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Is The Interest Rate Drop for Real?

Yesterday we saw the 10 year Treasury yield drop by 13 basis points which is always welcome and gave a modest boost to preferreds and baby bonds. It had been some time since we got a little ‘pop’ across the board. Obviously there was more demand for government debt, but will the tumble to 4.28% continue? No one knows, of course, and the economic news just ahead will still be the major factors that will drive interest rates.

Today we have consumer confidence numbers being released and they are forecast to be up nicely from last month. Then later today we have the FOMC minutes released from the last meeting–we will see the details of the Feds thinking for Decembers meeting. Then tomorrow we will get the latest read on inflation with the personal consumption expenditures (PCE) release. Right now expectations for a rate cut for December have fallen off with just 59% of forecasters expecting a cut–we will see a move in this number when the PCE is released – will it be the move be back higher–. Personally I see a 1/4% rate cut for this meeting–partially because I think the Fed is political and the incoming administration wants rates lower.

Today I hope to be a buyer–I am honing in on a few issues with yields to maturity of over 8%–needed to bolster my performance toward my target of 7% since I continue to hold plenty of money markets and CDs. I will write further today on this matter.

Markets are mixed this morning with the S&P500 futures up and the DJIA down–all in all pretty quiet. Being a shortened week and many folks likely taking the entire week off we could have prices quiet all week long—we’ll see soon.

11 thoughts on “Is The Interest Rate Drop for Real?”

  1. Technical analysis:
    I watch 2-, 10- and 30-year treasury futures. The 30-year stayed oversold for most of Oct, so the current pop is no surprise. Now, heading into overbought with the 50- and 200-day moving averages just above. The 50 is crossing down through the 200 in a death cross.

    My takeaway is the small rally in futures (fall in yield) is not big enough to constitute a trend yet. I will be watching to see how the futures react to the falling moving averages. The surprise for me would be if a strong trend develops, in which case I would have to reevaluate my choice to hold 12% cash.

  2. Last week 10 yr rates were said to be going to 4.5% then on to 5%. This week, rates are going down to 4%. Barron’s immediately pronounced the classic 60-40 stock/bond blend dead because 4% “barely covers” inflation. Because 4% is “a rather paltry return relative to average profit gains for stocks,” 70- 30 is the way to go. Or 50-30-20 adding commodities, private equity etc. if you believe JPMorgan.

    Bloomberg, always ahead of the curve, even had a week-end podcast on an risk-free lunch ETF strategy – return stacking – that bolts commodities on to an S&P stock component and leaves you money to spare to invest in bonds or elsewhere. The secret is 200% leverage.

    IMHO, the best portfolio reallocation for uncertain markets is investing 10% less time in reading Barron’s news headlines.

    My thinking on rates is simple. Short rates, controlled by the Fed, continue down. Long rates, going up long term. Too much debt and making lots more. JMO. DYODD.

    1. Alan Abelson seemed to be almost always wrong. Sort of like Jim Grant, you would not invest based on something he said. It was always food for thought.

      Has Barron’s changed?
      The thing about long rates is everyone says the fed can’t control or doesn’t control, but with only 2 % of govt debt more than 10+ years , it would not be difficult

      1. I miss Abelson.. as you say, he was always good for thought and had a great writing style about him – made you look forward to each week’s Barron’s… Is it just me or has it now turned into nothing more than a tout sheet these days hardly worth reading?

      2. OT – I don’t so much care about rates or investment returns as much as being impoverished in retirement. When I was a coin-collecting kid decades ago, I first saw the picture of someone pushing a wheelbarrow full of near-worthless paper money during the Weimar Republic. That picture has stayed with me for decades. Although then I had no concept of inflation or its impact. Hence my pessimism on long rates in the long term.

        I just replaced my old tires with a new set. I had the old receipt. I decided to compare prices then to now. I ran an inflation calculator for what is a dollar in 2009 worth in 2024?. (How much 2024 buying power do you need to match a $1 in 2009) The answer is $1.47. (You can run the numbers on any widget on the internet.) The price of the new tires was in-line with the inflation-adjusted old set. Except – The “real” inflation number was higher: the new set was generic vs the top of the line name brand. The sticker on name brand was 25% more than the generics. My mechanic recommended the generics. Economists calls this substitution. When coffee is expensive, you buy tea.

        I don’t consider 15 years a long time. I do consider a “stay even” 50%+ point-to-point portfolio return as a daunting challenge with taxes and crashes in between. JMO. DYODD.

        1. BearNJ…….. Did you just replace 13 year old tires? Good lord, they probably air rotted a while ago! You are right tires cost a lot more. The premium tires generally last a lot longer than the cheap ones. I just replaced the original tires on my car. The new ones are premium Michelin tires and will easily double the miles driven that the cheaper ones that came on the car. Another way to look at tire cost is cost per mile. My new ones cost a lot more ($1200 versus $800), but the cost per mile is lower due to the increased life. They also outperform the old ones in handling, ride quality, and noise. However you must maintain the tires to get maximum mileage out of them. Rotation, alignment, and balancing is the key plus driving at a moderate pace.

          1. Yeah, they were dry rotted. The tires were 14.8 years old, say 60-65,000 miles They were Michelin LTX, M+S rating a quiet highway tread. I don’t highway drive anymore, so the generics are fine for my driving style. I replaced the Michelins with Hercules Terra Trak AT X-Ventures, an aggressive all terrain tread popular with Jeepers, a little noisier but very grippy. I like them.

            I was thinking about replacing the Michelins – worn treads, sidewall cracks — when Fate intervened and I got a flat a block from my shop. Normally a valve is a 50 cent part, so just replace it, but the mechanic noted the tire was dry-rotted and damaged from riding on the rim. Which I knew.

            You’ll like the Michelins. Great tires. Capable in the snow and quiet on the highway. I liked them better than the OE Goodyears.

            1. BearNJ…. I have Michelin MXV4s that replaced Goodyear Eagles that were worn out at 30k. Should have replaced them at 25k. The Michelins are on my Honda Accord Sport withe the 2.0 Turbo engine with a six speed manual. Great driving car with the Michelin tires. Most likely my last hot rod before I trade it in for a walker.

    2. I agree most financial news has lost their way trying to be predictive. A lot of talking heads trying to whip everyone into a frenzy on a daily basis.

      Nobody can deny certain sectors of common stocks have been on a rip roaring tear giving wonderful returns. Who knows how long it will last without something tipping the apple cart. At this stage who wants to rush out and buy more Tesla, Bitcoin, and Nvidia? I mean what could possibly go wrong right? Load up on the Mag 7 and ride off into the sunset…

      As for interest rates… they feel pretty good right now to me. Restrictive but not overly so. People are thinking twice before borrowing money.

      1. Walking along behind the apple cart- waiting for some to fall– will pick up some with my 44% cash equivalents. Looking like a bumpy road.

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