Interest rates are pretty steady this morning–the 10 year treasury is hanging out around 4.31%. I suspect they will remain in a pretty tight range until Fed Chair Powell speaks tomorrow.
Of course I didn’t buy anything yesterday–and there is a lot of money now residing in money markets waiting for a more permanent home—certainly some heading back into CDs, but some into higher yielding preferred issues. I am finding myself being kind of lazy when it comes to reinvestment of maturing CD funds – it is so easy to just take a 3 month non callable CD at 5.35%.
So one question I find myself asking is what if we have seen the low in interest rates? I know that sounds silly, but what if we see a weaker economy in the next year and the Fed cuts rates so short term rates fall, but the 10 year remains elevated–it could happen. If the treasury continues to need to raise money in massive ways we all know there is trouble ahead–exactly when trouble arrives is anyone’s guess.
Equity markets are a bit soft right now so it looks like we will reverse yesterdays gains. The average $25 preferred and/or baby bond moved 3 cents higher yesterday–likely will see just a penny or two move today. Then we will see the ‘tone’ of Powell tomorrow and that will maybe move markets–although there shouldn’t be many (if any) surprises from the chair.
Nice young guy we hired today. Starts April 1st. We had 3 others apply and 2 were no shows and one was nice enough to call to say he took another job. New guy said he has been looking 5 months wants a long term job. If he works out then I am out of here end of April
I think there might be differences between types of jobs and areas as to how employment is
Fresh new batch of monthly pay short term (3-6 months) CDs flying off the shelves. 5.3%-5.35% @ TDA
Only one not sold out is the 5-month from ConnectOne
If you take a look at the latest Pref. Stock & Baby Bond issuances (up to 4 or 5 months ago to present), you will see yields that are inordinately high. However, they have very short 1st call dates. This tells me that they are ‘hedging’ their bets. If Fed rates do start dropping in mid summer as originally predicted, THEY WILL BE CALLED. If, on the other hand, the Fed signals that for the time being rates will hold steady until inflation levels are satisfactory, etc., they will be extended beyond 1st call date. Thus, the consumer–US–must make a judgement re these 2 possible scenarios & purchase accordingly. From my perspective, I would rather purchase an issuance with lower yields rather that those with higher ones—I would not want to go fishing in an emplty lake if Fed rates do, indeed, begin to fall sooner rather than later. That would mark the end of these unusually high yields from some halfway decent entities.
As you travel Tim, talk to people. See how businesses are doing, are stores closing, how are people doing in jobs. I don’t get into the stuff we hear in the news like do you feel better off now than you did a year ago. That kind of stuff can change just from how the people are feeling.
Was talking to our outside rep who traveled through the lower San Joaquin Valley seeing customers last week. Lots of new faces, long time employees gone. Retired , One moved to a new line of work, Some moved out of the area. A few reduced staff said things were slow with the building biz in both commercial and residential, one customer reduced counter staff and brought on a new line specialty products hoping to generate business. Still waiting to see and talk to the LTL drivers.
Charles
Very good thinking about Tim probing the reality of economic activity.
But there is another side – changes in financial conditions and liquidity – that I believe is driving current market conditions..
So many things show that financial conditions continue to ease: strong government spending, high tax receipts, slowing fed QT, increasing “risk-on” psychology, rising stock market prices, Bitcoin, etc etc
The balance between these two forces is what determines market prices.
Howell yesterday said that liquidity is THE driver.
When you think seriously about it, economic activity is unavoidable reality, the other is more psychology.
That is why I/we feel an unease.
What/where/when will come the Black Swan event (Taleb) that comes out of nowhere shocking us and creating a major market correction?
Again:
“It’s not what you think might happen that hurts you, it’s what you never expected that can kill you.”
Richard Bernstein ‘most recessions come suddenly and unexpectedly.’
Don’t we already have a black swan in the offing with the addition 1T of debt every 100 days as well as a bloated Fed balance sheet?
Westie, seems like a slow commentary day. Not sure if anyone has seen this article on Yahoo today or earlier on Bloomberg. Talking about CRE and CLO’s basically they started after the Great financial collapse in 2011 and are touted as “safer” than the packaged residential bonds that blew up in 2008. Back again to MREIT’s &PE supposedly if these bonds backed by CRE blow up the lower tranches end up with nothing. Right now, MREIT’s are taking cash and buying back these bonds giving the appearance the defaults are lower than they really are. I will not spoil the suspense of which 3 mortgage REITs are possibly in trouble. You have to read the article, but all 3 mentioned in the article at the end. have all been talked about here. Including one the CFO just left from.
https://finance.yahoo.com/news/real-estate-pain-showing-obscure-110000637.html
As several people here have commented, this commercial real estate problem may take years to play out and bond investors along with banks may get singed.
I work in “the building biz” west coast and we can’t keep our staff… it’s boom town? Maybe in your region ? I prefer to believe in the more reliable number unemployment is still at a decades low.
We are still seeing a slow exodus of retirees from Silicon Valley, but it has slowed down as housing prices have stalled/dropped a bit.
I was talking to one of my kid’s neighbors (we helped him load up some big stuff into his truck). It is just too good a “deal” to pass up for someone sitting on a 1800 sq. ft house built in 1970s-80s that they bought for under $200K (30+ years ago) that is now worth $2M – and if they want to stay in CA, they can move somewhere cheaper and “transfer” their property tax base to their new home.
Lots of people in our area moving away (NV, AZ, UT, OR, WA..). Screws up property values in a lot of places because Californians drive up prices as they move in.
I live in north east Indiana and have a hard time understanding the talk of slow business and construction. Everywhere I see new construction with new restaurants and stores. Houses selling as fast as they can build them. It has to have a lot to do with different states and how their regulations and taxes are effecting the business environment. Indiana has a very pro business environment.
“Fed cuts rates so short term rates fall, but the 10 year remains elevated”
Times time and baring responsible fiscal policy, hard not to see this as an inevitability.
Cutting rates will be a policy mistake. Inflation has returned but Powell will likely go dovish as per usual and stocks will go up. Hey Powell, it’s the 1970’s calling pick up the phone.