Our site runs on donations to keep it running for free. Please consider donating if you enjoy your experience here!

The Time Has Come – We Knew it Would

So we are now at the point where we will actually have a Fed Funds interest rate increase tomorrow–almost certainly 25 basis points (1/4%).

What we don’t know is how dovish or hawkish Jay Powell will be at the press conference after the rate hike is announced.

Here is what I am thinking (my wild a** guess).

Powell will be very careful with his words–we have added the Ukraine/Russia into the equation now so he will have to be careful not to spook the markets. On the other hand inflation is raging so he can’t be too dovish. He will be data dependent–really what else can he say–and that is exactly how it is should be. These wild ‘guesses’ from the smart folks are just baloney–JPMorgan says 9 rates hikes–1 at each of the next 9 months. The JPMorgan dude (or dudette) must be REALLY smart!!

Today we saw a pre rate increase rally in stocks–markets saying “let’s get on with it!”

The 10 year treasury yield moved 2 basis points higher–2.16% although during the coarse of the day the rate fell as low as 2.07%. I thought rates might fall a bit today–maybe tomorrow.

So nothing changes for us–we expected a rate increase and we will get it. I expect another next month–25 basis points–beyond that we will have to see how the economic numbers shake out. The consumer is retrenching with high fuel prices and their confidence is shaken based on prices and Ukraine–no doubt in my mind that the Fed will modify their thoughts a number of times as we go through the year.

26 thoughts on “The Time Has Come – We Knew it Would”

  1. Largest up day for all of 21/22 YTD for the high quality, low coupon (Canary portfolio) preferreds= 1.31%, compared to all preferreds being up +.66%. Would not get too excited though, the canaries are still down -17.8% 22YTD.

    A little surprising with the UST 10 year finishing @ 2.188% up +.028% on the day. In general we are not buyers of any preferreds at these levels, i.e. we think they will be available at lower prices.

    Working on some new data, will publish it if it has any potential value.

  2. The Fed projects a rate of 2.8% by the end of 2023. Why is no one talking about how much more interest on the federal debt will cost? $500 to $600 Billion a year without any revenue increases? Once Congress and the White House are forced to acknowledge the problem, I suspect that they will pressure the Fed to stop raising rates because no one in Washington wants to increase taxes just to fund federal interest expense.

    1. Potter said: “Once Congress and the White House are forced to acknowledge the problem.”

      Potter, Washington has run up a ~ $30 trillion cumulative deficit and for some reason, investors keep buying ALL of the newly issued US Treasury debt. Decades ago there was a mythical group called “The Bond Vigilantes” which supposedly would go on a buyers strike if they were not happy with UST interest rates/deficits. There are now on display in the Smithsonian next to the dinosaurs, both are extinct.

      The investing landscape so far is that there is nothing to reign in deficits increasing each and every year. It does not make any difference whether we agree with that policy or not, it is what we get to invest in.

      We might all agree that one day will end, the question is how many of us will still be alive if/when it happens? In the meantime, we get to play the cards that have been dealt.

      1. Tex..Those that subscribe to modern monetary theory don’t agree that deficit spending has to end one day. The concept is that the federal govt. is a currency issuer and cannot run out money because they can print it. This was made possible when the currency came off the gold standard in 1971. All other budgets based on the dollar such as individuals, businesses, or states are currency users, since they cannot issue dollars. Their budgets must balance at some point. Even though it cannot go bankrupt, If the federal govt runs too large a deficit either through too many tax cuts and/or excessive spending, too much inflation will be the result however.

        1. Lucky, the reason they believe that is because it’s true. Everyone KNOWS that the U.S. government’s spending is not limited to tax revenue, or even borrowing, for that matter. Some people just don’t like that it’s true, so they haven’t moved beyond monetary theories that died 50+ years ago.

        2. As I understand Modern Monetary Theory, the Fed continues its role on the gas pedal but Congress takes over the ‘brakes.’ The Fed’s refusal to discontinue QE in the second half of last year seems proof of that. Now the Fed is seeking credibility with a projection of rate hikes and QT. Given the new gaping bump up to the deficit, I doubt that the Fed actually follows through such that a goal of 2-3 percent inflation becomes unlikely.

      2. Tex2:

        Not so fast…the bond vigilantes may finally be coming back after a very long period of hibernation!


        I had forgotten that the 30-year Treasury bond yield had fallen to 1% at the height of Covid hysteria two years ago. Congrats to anyone who shorted it after what turned out to be a lay-up.

        And thank you for that update on the “canaries” – as I used the big bounce to sell some of my low-yielding preferreds today from high-quality property REITs that I recently bought.

  3. I’m not gonna buy dips until rates settle down more. Obviously (to me at least) inflation is roaring and we have a long way to go. When there is a glimmer of light at the end of the tunnel, we will have a good idea where the real bargains lie. At that point I’ll deploy my cash and get some long term holds that I can have confidence in.

    I’m very cynical. I believe this rate hike is really not serious. Powell will be very gentle until he gets re-confirmed and after the election. That is when we may really see some action.

    1. “When there is a glimmer of light at the end of the tunnel”
      Harrold—Do you have the secret that lets you know it’s not an oncoming train? If so, please pass it on because I would sure like to know. I guess that’s why I’ll just buy-in as prices deteriorate and hope, all-in-all, that things work out ok.

      1. The end of the rate hike cycle is when: inflation trends down, or the markets have a major correction, or there is a major recession. The last 2 are easy to see, and the fed will have to respond by easing again.

      1. Personally I shall invest all my cash 1 day before the exact bottom.
        Although that surge of buying might change when the exact bottom is?
        Now I don’t know what to do?

  4. Before one rate hike, the 7y/10y treasury is inverted. The market is pricing in 7 rate hikes. No way – COMON MAN

  5. The fed should raise rates by half a percent and then state we will wait and see about more based on data but we have to get in front of inflation. Don’t expect another raise in a month. Perhaps 3 months. As for the balance sheet run off they do not have to shrink it yet. Just stop reinvesting their interest on existing as the next step. Afterwards just speak in a neutral manner. Not hawkish, not dovish. Wait for data.

    1. Im pleased to see Libor has shot up 70 bps since beginning of the year and 40 bps in past 2 weeks alone. Depending on the issues exD date, Im gonna get some nice pops in yield next cycle. Heck even WTREP with the 1% minimum floor may get a pop as yesterday Libor had ballooned to .92% already.

      1. Grid, profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Fasten your seatbelts; it’s going to be a bumpy night…

        1. Azure, the long presently anyways, is really fighting back though relatively speaking, as the 2-10 spread is pretty tight. Gundlach said today the 30 year has topped out in yield. Of course he predicted a 6% 10 year just 3-4 years ago that never happened. So who knows, I sure dont. But I do like that Libor spiking as it helps my “live floaters” and about to be’s.
          But I cant hang my hat on that so I spread it out as who knows what the market will be thinking next month, or tomorrow for that matter, ha.

          1. Let’s see how Gundlach does in a rising interest rate environment; his fund(s) will feel the pain (there is no way to hide) as he has to be almost fully invested to create income for his fund(s). At least buying individual preferreds/bonds/equities I can decide on the amount of risk and time frame after my own due diligence. Stay tune…

            1. Gundlach has been defensive on rates for several years, so DBLTX looks a little better than the category this year, but is in the category’s basement over the last 3- and 5-years. Market timing is hard and even smart guys can’t do it very well.

  6. I agree with your wild a** guess, Tim.

    There was something today that gave me pause. I don’t recall if I read it or it was from one of the talking heads on TV, however, the larger concern here is the balance sheet.

    Ending the purchaces is one thing but allowing the balance to run off is another. We may not get more clarity on this until May.
    This is a huge liquity issue for the markets. QT from nose bleed heights has never been seen before. This could create huge down draft in fixed income issues. Maybe a better time to buy later. I am shaking to deploy cash to IG issues and planned to do so by the end of this month but there may be a better entry point in a short while.
    If it were golf season in the NE I would be busy worring about sand traps. But I’m stuck noodling on this until I file my taxes.
    We sure do live in interesting times.


    1. Nick – Following a sentence about filing your taxes with “We sure do live in interesting times” seems to be an oxymoron imho…. LOL…… I’m in the same boat – keep postponing or just doing what I can stomach for a whole then putting it aside……

  7. I know what Powell will say: We’ll watch the economic situation closely and we’ll act as appropriate.

    1. I agree that Powell will say next to nothing right now. If inflation continues to rage and gas and other consumables continue to go sharply up in price, the American public will lose interest in the Ukraine situation. They will be concerned about their own standard of living and financial condition. The midterm election will be about inflation—not what we should be doing (or not doing) about Ukraine. Sooner or later, inflation has to be addressed. Even if it means creating a recession. I just wonder how long it will take Powell to address inflation with something other than a few 25 point increases that have been announced months ago. Maybe never………..

Leave a Reply

Your email address will not be published. Required fields are marked *