Monday Morning Kickoff (on Tuesday)

Well here we go again–a new week, albeit a short week.    We trust everyone had a good long weekend and avoided all the weather events of the weekend.  We were in northern Minnesota this weekend and as we rode through the metro on the way home our car thermometer read 101 degrees–wow–not that I really mind the high temp–but it is May 28th.  Fortunately a front moved through an hour later dropping the temp to 77.

Last week we saw a falling 10 year treasury rate as the Fed seemed to indicate they might tolerate a little inflation and the Trump North Korean summit was cancelled–before being back on over the weekend.  The 10 year started the week at 3.08% and fell as low as 2.92% and closing at 2.93%.  We think this is probably the lower end of the 10 year trading range and would expect it to end the week higher–but short term predictions are near impossible–longer term of course we are looking for the year end 3.25%.

In the economic arena we have only 2 Fed presidents speaking this week–obviously everyone is on vacation as we haven’t seen so few speeches all year long.  On Tuesday we have the Case Shiller Home Price Index being released and it is expected to cool a bit to show a 6.4% year over year gain.  Also consumer confidence is being released and is expected to remain strong at a reading of 128–this one is actually important for interest rates, but has not been a real market mover–ever.  Personally it is our belief that a trend here–higher or lower is super important as the consumer is the lions share of the economy–when they turn tail for a 3-4 month period you damned well better be paying attention.  On Wednesday we have the second estimate of the 1st quarter GDP–important to watch if the 2nd read is more than a couple 1/10th’s off the initial estimate of 2.3%.  Also Wednesday ADP releases their employment report for May and it is expected to show 186,000 new jobs–mostly NO ONE cares as the report isn’t the official report–which will be released Friday and is expected to show 185,000 new jobs.  Of course nobody has any real clue on this report and the talking heads will make up 100 different reasons for a miss–either up or down, but in the end it could move markets.

The Fed balance sheet was totally flat last week indicating no run off of assets at all.  With recent Fed comments we will have to watch and see if the Fed makes any changes in the plans to let assets run off at $30/billion a month now and $40 billion a month starting next month.  While we believe that the run off keeps upward pressure on rates there is no doubt that demand for U.S. paper remains fairly strong on a global basis.

The average perpetual preferred and baby bond was up 7 cents last week-mainly in the last couple days as interest rates tumbled.  As the average price rose the number of issues trading under $25.00 fell to 188 from 202 last week–the largest drop in months.

We had a couple new baby bonds being priced this past week.  Ladenburg Thalmann priced baby bonds at 7% while tanker company International Seaways has priced a new issue at 8.50%.  We had reviewed Ladenburg Thalman last week since we had not taken a look at their financials for quite a while.  That review can be found here.




2 thoughts on “Monday Morning Kickoff (on Tuesday)”

  1. Hello Tim. I don’t fully understand balance sheet runoff and effect on rates. Does runoff mean the fed allows bonds to mature but they do not reinvest the funds? Does the fed also sell less bonds? Do both of these events happen in runoff? With less paper to sell, rates rise because there is more demand?
    many thanks!

    1. Hi Jeff–the run off is that they let bonds mature and do not use the proceeds to buy new securities. Basically the demand is lessened for government bonds/bills. In theory this should move yields a bit higher. During QE (quantative easing) they bought over 4 trillion in bonds thereby lowering yields with increased demand–now with QT (quantative tightning) they need to reverse.

      In theory they can buy and sell—but I am not aware they are doing much outright selling which would increase supply.

      The treasury (not the Fed) is selling plenty–with a projected 600 billion deficit this year, but I would have to really dig into the detail to see if the Fed is buying and of this new issuance.

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