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Interest Rates Head Lower

The 10 year treasury is now trading at 4.41%—why? Of course the answer is that there are more buyers than sellers. Why do I even consider where interest rates are today and where they will be tomorrow? In the short term (say a week or two) you can’t make heads or tails of where rates go–honestly I quit trying to project these things years ago. Yesterday we had hot inflation at the producer level–BUT the numbers were revised lower for the March period so all is good!! Jay Powell was yakking in Amsterdam yesterday and with the PPI numbers he sounded a little hawkish–with the Fed debating whether the Fed Funds rate goes up or stays the same–you can be CERTAIN that the rate is not going lower anytime soon.

Today the calendar is chuck full with economic news with the CPI being the most important to me, but retail sales will give the talking heads lots of info to blabber on with–is the consumer weakening? We follow up tomorrow with jobless claims and these become ever more important (at least to me). Will this number continue to show a moderately weakening employment situation?

These economic crosswinds – and certainly the markets reactions make it difficult to invest with confidence. To me this simply means staying with short duration term preferreds and baby bonds. In my mind I have more than enough perpetual preferreds, but when I can by 8% issues that mature within 5 years I am going to play in that arena. While I am less concerned with share price losses than I was a few years ago I see no reason to search outside short duration when there are plenty of 7-9% issues available.

22 thoughts on “Interest Rates Head Lower”

  1. With the presidential election less than 6 months away, there’s no way the Fed will raise rates—too much political pressure not to do so. Consequently, rates will either be flat or slightly lower the rest of the year. I think this is why rates are trending lower at the moment, even in the face of persisting inflation or lack of disinflation to any major degree. The issue is—what happens after the election—no matter whom is elected. If the enormous deficit requires constant Treasury issues and the economy stays strong, rates have nowhere to go but up. If a recession occurs, perhaps Treasury issues will be offset by lower private demand for funds. If we knew which was going to happen, we would all be, in the money, fat cats.

    1. They may or may not, but history doesnt support any political responses (that being said I personally agree with your assessment on Fed rate projections rest of the year…..)
      ….Since 1980, the Fed has either hiked or cut rates in every single election except 2012, when rates were at zero and the economy was still healing from the financial crisis. Otherwise, the Fed cut rates in five election years and hiked in five election years.
      … One theme emerges clearly: whether the Fed was adjusting based on dynamic economic conditions, responding to severe recessions, or following a path already forged, it continued to pursue its dual mandate irrespective of elections.

      1. Grid—great article. However, I really think political polarization is much greater than ever in our country. The Fed, although theoretically independent, will not want to be seen as favoring one party over the other. It’s really between a rock and a hard place. I think the Fed would prefer to make no changes for the next 6 months unless absolutely necessary. Just lie low in the water.

  2. @Tim McPartland…re “I see no reason to search outside short duration when there are plenty of 7-9% issues available.”
    Would you and others share a few on their short list that can be assessed w further due diligence. I especially like and looking for term preferred in the 3-5 year time frame. Thanks

    1. There are so many thousand dollar bonds at over 7% current yield it would be scores of offerings. The problem is, many are callable, and you could end up having risked substantial principle to earn 2-3%. And that may be for less than a year. Say 6-9 months so 50-75% of…. 3%…. Risk free is still 5

      I have tons of these but it’s with eyes wide open. And in general I don’t talk about individual issues. Many listed here on the master list.

      The CRE risks to small/ middle tier banks and insurance companies is widely advertised. One prediction said 1 bank failure every other day for a year oe two. It could happen and if it does even senior debt will face the acid test

  3. As always, Tim’s intro for the day is thoughtful.

    I, too, have been thinking about what to do in today’s atmosphere of uncertainty. Short term, things have been, and appear to continue, to be fine. But I continue to have this lurking feeling of concern given the way our government is overspending with abandon. When, and whether, this piper will be repaid is my daily question to myself. How do I make correct investment decisions?

    The fallback answer that I have come to appreciate, is the advice that a long-term successful broker once shared with me:

    “If market moves bother you, you do not have the right asset allocation.”

    Seems to me that one line answers all of our questions:
    – Interest rates going up or down?
    – Are banks safe investments?
    – BDC’s?
    – Common or preferred?
    – Bonds or stock?
    – Etc, etc.

    Tim’s point: “These economic crosswinds – and certainly the markets reactions make it difficult to invest with confidence.”

    The answer is to lay out the asset allocation – and choice of individual investments – that meet your needs/goals in the best balance as well as answering the challenge:

    “If market moves bother you, you do not have the right allocation..

    1. Westie, I appreciate your thoughtful musings. Several months ago you used a few sailing adjectives to describe your feelings and you said you were battening down the hatches.
      In the years past, I went by my senses and have done pretty well at guessing what to expect 3 to 6 months out. Now, I don’t know what to expect.
      It feels like a calm before a storm, or are we in a calm safe harbor now?

      1. Charles….
        We are anything but in a safe harbor
        Safe…. for now…. maybe
        Going forward

        Put your bets on the following on the table….

        Bet #1 Who wins the electoral majority Nov 4?
        Possible answers: a) T, b) B, c) none of the above, d) the loser contests the loss and no one is the winner until some time in the future when the Supreme Court finishes its deliberations

        Bet #2 What is the most likely economic outcome of your answer to #1?

        Do any of your answers generate a positive economic outcome?

        I still have my hatches battened and my foul weather gear on
        60% T’s, CD’s, and BB’s. no duration past 2027
        40% 1/4 commons bought near 52 week bottoms, 2/3 IG prefs, remainder high quality prefs
        I can be satisfied with interest & divs
        Don’t expect any capital loss fm first category; commons could fall but how far below purchase?, IG prefs are a hold until storm passes

    2. W18,
      “If market moves bother you, you do not have the right allocation..

      Not sure which direction the market will move, short or long-term, thus safe in Money Market fund. I think a time will come that I can look out 2 years with some clarity; for now I can only speculate. Cheers!

    3. govt. spending with abandon especially in one’s own currency is perfectly fine, as long as there are unused resources (unemployment).

      – this means the debt can be repaid anytime.
      – unemployment falls which is good.
      – inflation will not happen.

      The current bout of media hand-wringing with respect to “govt. debt” started with the latest bout of elections – never heard a bit about it in 2020 – 2022.

      When things start showing up in the media – remember that someone out there has an agenda.
      Clinton reduced debt.
      Also remember Bush/Cheney didn’t take any steps to rein in debt. Spent like drunks on war and tax cuts.
      Obama was forced to take on debt because of the mortgage crisis brewed under Bush/Cheney.
      Trump didn’t do anything about debt. Increased the deficits by increasing tax cuts.

      So at the end of they day, one needs to really really think hard!

      1. David I was also tempted to say something, but because any talk about the debt ends up with political talk and I realize we are all to blame but we all agreed not to mention anything with politics on the forum.

        1. That’s right. In return for free and open HDO bashing, we were putting politics to bed.

      2. It’s unfortunate you decided to post an opinionated political post with some inaccuracies. Because of the rules, I’ll just leave it at that.

          1. charles, jd & legend

            sorry for bringing politics in – though I tried to be even handed.
            I did make other points and you could have addressed those.

      3. Left unsaid is… the IRA….. Inflation Reduction Act. So take two trillion we don’t have and spend it on pork we never asked for, while ignoring warnings that unbridled gov spending would cause inflation.

        Then act surprised when you get inflation. And blame everybody else.

        And BTW it’s a real knee slapper when you pretend Clinton lowered the deficits. Maybe you forget the huge fight, w Congress forcing the lower spending. You know the 1 montg government shutdown. All fed workers went home?

  4. More knee-jerkiness in the markets…up. I’m not a firm believer just yet. I don’t think we have anything terrible but I do not think rates will fall anytime soon and, perhaps there may be a tweak higher within the next year or so. Time will tell.

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