Monthly Archives: January 2018

Today’s Bond Market

   The 30 year Treasury yield has been rising recently. However, it started the 2017 year with a yield of 3.06% and is now at 2.94% 13 months later. The 0.15% drop in yield in 13 months multiplied by a duration of 22 implies its value increased by roughly 3% since 12-27-2016. The 10 year Treasury yield today went up 0.037% to 2.695% which implies its value went down by 0.33%. I prefer to keep duration at 4 which meant the recommended bond portfolio value today went down about 0.10%. Contrast that with the SP index which was down 0.67% today. If you had $100,000 in bonds with a duration of 4 and its value dropped by 0.10% today then

2018-01-29T14:24:05+00:00January 29th, 2018|mayflowercapital blog|Comments Off on Today’s Bond Market

Tax Cut Stimulation to Boost Economy?

The new law of last month requires corporations to pay 12.5% tax on future foreign earnings of their subsidiaries. How will that effect the economy? Currently many U.S. corporations pay 12.5% to Ireland or 8.8% to Zug, Switzerland. These foreign taxes can be netted against the new U.S. foreign tax rate of 12.5% so the U.S. parent of a Swiss subsidiary would have to pay the U.S. a 3.7% tax. Thus the tax law may raise very little tax money from foreign subsidiaries.   The trend likely to emerge is that U.S. small companies that are too small to have offshore tax advantages or too weak to need tax savings may be bought out by giant multinational companies who would

2018-01-29T11:49:44+00:00January 29th, 2018|mayflowercapital blog|Comments Off on Tax Cut Stimulation to Boost Economy?

Repeating The Taper Tantrum of 2013

     In 2013 the ten year Treasury bond yield was around 2% in the first half of the year but after the Taper Tantrum incident (the Fed hinted they would raise rates then they chickened out and didn’t) it traded in a range of 2.5% to 3.0%. Then in 2014 it came down to the mid and lower 2’s range. Using the 2nd half of 2013 as an example of how interest rates can rise implies that rates could go to 2.75% with a plus or minus 0.25% range. That’s only 0.09% higher rate than today’s 2.66% yield. If rates rise by 0.09% on a bond portfolio with a duration of 4 then the bond portfolio would drop in value

2018-01-26T14:35:57+00:00January 26th, 2018|mayflowercapital blog|Comments Off on Repeating The Taper Tantrum of 2013

Stocks Inability to Have Duration Is A Concern

  Bond duration is the amount of years until you get back your initial principal, adjusted by Present Value. In a low rate environment the discount rate is modest enough so as not to greatly diminish Present Value. But if a bond has 50 years future life and the expected discount rate is very high in future years because of an expected increase in the discount rate then the duration (the hypothetical time it takes to get paid back) can be very long. But what about stocks? Is the duration simply 2% yield times 50 years equals 100% to get paid back? The yield needs to be discounted for Present Value and is needs to be projected to grow with

2018-01-25T12:20:40+00:00January 25th, 2018|mayflowercapital blog|Comments Off on Stocks Inability to Have Duration Is A Concern

Dollar’s Decline: What Next?

The dollar has declined from 103 points in December, 2016 to 89 points. This implies that interest rates need to rise to encourage an inflow of foreign capital, even though our rates are the highest in the Developed world, except for Australia. The global markets may be concerned that the U.S. deficit is growing and so they want to avoid the U.S.    The dollar index has fluctuated between 70 to 130 since the gold window was closed in 1971. If one excludes the one-time effects of ending the gold standard in 1971, the extreme high interest rates of 15% in 1981, and the extreme tech stock bubble of 2000 then typically the dollar’s value fluctuates gradually in a trading

2018-01-24T15:08:30+00:00January 24th, 2018|mayflowercapital blog|Comments Off on Dollar’s Decline: What Next?

Why Rates Are Low

Did U.S. interest rates drop because of low rates in Japan and the EU? At first glance it might seem intuitive that money, being fungible, flows across international borders until interest rates around the Developed world are equalized (after adjusting for local inflation risks). However, many bond investors seek safety to the point that they insist on or strongly prefer to hedge their foreign investments against the risk of devaluation. Thus foreign investors seeking to buy U.S. based debt often insist on using a currency hedge such as options or futures contracts which might cost 1% or 2% a year. If a bond investor can earn 0.5% in the EU and has to pay 2% for a currency hedge to

2018-01-22T15:51:26+00:00January 22nd, 2018|mayflowercapital blog|Comments Off on Why Rates Are Low

Bond Yields Slightly Higher With No Fundamental Reason

    The ten year Treasury closed today at 2.65% yield just a hair over one of several trend lines. News items that may have propelled rates higher are reports that the tax cut will produce slightly more stimulus than expected, and that the unemployment rate in some categories is at record 45 year lows. The tax cut, in my opinion can be best viewed by looking at the incremental increase to the deficit of $150Billion a year which is 0.75% of the total federal debt, which is less than the 1.5% rate of inflation. Thus on an inflation-adjusted basis, taxes were not cut. For individuals they may find they save perhaps $800 a family a year but these cuts expire

2018-01-19T15:14:54+00:00January 19th, 2018|mayflowercapital blog|Comments Off on Bond Yields Slightly Higher With No Fundamental Reason

Will Unwinding QE Blow Up The Bond Market?

    The Fed has scheduled gradual, measured sales of its inventory of bonds so as to unwind the Quantitative Easing (QE) programs of 2008-2014. This could increase the supply of bonds in the market 20% which would act to raise interest rates. The controlling factor in this will be the level of interest rates; if they rise too quickly the Fed will have absolutely no choice but to slow down their scheduled sale of bonds. There is no need for the Fed to sell their bonds and plenty of need to avoid harming the economy with sudden rate increases. Many of the Fed’s holdings will have a natural “runoff”, if the bonds are not sold, of roughly 12 years, assuming

2018-01-17T13:04:11+00:00January 17th, 2018|mayflowercapital blog|Comments Off on Will Unwinding QE Blow Up The Bond Market?

Rates Already Too High?

   Estimating fair value for interest rates requires looking at the “real natural” rate which is the rate where the economy is in equilibrium in terms of supply and demand for loans. This rate is now just under 0%. Then add to that inflation. I like what Stanley Druckenmiller said last month on Bloomberg that a study showed that long term inflation averaged 1.1% a year. The PCE inflation index has been around 1.5%. The CPI, if adjusted for an erroneous calculation of “Owner’s Equivalent” rents, in my opinion, should be below 1%. Adding 1% inflation to a near zero real natural rate implies that fair value for the overnight risk free Fed Funds rate is 1.0%. Currently it is

2018-01-11T12:10:01+00:00January 11th, 2018|mayflowercapital blog|Comments Off on Rates Already Too High?

Bond Bear Market To Start Now?

       Today the ten year Treasury bond yield rose 0%, despite news stories quoting a former Bond King who claimed the yield has broken through a trend line and started a bond bear market. I use fundamentals instead of trend lines on a chart. The fundamentals are that global labor markets influence inflation and for labor there is no foreseeable cure for their problem of jobs in Developed countries fleeing to low wage EM countries. Labor’s best hope was that Trump would start import barriers and make-work infrastructure projects. Yet today it was announced Carrier air conditioning is going ahead with domestic layoffs, even though a year ago it was in the news that Trump had persuaded them not to

2018-01-10T19:30:38+00:00January 10th, 2018|mayflowercapital blog|Comments Off on Bond Bear Market To Start Now?