the average contract rate on a 30-year fixed-rate mortgage was 7.07% last week, down from 7.9% in late October.
An important reason long-term rates have fallen is that they are in a large part a reflection of what investors think the Fed’s target will average over the long haul, and investors are increasingly convinced the Fed will lower rates significantly over the next 12 months. Interest-rate futures imply that, at the end of next year, the Fed’s target will be around 4%. Fed policy makers had been pushing against the idea that they would cut rates by much next year, but on Wednesday they caved a bit. Projections released following their meeting had a median forecast for overnight rates at the end of next year at around 4.6%. The last time they offered up projections, in September, the end-of 2024-rate forecast was around 5.1%.
The problem is that, after falling so much, long-term rates might already be as low as policy makers would like them to be. The drop in Treasury yields since October has ignited something of an everything rally that has pushed stocks and an array of other investments sharply higher. Companies can now tap the bond market at lower rates, while the housing market seems poised to bounce back.
But short-term rates matter, too. Credit card rates, which are based off of the prime rate, are high. That not only affects consumers’ borrowing power but also risks pushing some people into worse financial straits. High short-term borrowing costs can weigh on businesses, too, by making it more costly to finance inventories, for instance.
Ideally, what the Fed might like is to be able to lower short-term interest rates without watching long-term rates fall any further. One way to do this might be for policy makers to to lift their projections of what they think overnight rates will be in the long term—their just-right rate of where rates should be when the economy is neither too hot nor too cold. Wednesday, they left this figure at 2.5% but, given the economy’s recent resilience, it is reasonable to think it might be higher. At the least they could start talking up the possibility that rates will need to settle in at a higher level than before the pandemic.
As it stands, though, the Fed is facing a situation where rates could simultaneously be too high and too low.
Write to Justin Lahart at Justin.Lahart@wsj.com
NLY-F currently yielding 10.86%
Suspect Powell will give a similiar speech to the one he gave a few meetings back when bond markets were not listening to the FRB and and trading against them.
Cheers!
As to inflation and softening, I recently bought a new 2024 Chevy Equinox with a $31,000 list price. Got $7500 off list. I think the auto companies are seeing the consumer being stressed with high prices.
wow I may be in the market for a replacement for a sedan type vehicle for the 2011 Subaru rustin out in the ‘rust belt’ soon, good to know! that is an amazing price reduction . Was that a firm no haggle price? then ‘haggling’ ? I thought they weren’t ‘dealing’ anymore at most dealers. I’ll miss my CD player! lol. All I need is heated seats for my/mom’s old backs.
I have a bunch of stink bids for some pfds on FED day we’ll see if they hit, the PPI # was encouraging. On inflation, my NG bill is cheaper than water+sewage now, unreal, we heat/water heater w gas keep it warm for mom. Read where rents are stable/falling even in Tampa and other ‘hot’ markets. glta. Bea
No Haggle. Price was on internet.
Cash buy? I don’t like to carry any installment debt which tyically keeps me in 2-year old used cars to take advantage of the depreciation of a new vehicle and use $$$. I usually focus on those coming off lease since they are typically well-kept. If I could figure a way to buy on PayPal and get 3% cash back, I would! That said, maybe new cars are coming down into range!
My wife bought a new plug-in hybrid last Oct. and got 5 year, 0% financing (plus the federal and CA state incentives). We don’t like to carry debt either, but that financing deal was just too good to pass up – so I put the cash we were going to pay to work, making it like a negative interest deal.
Funny thing – my wife decides what she wants, then sends me off to the dealer because “men get better deals”.
For me, I still drive my 15 year old pickup, which I bought because I gave my then-15 year old pickup to my son-in-law who really needed a truck, which I bought to replace the old truck that I gave my brother-in-law, which my dad had given to me about 15 years prior.
As I write this, I realize it must be time for me to start looking for a new truck if I am to keep on schedule.
Dang it Yazzer, now I have to go truck shopping.
my cars have lasted 12-13yrs, the yabaru is 13 in Feb, if it doesnt pass inspection for the underbody rust will get a new one, have to get a sedan w comfy seats for mom 90 or I’d get a benz coupe. Leaning toward VW Jetta, nice prices,deals, fits the bill. I was a car ‘nut’ in my youth, last 3 totaled 35yrs, wised up thankfully..I would also take a low int deal if I can get one, seems like incentives are heating up..VW and Mazda came up best on my ins cost Hyundai off the charts some models no go w the theft issue.. Subaru dealers are now too far away for service for me, cant be spending 2-3hrs for travel/oil change w mom.. its been a good car for me, only 15k miles, I have no life in caregiving but wouldnt have it any other way!
OH well enough of that, here comes the FED news!! the ‘talk’ after to me is the ‘meat.’ best to all. Bea
Before getting a new car just due to underbody rust, take it here for a free evaluation (they are near Pittsburgh on Rt 88)
https://rustrepairinc.com/gallery
My daughter has a 20 year old Honda Element. About 4 years ago two different mechanics told her she needed to junk it as one of the two sections holding the drive shaft in place had completely rusted through. I checked with 2 body shops – none wanted to touch it and said junk it. These guys looked at it, said no problem, we can fix that and fixed it for $600. That was 4 years and at least 30,000 miles ago
They are more metal fabricators than true body shop guys that make it pretty. But for undercarriage work, it doesn’t need to look pretty. The link above shows some pics of the work they have done
had similar with my 2004 F150. The frame under the driver was rusted – we take it on the sand on Assateague Island and the salt gets to it. For $500, a metal fabricating shop here welded steel around the problem – it’s been fine ever since and they said it would be good for at least another 10 years!
Yazzer,
This is not a car forum.
CAR.PR.A – that’s better.
you could also do CAR-UN.TO Canadian Apartment REIT, which I just sold for a 25% gain off its lows a few mos ago.. oops that should be in the Canadian Discussion.
yes My mechanic recommended that shop!! thanx Mav. It’s more a new car thing probably my ‘last’ at 65, have to have a safe (mechanically ) for mom especially in the ‘Burgh winters. We’ll see, I have taken good care of it otherwise, the rust is bad. Endemic to Pittsburgh cars and apparently a common complaint on Subaru’s which ‘last forever’.. safety first.
that place gets stellar reviews, they ‘save’ a lot of old bombs like mine!!
You know, if you really want to stop dealing with all the rust, come west. Not much rust on the cars in sunny central California – and no snow (unless you want to go to Tahoe). You do have to put up with the clown circus playing at state government….
Mav, As a kid in upstate NY’s Hudson Valley, my uncle drove a car whose rear floors rusted out so bad we could watch the road go by beneath us. No-one really cared or said much about it, it’s just the way it was.
Our standard was: Just did not want to be the doofus that put their foot through.
As a kid, we had an old ford that you could see through the floor – not from rust, but from constantly bottoming out on unpaved roads (we lived about 50 miles from a paved road). My dad cut some plywood for the floor after my mom bugged him enough all the dust coming up.
nice – I have a 2015 Civic that gets me 34 mpg and a 2004 F150 pickup with only 70K miles on it – just applied for historic tags here in MD! Insurance is cheaper, registration, cheaper, etc. etc. Hahaha on the truck shopping – my 89 yo dad sold me the F150 a few years ago for a song saying as long as he gets to use it!
Lest you think I’m an old cheap curmudgeon, I don’t mind dropping $300 or more on a nice French burgundy or more for a week for me and my GF to go to Sonoma’s wine country! Priorities are priorities and I need to spend a good part of my kid’s inheritance!
I had a 1996 Honda Civic hatchback and got 50 mpg. It was rated at 46/42. They don’t make ’em that good any more because the customers don’t seem to care, everybody wants big gashogs.
Hey, some of us old, cheap curmudgeons might take that personally.
Yazzer, I can certainly appreciate that. But I went opposite way 2 years ago when market was crazy. I only got $1000 off sticker from factory rebates on a Blazer. But I traded in a 4 year old Explorer I had bought new and they gave me $3000 more than I paid for it. Plus they offered me 7 years 0% interest. I dont mind taking someone’s money and using it for “free”. But now, my car insurance and personal property taxes are almost more than my car payment, ugh.
Gridbird,
I love your posts but not the one about describing your car experience. It seems inappropriate for III.
Danzeb, Find peace my friend.
chill, my brother.
GRID: The laws of unintended consequences!
Tim – Obviously I have no idea if you personally would consider LANDM to be “mid level quality” or in your targeted maturity range, but at its last price of 23.47 and it being a monthly payer, LANDM, Gladstone Land Corp 5.00% Series D Cumulative Term Preferred Stock Due 1/31/2026, has a YTM of 8.25%. You may want more current yield than this, but when comparing its YTM to its pari passu LANDO and LANDP’s CURRENT YIELD (there’s no YTM on these 2 as they are perpetuals) of about 7.80% average, it seems to me to be cheaper than it ought to be.
Tim – I promise, I was not a little birdie sitting on your shoulder when I wrote this……… lol
“We still have work to do.” You’d think they were out in the broiling sun with a pick and a shovel.
Stephen–yes it does sound kind of funny — “work to do’. In this case is sit back and see what happens – maybe from Sun Valley or maybe Switzerland.