Well it is just about an hour until the consumer price index for November is released and there hasn’t been a more anticipated inflation number this year – we are just at the cusp of an announcement of the next interest rate hike making the number even more anticipated.
Expectations are for 7.3% (versus 7.7%) year on year with core CPI at 6.1% (versus 6.3%). Numbers more than a 1/10% or two outside expectations are likely to send markets (stocks and bonds) flying–all I can do is cross my fingers for mild reacts (ha ha – the algos don’t know mild – just overreaction).
Yesterday was a pretty quiet day in income issues even though the 10 year treasury rose 4 basis points. This morning interest rates are down a few basis points–really just drifting as we await the inflation numbers. Equity futures are up over 1/2% this morning–futures are always suspect in terms of pointing the way for regular hours trading and of course today they mean nothing–CPI will determine regular trading.
Of course I did nothing yesterday investment wise – kind of the norm for me – once one is positioned comfortably with investments there is little follow up actions required except occasional ‘check-ins’ on my accounts.
So now I will sit back and see what 7:30 a.m. brings us in the way of inflation.
700+ pt drop on the day’s high – crazy stuff.
vai Harley Bassman:
Come this time every year, I publish a list of “Investments” that I think will do well over the intermediate horizon – two to five years. These are NOT meant to be nips to blips RV trades, but rather longer-term notions that capitalize upon either my strongly held themes or the trembling hands of Sharpe Ratio focused portfolio managers.
As a special addition this year, I offer a long-term buy and hold ETF Portfolio; a set it and forget it construction. While I am restricted from naming tickers, I suspect you can make a good guess.
>>> https://www.convexitymaven.com/wp-content/uploads/2022/12/Convexity-Maven-2023-Stocking-Stuffers.pdf
Not to bury the lead, I think the FED will hike rates to 4.75% and stop, that will be the peak. While the derivatives market mostly aligns with this view, I take exception to the notion of a mid-year “pivot” to lower rates….I think the FED will stay at this rate level for all of 2023 as CPI inflation will not tick below 4.0% until at least 2024.
As a bonus for finance professionals, don’t miss my ISDA required ticket on page 11.
Your questions and comments are always welcome at: harley@bassman.net
@Jill thanks for the post. Bassman’s work experience is impressive. I wonder how good his prediction success is. I’m sure it’s better than mine.
I doubt anyone is perfect in predicting the economy and good investments. For income investors I’ll note that Bassman, in Dec 2021 (not 2022) wrote “My view is that inflation will remain well above the FEDs 2.0% target for all of 2022, yet they will be reluctant to raise rates” Also “The FED (sort of) promised not to raise short-term interest rates until at least January 2023, and I still believe this to be the case.”
He does end with “Finally, the cheapest option available in the market today is CASH.
Short-term rates near zero create a low opportunity cost, and this offers you plenty of “dry powder” if the FED makes a policy mistake that tanks the economy (and the market) like the current flattening of the Yield Curve seems to indicate.”
The F/F Rate Bond Conundrum – OK, what to do what to do…. Obviously giant moves down today in interest rates in general… If sustainable, then one has to decide what to do with F/F positions. For example, I believe the 3/15/23 coupon should have now been set of the CUBI preferreds based on today’s 3 Month Libor rate of 4.679%. That will give CUBI-E a coupon yield of 9.819% for 3/15/23 and CUBI-F = 9.441%, obviously very high. Yet if the the trend is now theoretically lower on rates, then rates on all these F/F’s will be coming down and market prices could adjust accordingly… So when do you leave? Do you look to collect in March on CUBI preferreds before exiting or do you forego? All I know is that history tells me personally, I’ll probably be too slow on the trigger..
2whiteroses…Reiterating what I have said concerning other questions on what decision to make, it does not have to be binary. Can’t decide? Sell some keep some.
Yep. Im not going to the Bullpen just because the starting pitcher walked the first two batters in the 3rd inning of a 0-0 game. Besides like you alluded to Lucky, Im already hedged out in other directions too.
The Fed is likely to come along tomorrow and announce no change in its plans for rate hikes, so having an inflation print a couple of tenths less hot than predicted for a given month would seem a bit premature to be making any big leaps from one sort of investment to the next.
But I always get this stuff wrong so who knows? We know inflation will have to peak well before rate hikes end. The stock market will respond in anticipation because that is what the stock market does, but the floating stuff will still be based off an increasing Fed rate so will people really dump it in droves while it is paying more and more? And go where? The fixed rate stuff will still be getting hit.
I think we can see the point where we will need to turn the ship, but are not ready to go hard to port yet.
Nine times out of ten, turning hard to starboard is recommended over turning hard to port.
2WR:
Where are you getting the real-time 3MO Libor rate? 3MO Libor closed yesterday 12/12/22 at 4.75271%.
I wouldn’t panic on the “live” floaters until the Fed signals its intentions to first stop raising rates. There is a very good chance the Fed will stop raising in 2023 BUT keep the Fed Funds rate near 5% for the entire year. We aren’t anywhere close to the ballpark of rate cuts yet. This should keep 3MO Libor (and SOFR) rates also near current levels.
Today or tomorrow are dividend determination dates for the the CUBIs , SLMBP, and GJO. I own all three.
They had an interesting graph on Bloomberg yesterday. It showed that rates stayed at their peak level for an average of 8-9 months with a minimum of 5 months. My problem is that the market, including some of the people on this blog, will know that and the market will anticipate lower rates and sell on the future rather than the current rates? FF and floaters may not get much of the upside with only two higher payments, followed by declines. Issues that re-set over this period are the only big winners.
Rob – Someone else on here (sorry, Someone, for not remembering your name) that the most up to date provider seems to always be Bloomberg TV. That’s where I got the quote.
2WR,
Might be a small transposition above. I see 4.769% for 3ML today. I’m the “Someone.”
You’re right, nhc, I did typo the rate – it’s 4.769%, but I think my math was right, right? and sorry for not remembering it be you who gave the original Bloomberg as source info..
Your addition was right. However, with the corrected 3ML, I get a coupon rate of 9.91% for CUBI-E and 9.53% for CUBI-F for the next quarter.
And, to get back to the original question, as I see it, if there is a significant decrease in long term rates, then you won’t do as well from where we are now with the FTFs as with the low coupon fixed rate issues. On the other hand, if the spread to 3ML (or whatever) is compensatory for the credit quality, then the market price of the FTFs should, in theory at least, hang out around the call price even if rates drop. But I’m guessing that you probably already know all of this.
Aren’t FF still vulnerable to a reverse in inversion? Floaters as well?
Then my math wasn’t right….. I posted based on my own typo mistake instead of the 4.769% actual rate… Boo hiss on me! Thanks for catching and correcting..