Yields Tumble Again

There should be little doubt that a recession is either here already, or will be soon. I originally predicted (or should we just go ahead and say ‘guessed’) the 3rd or 4th quarter). As more than one reader has mentioned you just have to watch energy prices to know what the economy is doing—when we see gas prices fall substantially we will get some relief.

The final reading on 1st quarter GDP came in at -1.6% today, slightly above the -1.5% that was expected. Technically we have the 1st quarter of negative growth of the 2 consecutive we need to call a recession–although I now hear the ‘talking heads’ trying to revise the ‘official’ rules for a recession.

Interest rates continue to predict a recession with the 10 year treasury yield off 10 basis points today to the 3.11% area. If we thought the Fed was backed into a corner before–they are really backed in tight now yet Fed Chair Powell said they still have a chance of engineering a soft landing–we’ll see I guess.

I continue to sit tight–primarily watching a handful of term preferred and baby bond issues that have redemptions in 2024. All of those issues are here.

46 thoughts on “Yields Tumble Again”

  1. The Atlanta Fed GDP tracker is at -1% today for 2nd Q. Yields are dropping fast. The bond market is now getting more worried about recession than run away inflation.

      1. In general it’s called the “flight to safety” trade. But longer term if recession comes and inflation tames, Fed lowers fund rates which indirectly lowers long end. There are several other ways the curve can be manipulated though. Flip your coin to decide a month from now if 10 yr
        is up or down from today.

    1. Update – now it’s changed to -2.1%. I believe second quarter GDP is released on July 28.

  2. I have a simple question about yields/rates.
    My understanding is that yields rise when inflation increases to recoup purchasing power, and when the FRB raises rates, lending institutions raise its rates correspondingly.
    I understand that rates vary based on risk, duration and other variables, but is the primary drivers of rising and falling rates, inflation and FFR? Cheers!

    Windy

    1. You’re correct there are multiple factors in play. For a solid issue with not much else going on then interest rates are the most important factor in moving the price as investors demand a higher return. For a high risk company an economic downturn might increase bankruptcy risk, and for various companies it could drastically alter their business plan. Which could be just as important as rising rates or moreso.

    2. I didn’t answer your precise question. The primary driver of rising and falling rates is Fed policy which sets those rates. Their decisions are based partially on Inflation. So Inflation is an indirect factor, and when it gets out of control like now it becomes a bigger factor in their decisions.

      1. Martin, thanks. I noticed that before the fed started raising FFrates, treasury yield were already on the rise, was this rise driven by inflation? It appears that the market initial response to higher inflation is rising yields/rates, and in todays case the fed is catching up. The market is more efficient than the fed ( never thought as the fed as efficient) Makes sense?

        1. Market rates also go up in anticipation of what they expect the Fed to do. A combination of market pricing and Fed manipulation. The market is most certainly more efficient than the Fed in seting prices if left alone but in today’s market Fed manipulation is probably a bigger factor

          1. Martin, What you said is precisely why I wanted to wring the neck of my step moms broker/advisor. She wanted to start toeing in some safe income with cash sitting around with shorter duration. I told her to go up the day the 2 year went above 3.4% and buy some. He talked her out of it because he said “interest rates were going up next month, so wait a month”. I tried to explain to her that had nothing to do with rates as market had already priced that in.
            She didnt understand what I was saying, so I just let it go as I didnt want to worry and confuse her.

            1. The market priced in their guess of what the rate woud be. It could be higher or lower than their guess.
              Most brokers know more than the layman but less than successful Investors. That’s why they are brokers and not Investors. Many of them are business graduates who weren’t good enough for Wall Street.

        2. The Fed was way behind the curve in raising rates to counter Inflation and even moreso in tightening the money supply. There are various theories about why that is.

    3. To further add to Martin’s post credit spreads between corporate debt and govt debt also contribute to yield increase or decrease. Generally in good economic times credit spreads tighten and corporate debt trades closer to govt debt (preferreds follow suite also) and in recessions credit spreads can widen. And as mentioned earlier, sometimes govt yields can go down and corporate debt can actually go up. This is sometimes called credit spread blow outs. To further cloud the issue sometimes Fed increasing funds rates can actually cause long term debt yield to go down while the “short end” (which Fed is more directly involved with) is going up.
      This is why guessing where future yields will go can be done with little to no certainty.

    4. Windy, the executive summary:
      God only knows where short term and long term rates will be in the future.

      Decades ago, it was easier to forecast rates. In a perfect world, US treasury rates would be your guess at inflation plus a little bit. If you forecasted 3% inflation 5 years from now, you would price a 5 year treasury at say 3.3%.

      Three major factors have changed all of this:
      1) Alan Greenspan decided to add a “Fed Put” back in 1998 when Long Term Capital Management failed. It had a Nobel laureate and famous Wall Street bigshots running it and was leveraged about 25X. When it blew up, literally one or more countries, Thailand, would have defaulted on their debt. Greenspan stepped in and orchestrated a bailout. This is what started Too Big To Fail.

      2) US interest rates are strongly dependent on foreign investors, their interest rates and currency exchange rates. For example, the current Japanese 10 year bond yields 0.231%. If you ignore exchange rates, obviously every Japanese investor would purchase UST 10 year @ 3.00% instead of Japanese bonds, aka JGB’s.

      3) The Fed has three mandates. Two are in writing: inflation and employment. The third is the level of the stock market and some Fed board members will privately tell you that. Fast forward to the recent meeting between President Biden and Jay Powell. Jay gives the President a choice: you can either have lower inflation/lower stock market/lower growth or you can have high inflation/higher stock market. Which one do you want? Short version of the current situation is that the mandates are in conflict and NOBODY knows, including the fed, exactly what they will do and when they will do it.

      Wish there was a more actionable, concise answer, but it does not exist IMO. At the end of day, each investor has to make their own guess about where interest rates will be. Personally, I recommend considering a range of outcomes with different probabilities, as opposed to a “point forecast” which bets everything on one, specific outcome.

    1. Part of the Pipeline business is blending and delivering to refineries; say US light sweet and CN of Venezuelan heavy refined bitumens. The pipelines also are the delivery system for sequestered CO2, and natural gas for pressurizing fields.
      H2 is being blended with NG and producing a higher BTU content and green elements for building out the H2 resource commercially.
      I just bot some AltaGas, USD ( no longer keep pink symbols) ALQ.PR.U below par, $24.35, IG and 5 year reset at over 7% for five years or call it in Sept. Either way ,I’ll hold. Huge critical infrastructure being expanded and almost 2MM utility accounts. ENB is a similar high grade monster. These site and other CN Pipes are a good read regarding these technologies.
      I’ll take that over annuities and am using IRA/Roth funds.
      Last Comment: Any young people you know, FORCE them to fill up their IRAs early. Steal their paychecks if they don’t get it!

      1. Joel

        I’m a fan of Canadian resets as well and thank Bob in Delaware for educating me on them. I am long two Enbridge resets (EBBNF and EBGEF) and one from Brookfield Renewable (BRENF) and have been very pleased with their performance.

        Many of these preferreds are available on the OTC marketplace. A search engine for them is on this link.
        https://www.otcmarkets.com/research/stock-screener
        I used preferreds and Canada as my search criteria.

  3. The writer Robert Anton Wilson once said “If you can see Them….Its not Them. And its hard for me to believe that the people most unhappy with the current anti-business, anti- established wealth and power Party now in control decided to roll and over a play dead for the current administration.
    I think it was James Carville from the Clinton days that coined the phrase “ its the economy stupid”.
    In a way, it doesn’t surprise me that things have taken the turn they have and that this squeeze on the economy will be used as the primary driver to influence the Congressional mid terms and the 2024 Presidential election.
    And if I’m completely wrong and there is no “Them” and we do have a recession, I think half of the reason is media induced sentiment that becomes self fulfilling. And the other half is the simple fact that recession is the primary tool for fighting inflation.
    As I’ve said before, I don’t mind a bit. One year brokered CDs at 2.9%, 5 year non-callable CDs at 3.35%. IG Corporate bonds with 4.5% coupons and reasonable duration. After being starved to death for 14 years by Ben Bernanke, Janet Yellen and Jerome Powell. I couldn’t be happier.

    1. Richard, you may be interested in MYGA’s. Multi year guaranteed annuities. You can withdraw income yearly and most are from A rated insurers. You also have choice to defer the income and collect it along with the principal at end of contract. In my state I see A rated at 4.2% for 5 years, and 4.5% annually for 7 years. I am going to keep an eye on these now that I am aware of them.
      https://www.blueprintincome.com/fixed-annuities?utm_source=google&utm_medium=cpc&utm_content=58584688509&utm_id=1558032692&utm_term=myga&gclid=EAIaIQobChMIzrSq55HU-AIV88LCBB1ipgpQEAAYASAAEgLXR_D_BwE

      1. Gridbird….Thanks for pointing this out. Its actually the first time I’ve ever seriously looked at an annuity. Every time I’ve walked into a brokerage office to review my portfolio the first two suggestions tossed out to me are annuities and Municipal Bonds. And that always brings up the same thought: who do I trust less? State and City governments or Insurance companies?
        In my own simplistic thinking I look at most investments as CD Proxies and in this case the Guggenheim MYGA products really are CD proxies.
        I may just give this a try after some further research.

        1. Just make sure the broker doesn’t talk you into some fancy variable annuity product…

  4. Tim.. We hope the next president will chose you, as chief of the federal reserve.. this guy, drop it ,never giving time to settle , Now he raising never giving Time settle , no rules , take it easy, navigating this is a big economy !
    Georges

  5. Three points:

    1) Last week I posted a study on preferred rates/price versus the UST 10 year yield. I cautioned the UST10 is NOT always the best predictor. I am hoping to publish the next in the series about WHEN the UST10 is not as good. Bottom line is that you can have falling UST10 yields AND preferred prices at the same time. Two good examples are Covid (3/20) and GFC (2008ish)

    2) US fracked oil is “light” and cannot be used to make diesel, which is what is in the shortest supply. Which is pertinent because:

    3) Diesel is in much shorter supply that regular gasoline. Current inventories are ~25% below typical levels at this time of the year. Several large truck stops have been close to running out. Would not be surprised to see diesel rationing, in which case transporting all of the stuff across the country will be a little harder, hence higher priced.

    1. Tex, Dec. 2018 was another example of govt debt yields dropping and preferreds dropping hard on a sudden if not relative temporary credit spread widening. That was a great trading month!

      1. Yeah! If we’ve learned anything about these hard moves is that you have to hit it when all others are bailing!!

        1. If you prefer, I gotta admit, I prefer it to happen like 2020 and Dec. 18 when everything is falling from the sky instead of whack a mole. Because the illiquids always are the indicator that it is not the end of the world when all the liquids are cratering. You just roll out of the former and into the latter and pocket the gains. The whack a mole situations are a bit more daring as you never are quite for sure if you bought that special one heading over the cliff.

      1. Hi James, thanks for clarifying this. I could have said: “US fracked oil is “light” and cannot be used to make diesel as refineries are currently configured.” But then I would have had to explain that you cannot reconfigure a refinery at the drop of a hat. If you reconfigure an existing refinery, it would remove capacity from something else, like regular gas. So you say, we will just build a new “green field” refinery to process light crude into diesel and it takes 5 years minimum and realistically 10 years. No much help to the truckers that need it TODAY! The last major refinery built in the US opened in 1977.

        The end result is the same, even if you can add 1 million barrels of fracked oil, it will NOT produce a single additional gallon of diesel in 2022.

        1. Nobody will open a new refinery without tax payer help due to it being a lower margin business. Future is diesel and jet fuel which present refineries will be converted.

          Second issue is the 2030 world wide policy choice to bad internal combustion engines. Why build a potentially stranded asset.

          Even Shell has been attempting to unload its refining capacity in the last 2 yrs.

    2. Absolutely agree Tex–I believe you had mentioned before energy and the disconnect between the 10 year treasury and preferred prices. I had noted some time ago that preferreds were not ‘acting’ as they had on a historical basis–plunging yields and income issues barely moving higher (if moving higher at all).

    3. As for diesel shortage, maybe it’s long past time they realize we should be using compressed natural gas for commercial trucks. Proven technology, infrastructure in place, cleaner, and we have an abundance of product.

  6. Difficult to rationalize a recession when the number of job openings surpasses the number of job seekers. But…stranger things have happened and this economy sure looks and feels like it is sliding towards negative growth. One industry where we have already seen some demand destruction is housing, where the combination of high home prices and escalating 30-year rates have already sidelined many buyers. Today’s fixed 30-year rate averages about 5.91% (Bankrate.com) pushing many young people to rent. I live in FL and, anecdotally, I can tell you that rents on single family dwellings have simply skyrocketed in the state’s two largest counties, Miami-Dade and Orange. As we all know, housing acts as a locomotive that pulls many other sectors of the economy, if housing cools significantly it may be the straw that…well, you know.

    1. Artemisa: I live in a semi-rural city in California. The average rent here for a 3 bedroom house in a middle class neighborhood is around $3000 a month. I own a 4 bedroom home that would rent for $3300 a month. I bought it new 20 years ago, if I didn’t already own it I could not afford to live here anymore, sad.

    2. We have already had 2 qtrs of zero or negative growth. The recession is already here. And last I checked, the number of people employed is still not at pre-covid levels so the unemployment numbers are misleading.

      The only reason we aren’t officially in recession is that there is a small board of economists which declares such things and it just hasn’t done it yet.

      1. Scott:

        Saw a report yesterday that companies like Goldman are now placing large bets that the Fed starts to CUT rates as early as mid 2023.

        There is just no way the Fed will continue to aggressively raise rates for years into the teeth and fangs of what is likely to be a very painful economic downturn. I believe one Fed member recently said, “We need to raise rates now so we can cut them later….”

        Look at all the layoffs happening in the high-paying high-tech sector…and this is only the beginning. All those unicorn companies that thought it was OK to lose money for years (since they could always do another funding round) have finally realized the game has changed and are cutting headcount.

  7. I continue to be fully invested. I gave up some years ago to try to “time” the market. Any fresh interest or dividends I receive I plow back into short and medium duration term preferreds and baby bonds. Also hold several closed end muni funds yielding between 5.25% and 7.75%. Looking forward to tomorrow. Will have a slug of income payments posted to my brokerage account. It will be a fun shopping day picking up more shares which will reduce cost basis and increase income.

  8. Gas prices aren’t coming down substantially anytime soon unless people can no longer afford to drive. There is no significant excess supply available – and given that a war on fossil fuel has been declared in this country by those in charge, even if the admin reverses course and begs harder, going to take 6 to 12 months to bring meaningful new supply online

    Their only hope is demand destruction

  9. Talk is cheap. Talk also moves markets even without any evidence that it will be backed up by action.
    Fed can’t reverse course without losing any remaining shred of credibility. And I don’t think they will pause until Inflation comes down, if they get scared off by recession they become a puppet agency of people who know nothing about economics.

    1. Since we all can make predictions/guesses about the future, I predict the Fed will back down due to intense political pressure (from both Republicans and Democrats) when September rolls around and the mid-terms are only two months away. I hope not, but that’s my feeling anyway.

    2. Credibility (or even a shed of it)? They lost that a long time ago.
      The game is that Fed can control the money supply and make markets move one way or the other in the short term. As far as the long term goes, we can’t pay our existing debts and we keep racking up more. Every year Congress kicks the can down the road and lifts the debt ceiling. No one there wants to deal with any pain now, and no one with a brain (which excludes a lot of elected officials) honestly thinks we can “grow” our way out of it.

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