bond forecast

Low Inflation Rate May Go Even Lower

   Today the BLS released CPI data showing the core rate was 2.1% year over year and 1.6% for the quarter. If one accepts my theory that Owner’s Equivalent rent needs to adjust the CPI downward by 0.25% (or even more), then the 90 day core CPI would be 1.35%. With oil in the mid-50’s, its dramatic drop will surely put more downward pressure of CPI in the future. I remember when oil went up above $40 in 2004 and it seemed like a big deal, a high price at the time. Adjusting for inflation, a $40 price 14 years ago is like $53 this week (it’s now $56 for WTI oil) so we are almost equivalent now to the

2018-11-14T17:32:05+00:00November 14th, 2018|mayflowercapital blog|0 Comments

What Is The Proper Level For Rates?

  Regarding the concern that interest rates will rise to dangerously high levels, I doubt this will occur. The fear that Quantitative Tightening, where the Fed sells its holdings of bonds to undo QE, will make rates go up a lot is incorrect. When QE was implemented from 2009-2014 it didn’t create inflation and probably only lowered interest rates by 0.5%. The reason yields went down was because of global fears of falling into a debt/deflation trap and because other Developed countries (the EU, Japan, Scandinavia, Switzerland) had negative rates. I don’t see things getting better in Europe; probably the economic problems have not been truly solved in Japan. Thus since the fundamental reason for low yields in the U.S.

2018-11-05T17:54:35+00:00November 5th, 2018|mayflowercapital blog|0 Comments

Major Stock Crash; Bonds Improve

    Stocks crashed today, thus rescuing bonds, since yields dropped because of the stock crash. The 10 year Treasury yield dropped 1.6 basis points; in after-market trading the yield dropped even more (a total of 3.5 basis points), like a stone in water. The SP stock index dropped 3.3%; NASDAQ declined 4.08%. The VIX exploded up 44%, making it too hard for speculators to buy put options thus forcing sales of stock out of the hands of short term speculators. Much of the world’s stock indexes have been negative for the YTD. Looks like the U.S. market is moving towards a global stock bear market, as are bond yields. This morning the PPI inflation data was released showing inflation YoY

2018-10-10T14:00:35+00:00October 10th, 2018|mayflowercapital blog|Comments Off on Major Stock Crash; Bonds Improve

Improving Labor Market Unlikely to Hurt Low Duration Bonds

    The BLS Employment report was released today showing 134,000 new jobs. Adjusting for 125,000 monthly population growth, of those likely to want to work, implies the net increase was only a few thousand jobs in a nation of 144million job holders and is thus a near zero growth rate. The unemployment rate decreased because less people attempted to participate in the workforce. When the unemployment rate is this high it is a sign of an overheated economy that will fall into recession in a year. Stocks may anticipate this a half year early so if recession come sin 12 months then stocks could crash in 6 months.    100% of the increase in employment went to those with no

2018-10-05T09:49:08+00:00October 5th, 2018|mayflowercapital blog|Comments Off on Improving Labor Market Unlikely to Hurt Low Duration Bonds

Bond Yields May Have Topped Out

    Yesterday’s dramatic bond market crash may make some people worry about rising rates, but I disagree. First, this year has seen an unusual degree of tax cut stimulus with huge federal deficits. This stimulus acted to make economic statistics including employment, hotter than normal, which resulted in rising interest rates. However, the typical scenario of a big stimulus package is a 5.5% GDP growth, not the 3.2% for the first half of 2018. The fact that the economy is growing 2% slower than it should (based on tax cuts) implies the stimulus may soon fade away and thus reduce the risk of inflation. During the two days before the monthly BLS Payroll Employment report bond yields tend to go

2018-10-04T12:56:32+00:00October 4th, 2018|mayflowercapital blog|Comments Off on Bond Yields May Have Topped Out

Interest Rates Up A Lot: Are Bonds Doomed?

  Today the yield on the ten year Treasury went up 0.12%, about three or four times the typical day’s movement. Reasons for yields to go up are that the economy is growing and experiencing rising wages and a shrinking jobless rate. Based on old cliché-like paradigms of the pre-2008 crash era the ten year bond yield should be the sum of inflation and GDP growth, about 4.5% total (today it's 3.18%). Also, the real yield should be about 2% (1% higher than today) which means, if inflation is 2.2%, then nominal yields should be 4.2%. So based on old-style fundamentals the ten year Treasury could go to a range of 4.2 to 4.5%. The effect of bond yields rising

2018-10-03T15:30:01+00:00October 3rd, 2018|mayflowercapital blog|Comments Off on Interest Rates Up A Lot: Are Bonds Doomed?

The Fed Raised the Rate Today: What Happens to the Economy?

             The Fed will keep on raising rates until they reach a level that makes them feel they have returned to normal. This means that real rates for short term rates, in the opinion of the Fed, ought to be about 2%, and if inflation is 2.2% then the Fed Funds rate could reach 4.2%, some 2% higher than today’s new rate. However, in their journey to higher rates they will find the economy is addicted to low rates and the economy will respond by falling into recession. Thus they will have to reverse course before they reach their goal. There is no way to go back to the past. To successfully return to the past when the ten year

2018-09-26T13:20:26+00:00September 26th, 2018|mayflowercapital blog|Comments Off on The Fed Raised the Rate Today: What Happens to the Economy?

Declining Yield Curve Spread Hints at Recession

    The yield curve spread between 2 year Treasury bond and ten year is 21.5 basis points, it was about 25 a week ago, and is consistently dropping to new lows not seen since last economic top of 2007.  Economists say that a declining spread eventually moves the yield curve to inversion which is a symptom of recession, and partly a cause of it.     Global rates have already inverted as have some domestic esoteric short term bond swap contracts for 2 and 4 year maturities. The old paradigm that the ten year Treasury yield is the same as nominal GDP hasn’t worked since 2008 crash because a new world exists where major regions such as the EU and Japan

2018-08-23T15:11:59+00:00August 23rd, 2018|mayflowercapital blog|Comments Off on Declining Yield Curve Spread Hints at Recession

Inflation Data Implies Fed Almost Done Tightening

   Today the CPI data was released with the core rate for 12 months up 2.4%. Housing increased 3.5%; if housing is multiplied times its 40% weight that would be 1.4 percentage points of the 2.9% overall non-core CPI, so CPI ex-housing is 2.9% minus 1.4 = 1.5%, and would be even lower if the figure was ex- food and energy. The problem with housing CPI is the Owner’s Equivalent rent is miscalculated by non-landlords who are unfamiliar with rental rates and who let their emotions of pride about their house leap to conclusions about imputed rent they are not actually paying; further these people may own their house free of debt or they may have a fixed rate mortgage,

2018-08-10T15:58:23+00:00August 10th, 2018|mayflowercapital blog|Comments Off on Inflation Data Implies Fed Almost Done Tightening

Inflation May be Cooling Down

The expected inflation “breakeven rate” for 5 year TIPS Treasuries rose in a trend line from 1.5% in mid-2017 to 2.17% and then last month the trend line was broken, and now it is down to 1.98%. Residential construction spending decreased 4 of last 5 quarters; the last time it happened was at the bottom in the 2008-2010 period.  Read the article “Housing Sours Suddenly; It Won't Come Back Anytime Soon”. Much of the news about an inflationary shortage of workers concerns low payed semiskilled workers, but these types often earn so little that they can’t effectively use their paycheck to qualify for a big, attractive “A” paper loan that would increase the money supply and thus cause inflation. What

2018-08-09T11:57:35+00:00August 9th, 2018|mayflowercapital blog|Comments Off on Inflation May be Cooling Down