My headline says ‘time to move interest rates higher’–but honestly it is way past time to move them higher. Going way back to 2012 or so the Fed refused to cut back QE (quantitative easing)–honestly they have screwed up in this respect for 8 years now. Because there was a ‘taper tantrum’ once is no reason to keep doing the wrong thing.
The Federal Reserve, by proclaiming interest rates are going to remain low for years, is simply prolonging some pain, which can be alleviated, to a small degree, right now.
If the economy is so bad that we need to have the 10 year treasury at .77% why do stock prices keep going up and up?
The Fed needs to get out of the way–start cutting back asset purchases (in the last 2 months they have bought $130 billion in assets) NOW. We need the 10 year treasury to move to at least 1.50% in the next 6 months.
Through the asinine actions of the Fed insurance companies and pension funds throughout the country are all going to be on the verge of bankruptcy within a couple years. They will be the next bailouts–it’s coming, just a matter of time.
From my reading virtually all pensions systems use a totally unachievable rate of return to calculate their pension contributions and payouts–usually 6-7%–not going to happen when low risk assets such as corporate and muni bonds are paying 1-3% and over time, just like individual income investors, their achievable returns are going to fall dramatically.
Like pension systems, insurance companies, depend on safe income assets to fund their business–they live on the ‘float’–and the float isn’t paying much, if anything, right now.
It’s time for the Fed to quit kissing ass on Wall Street and do what they have to do for the good of the country.
Tim, I certainly agree with your sentiment, but markets are no place for sentimentality:) The Fed and other Central Banks have moved from independence to just another branch of government. While they want higher inflation to help devalue their currency and hence their debt obligations, they shudder at the threat of rapidly increasing debt service costs. They peg short rates at zero and try to finance most of their debt at the short end, keeping service costs low. Forcing individuals and pensions out the risk curve. 80/20 is the new 60/40. We just play the game as they remake the rules.
commenting on Chris W’s 80/20 is the new 60/40 ? Its already essentially 100/0 , from “risk free returns” to final destination “return free risk” get ready for negative rates, and government confiscation of all assets, when they need It.
“Don’t fight the Fed”………………..
https://www.youtube.com/watch?v=xvlxJPIP-Uo
LOL Let the fed fight the fed. I’ve closely followed rates and the fed since Paul Volcher’s tenure. Then there was M1 in mid 80’s. Ronald Reagan wondering why mortal rates were so high vs Treasuries…12% vs 9%. ‘Locking in 10% money markets’ …Chasing CMO traunches. Going long 10% 5 year Jumbo’s.etc…….add in another 25+ years and interest rate predictions still abound. Around 2015 the 3-4 yr dot plots were forecasting 4% fed funds by 2019. Even thru dec 15 2018 the fed shouted 4 rate increases in 2019. Bloomberg/cnbc favorite bill gross warned buy shortest duration you can get go ‘ultra short’. If he said it once he said it a 1000 times. Gundlach made same prediction 2016/2017. Not many on record stayed long. Except A Gary Shilling who said consistently “Buy longest duration”. He’s still long. His quote is Long Treasuries since early 80’s has done 6 times the S+P
Everything is turned on it’s head. Looking how GNMA’s lagged T’s and went from 3.25 to 3.9 in a weekend in March well road kill abounds now 2.82 vs 1.4 on 30 years. OR with muni’s which use to be 90% of a T, now are like 200% of a Treasury!!
The Q……. Did WE average down in 2009? How about 2020 ?? Were we able to just maintain positions in March? (10 to 15 handles on 25 dollar par bonds happened so quick as to be debilitating. ) I remain long (most higher) coupons with most a 3.5 YTC or higher. And would think our markets would benefit if the fed did let rates normalize
BTW when did we start accepting 5’s as a good rate?
Ah, memory lane.
I remember my father saying he’d never lend money at 8% again. He was busy maxing out 20% s/t CDs and when he got tired of driving to little banks all over central Texas, he bought 16% SW Bell bonds instead of the 14% 30yr Treasuries, disregarding the call of the Bells because, you know, rates were never going down again.
Oh, how I’d love a shot at something like those 8% Philly Elec bonds he so disdained.
So it goes.
Wisdom comes to us when it can no longer do any good. –from Love in the Time of Cholera
Check out this well written article by Lyn Alden Schwartzer…who applies real mind and perspective. Action with Treasuries, like History, rhyme not repeat. The outcome is not good for the public in any schema. It looks at three very distinct eras and the actual actions of the Fed (Private not part of the govt for a very good reason), Congress (public govt and budgeting, part of the Myth of Democracy) and YOU the dirt out of which all grows and is consumable by the Grim Reaper. Yes YOU are just fodder). The eras are unmistakable as the actuarial cycle and forgetfulness of generational time.
https://www.lynalden.com/treasury-bonds-risks/
Where you are placed in and experience the cycles have a broad influence on your behavior and belief in the Systemic Activity too. The cycle is obviously in the very late innings. This article may give a perspective for some alternative and perhaps counter-intuitive options to what you think you believe.
Good morning, Joel. It all does give one pause, doesnt it. Including the deflationary aspect of debt. I noticed the “trillion dollar coin” hasnt been trotted out in a while as a gimmick to solve the problem. Might need to mint more than a couple this time, ha.
There is another important point about interest rates. Preferred yields historically are more correlated to the Moody’s corporate Baa yield and NOT to the US treasury 10 year yield. This has been good for all preferred investors buying new issues this year. The Baa rate has dropped from 3.90% down to 3.46% year to date. That said the new low water mark for preferreds was recently set by PSA-N with its 3.875% coupon. If preferred rates were tied to the UST 10 year, it would have come out with a sub 2.0% coupon. And many more callable issues would have been called because companies could have reissued them with lower coupons.
The S&P BBB yield is 2.5%. Why is there a 100bps spread with the Moody’s index? I think Moodys has a slightly longer duration but that couldn’t explain such an enormous spread.
“ If the economy is so bad that we need to have the 10 year treasury at .77% why do stock prices keep going up and up?”
It’s due to multiple expansion, not higher revenue or profits. PE multiples are a function of the DCF discount rate which in turn is a function of treasury rates. Low rates increases the value of all long lived assets.
“ Through the asinine actions of the Fed insurance companies and pension funds throughout the country are all going to be on the verge of bankruptcy within a couple years. ”
I own insurance company preferreds and I’m not worried about it. Low rates increase the book value of their investments and low float can be solved by higher insurance premiums.
I agree on the multiple expansion due to low rates but insurance companies do not “mark to market” debt instruments that will be held until maturity so low rates really don’t help them much. Also, there is quite a bit of resistance to higher premiums although tough times do make some people head to the insurers for safety.
Tim, of course I agree with your point of view. But, like many others who have commented I don’t think it’s going to happen.
Many years ago a realtor friend told me that every 1% rise in mortgage rates takes one million potential buyers out of the market. Whether that figure still holds or not, I can not say. But housing being one bright spot in this otherwise dismal economy I can’t see the Fed doing anything to impair that. Here in Central Florida where I live, the devastation of the travel/tourism industry has had a major impact on the local economy. But, amazingly, developers continue to add subdivisions as if there was no tomorrow.
I agree that insurance companies and pension funds would have to be next in the bailout queue. Right after all those state and local governments that can’t pay their bills.
The time to move rates higher was 10 years ago.
The time to stop running up the deficit was 40 years ago. Our short term leaders have no incentive to do what needs to be done for the long term.
There is another part of the issue that really compounds the difficulty of the Fed’s management of interest rates: the structure of our debt over the various maturities. I don’t have the numbers but I am given to understand that a very large proportion of our debt is in securities with less than one year in maturity. This shocking refusal to diversify maturities means that any interest shock to the rate structure will be realized almost totally within twelve months. It means that any decision to alter short term rates prompt a huge immediate change in financing costs. Soon Congress will be facing a debt structure in which changes in interest costs that would match the defense budget or require large increases in income taxes to just pay the interest. The maturity structure will therefore encourage Washington to keep rates low regardless.
The Treasury should be selling 20 to 30 year notes for a large share, even a majority, of the new debt. This would allow the yield curve to support higher long term rates. I believe the Treasury tried to sell some 20 year notes and were struck by the market’s lack of enthusiasm for the low rates.
Our government is like an addict whose addiction to spending and low rates is consuming us.
Zero and Negative Interest Rates have been a total failure everywhere in the world. Starting with Japan almost 20 years ago, moving to Europe and the last 12 years in the US prove it.
I’m tired of hearing the obvious I’d like to know what to do about it. Between the most corrupt and incompetent Congress in the history of the country. Literally two money laundering organizations dedicated to plundering the country for whoever it is they represent. And a quasi-public Federal Reserve organization that is defined by Regulatory Capture, Insider Trading and a history of Catastrophic Asset Bubble failures.
So what do we do about it? Are normal Americans the only group in the country that get no representation, no consideration and have no influence? It sure appears that way.
Laughing out Loud.
I have never seen you this mad Tim.
I agree 100% with you
SteveA–hadn’t heard from you in a while so just worked to shake you out of the weeds.
Have been ultra-focused on the political side (in other forums).
Plus, building a common stock portfolio that I am comfortable with (value investor). 60% cash. The remaining 40% is 16% preferred, 24% common. My yield on my common stock is 4%, so it’s not too far off what IG’s preferred are paying. I have sold call options on these commons, so with that income, I am above 8% – better than preferred CEF’s can offer. This is the 1st time, in my life I have sold call options on common stock that I own. So, I have taken a slightly different path here – more risk for more reward.
As an example, I own the common of EQH versus the preferred. My yield is 3.5% plus monthly call option income. Will I be cashed out in mid-November due to rising market? Perhaps, but it will be for 15% CAPEX gain. With a forward PE ratio of 4 (yes 4…), I am not losing sleep with this approach.
I am not seeing much in the preferred market that excites me this year. BIP/PRA was an exception as was SLFSF in Canada. I jumped on these.
I have personally been wrong about the direction rates for the last 5 years. Back then, I invested primarily in fixed/floating preferred stocks, assuming that rates would surely rise. Now, I’m selling them with 3 years or less until they float—especially those with less than 400 basis points plus libor—and actually selling them at my cost or a profit.
This week I sold AHL/C (BBB-) over $26. In less than 3 years (7/23) , it floats at libor plus 406 basis points. Whoever is buying this issue is obviously assuming that rates are going to be lower for at least another 3 years.
With deficits gong to be sky high for who knows how many years, the Fed will have to keep interest rates low just to fund the debt. This will also require the Fed buying a lot of newly issued Treasury securities back from the wall street banks who are forced to purchase them, but are unable to peddle them to long term holders. This will eventually end, but who knows when that will be—-2 years, 5 years, 20 years? Everything is so up in the air.
randy–good to exit floaters–but the newer reset rate issues have much higher spreads.
Yes they might be forced to buy the treasuries–or alternatively let the marketplace determine a fair interest rate–this will get some ones attention right away.
I think political interference and the public’s ignorance are a major factors in the Fed’s behavior. Also, I think many situations are purposefully created to cause pain so the Big Boys can sweep in and “save us”, thus enhancing their position.
Jeff–I think the general public doesn’t have a clue what is going on–60% want more handouts–whether they need it or not. You can be certain the big boys will come out on top–they always do.
It is fine to have an opinion about what the Fed should or shouldn’t do. The more important issue is what WILL they do? Every one of us has already forecast what we think the fed will do. We do that each day we own preferreds. Even if you did not consciously make a forecast, you actually did by virtue of your portfolio.
For the record, my forecast accuracy on interest rates in the last decade or so is ~ 0%. The most accurate forecaster of interest rates I know has been Lacy Hunt for about the last decade. He was continually forecasting lower for longer, when the consensus was higher sooner. He continues to forecast lower for longer, in a nutshell.
Tex,
I also like Lacy Hunt. I think he is a sound thinker. I used to watch Van Hoisington on Wall Street Week way back when. Louis Rukeyser introduced him to me . Hoisington has focused on treasuries forever I guess and he and Lacy as a team do mighty good work.
Thanks for mentioning him.
Tex–no of course they won’t do it–I say start pulling the QE–let rates rise by 10 basis points a month for the next 6 months or a year. Common shares will fall by say 10-20% as those folks throw their tantrum–yawn.
15 year mortgages are at 2 1/8% now–so they go to 3% or so–that is just fine–I could go on and on.
My record on forecasting is about equal to yours-0
Tim,
Wish I had more time in the day to read all the great posts here. Over on SA there has been numerous discussions and it came down to rates would stay lower for a lot longer because the fed has control. Unfortunately there are other things in the world outside the Feds control.
My mortgage has one year to go and its a ARM one of the first to come out it can only be reset once a year and only 1/2% in a year. It has a floor it can’t go below so I am not paying the lowest rate but on the other hand I haven’t spent thousands to refi several times over the life of the loan like others I know have done. It would be better if the Fed’s did a calculated raise of rates and not let it be taken out of their control like what happened in the early 80’s
Charles M, early 80’s story about “mortgage rates” I had a construction loan in progress for $30m @ 7.5%+- with points when rates went ” crazy” paid the contractor with other assets and bought a 15% cd at the same institution as the loan. offered to work out a deal with the “savings and loan” officer, wouldn’t negotiate? Almost 8% on there own money for 6 years. is there any wonder so many failed?
Correct about interest rates.
Japan is a case study of QE being bad policy. It’s a sugar high but terrible long term policy.
But we can afford those McMansion homes. Can’t afford to maintain them but who thinks of that stuff.
For those who listen to podcasts, I highly recommend the most recent Invest Like the Best with Jesse Livermore (anonymous account on Twitter). Jesse recently put out a small book (free) where he explained why we are seeing the… Bad news is good news phenomena. It’s a good use of an hour of your time, or at least was of mine. It’s all macro.
Thanks – do you have a link?
I also recommend the podcast the Mriniprohet referenced. Here is the link:
http://investorfieldguide.com/jesse-livermore-upside-down-markets-understanding-fiscal-and-monetary-policy-invest-like-the-best-ep-194/
The podcast was based on long read paper that Jesse did entitled:
Upside-Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes
Link to a PDF of the paper:
https://www.osam.com/pdfs/research/Upside-Down%20Markets%20-%20September%202020.pdf
My executive summary of the paper: Fiscal stimulus from Congress and monetary stimulus from the Fed have boosted stock prices while the real economy is in the tank. Obviously, there is a lot more nuanced explanation detailed in the paper