Now that we have the elections mostly behind us we can move on to the regular topics such as interest rates.
The 10 year treasury remains higher and now is yielding around 4.44%. Just like equity prices interest rates remained higher all day yesterday even though one might have expected both markets to retrace somewhat. Obviously the election drove the markets and this will likely continue so we will have too see how this plays out day by day, but in the meantime we will have a continuous flow of economic Data affecting markets.
Today we have the FOMC meeting wrapping up and I see a 1/4% Fed funds rate cut, but at the press conference I see Powell start to hedge on further cuts. The Fed continuously backs themselves into a corner with ‘hints’ on rate cuts and they need to stop this–they need to be truly data dependent and hinting at future actions totally negates consideration of future data.
We will have 1st time unemployment claims shortly and these have been running at a lower number than forecast lately and we will have to see if it continues to forecast relatively strong employment. Today’s forecast is for 220,000 first time claims which is the lowest weekly forecast that we have seen for months–obviously the forecasters have been lowering their forecasts so we will see what happens in 30 minutes.
That was a mistake. As the stock markets surging….. cutting rates is ridiculous
Well- 1/4pt cut today
“Obviously the election drove the markets”
Just to offer a different opinion, I see nothing wrong if short-term rates are 3.25% – 3.5% (fed forecast for the end of 2025) of an extra 30% on the coupon for a 10 year term. So, if there is election impact, I do not think we have seen it yet. This to me is just the market believing we have avoided a recession and a return to normalcy.
I invested in my beliefs. I took some healthy profits in the low coupon rate issues. Items like Digital Realty. I like investments in the data center REIT area given the growth of AI. But I am still looking for coupon rates of 6%+ for investment grade.
I did keep my illiquid investments in Ameren, Eversource, and others since I have a yield of 6.2% – 6.3%. I still like holding investment grade utility companies (1% of my net worth in any 1 company).
Nothing wrong with taking some profits, and holding cash. CLIP paid 4.8% annualized a few days ago. Even with a rate cut today, should pay about 4.55%. I can wait and look for opportunity.
Steve ; I own a lot of IRM ; bot it back when it had the kind of yield you and I are looking for ; but i stick with it since it keeps on appreciating.
I once went to a dietician about going on a diet. He responded by asking how much weight I wanted to gain, disclaiming diets and citing studies that show long term weight gains after diets (despite initial success). Similarly, recent rate cuts seem to be increasing 10 year yields? Is this a one off reaction to the 50 point or is it reasonable to expect 25 point cuts now and in December to depress 10 year prices?
Potter
Short and long term rates are driven by different factors.
The Fed determines short term rates by its overnight lending facilities which banks rely on for their liquidity.
Long term rates are set by overall market expectations about supply and demand. The term “bond vigilantes” was coined to label market factors that were contrary to political desires (low long term rates).
Ask yourself: what yield are you comfortable with fixing for the next 20 years?
Me neither – too much uncertainty and predicted over-spending by the government.
As the uncertainty and overspending continue, the premium required to take term risk increases.
The Fed can enter the market by making bond purchases (QE) and sales (QT) but the market recognizes that those are primarily short-term political decisions that are likely to be reversed any time.
Supply and demand largely determine long term rates.
Westie, well put. I don’t care if it’s 1% or 5% of the Debt the Fed is having to roll over that is still a lot of debt coming to market and if the demand isn’t there the rates offered have to go up to get the buyers to buy and hold.
The other side is the secondary market. If sellers flood the market and don’t find any offers to buy the bond prices go down to increase the yield.
Thanks. So the ten year yield is the sum of the real rate plus inflation expectations and the term premium. The Fed’s 50 point cut raised inflation expectations because the market believes the cut will increase inflation? Since the Fed cut today is expected to be 25 points, there should be not much change in inflation expectations (unless the Fed says something that is perceived to raise inflation).
BTW, whatever happened to QT? Still chugging along?
Powell said more QT.
Fed total assets continue to drop. Down to 6.9 trillion from about 9 trillion in early 2022.
That’s right Josh. While inflation trades keep sucking up liquidity the FED is quietly siphoning it off.