Fed tightening

Fed Raises Rates, Market Cuts Them

         The Federal Reserve raised the short term fed funds rate by 0.25% today. The Fed funds rate of 2.5% is higher than the 3 month T-Bills rate of 2.35%, thus inverting part of the yield curve. The 2 year Treasury yield inverted, becoming higher than the 5 year Treasury yield. The difference between the 2 year and 10 year Treasury are only 11 basis points, so they entire yield curve is moving towards inverting. The 30 year Treasury bond’s yield dropped below 3.0%. Stocks crashed hard making new lows for the year. Many stock market charts show technical trading indicators, such as trendlines and momentum, that have been broken, thus leading to a full stock market correction. A plunge

2018-12-19T14:21:37+00:00December 19th, 2018|mayflowercapital blog|Comments Off on Fed Raises Rates, Market Cuts Them

Should Bond Investors Increase Portfolio Duration?

        Yesterday’s pseudo-capitulation by the Fed chief during a speech was interpreted by the market as a sign that the Fed is very close to ending its rate increasing campaign. More experts are tilting towards the possibility of recession next year. If recession comes then yields will drop, in which case investors who own money market funds would miss out on the chance to lock in intermediate term yields. When yields drop deeply then bond issuers refinance (they “call” the bond in) and investors are then forced to reinvest at lower yields. An exception to that is that Treasuries have lifetime restrictions and Munis usually have 10 year restrictions on calling in outstanding debt. Assuming that the paradigm that recessions

2018-11-29T12:12:45+00:00November 29th, 2018|mayflowercapital blog|Comments Off on Should Bond Investors Increase Portfolio Duration?

The Fed Can’t Afford to Raise Rates

      I calculate the appropriate interest rate by using the ten year Treasury Note’s real yield, now 1.09%, and subtract that from a historical average benchmark of 2.08%. The difference is 0.99%, which is the amount of real increase needed to return to “normal”. However, one “little” problem: we can’t return to what used to be normal because that would require returning to a pre-GFC 2008 crash era when the EU and Japan had far less debt and no zero rate or negative rate programs. A second “little” problem is the extremely weakened ability of workers to go on strike and demand wage increases means that employment (the alleged threat to bonds) is intrinsically weak compared to several decades ago.

2018-11-28T19:24:19+00:00November 28th, 2018|mayflowercapital blog|Comments Off on The Fed Can’t Afford to Raise Rates

Less is More: Excessive Fed Actions Can Make Things Worse

   The Federal Reserve is boxed in. If it raises rates that will make the dollar go up too much, causing a global recession. If it raises rates that can trigger a domestic recession. If it tries cut rates to stimulate the economy that could set off another bogus stock market rally. If it tries more QE in the next recession that risks damaging the Fed’s credibility that they deviated from their goal of selling of QE-purchased assets, and it will make rates go up because of fear of inflation. If it changes things dramatically that can disrupt plans of consumers and businesses thus tilting the economy towards a lesser degree of growth. QE is actually deflationary because it destroys

2018-11-27T13:06:09+00:00November 27th, 2018|mayflowercapital blog|Comments Off on Less is More: Excessive Fed Actions Can Make Things Worse

How High Will Rates Go Because of Quantitative Tightening?

         Quantitative Tightening (QT) is a plan by the Fed to sell off its bond holdings to undo their acquisition of bonds during Quantitative Easing (QE) of 2009-2014. These sales or portfolio run off will be done gradually over several years and was started 13 months ago. The disposition is to be done by selling off or allowing portfolio “run off” of 15% a year of assets starting in 2020 and ending in December, 2025. The pace is scheduled to be increased next year to 15% of assets; the first year was at a smaller pace. Ben Bernanke said QE lowered rates 0.85%, other people have said it lowered rates 0.5%. Assuming we use Bernanke’s figure of 0.85% and the

2018-11-26T17:06:32+00:00November 26th, 2018|mayflowercapital blog|Comments Off on How High Will Rates Go Because of Quantitative Tightening?

Quantitative Tightening: Will It Raise Interest Rates?

   Bloomberg BW ran an article July, 2018 saying B of A said aggregate QT globally from all central banks will be 4% over next 2 years (2% a year). My opinion: that’s almost nothing if someone adjusts for 2% annual inflation, or perhaps it is a 2% real shrinkage of debt over 2 years assuming a 1% global Developed country inflation rate since inflation is low in the EU and Japan. Assuming much of the debt has an intermediate term maturity or a due on sale (of  the collateral real estate) clause for mortgages, then the debt will experience portfolio runoff through natural paydowns of principal by borrowers. If Fed does nothing the portfolio will naturally shrink gradually. The

2018-11-20T12:46:26+00:00November 20th, 2018|mayflowercapital blog|Comments Off on Quantitative Tightening: Will It Raise Interest Rates?

Unaffordably High Rates To Create Recession

   Considering how fragile the economy is and how moderate income people are hurt when they try to buy things using a loan then soon the damage from rising rates will result in recession. Yes, it is fair for the Fed to try to return to “normal” where real rates are 2% and the QE purchases are sold off in a QT program, but that won’t happen because we are in a brave new world of excessive debt balances. This means people simply can’t afford to pay higher rates.    The debt / GDP ratio went from about 150% during much of the past century, before 1996, to 365% today, a huge change. If you earned $50,000 in 1990 and

2018-10-25T14:19:54+00:00October 25th, 2018|mayflowercapital blog|Comments Off on Unaffordably High Rates To Create Recession

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?

Fed Tightening Can Continue Longer Than Expected

    In yesterday’s blog I mentioned a scenario where the Fed would stop tightening in December, 2018. But that was based on logic with no allowance for how emotions hijack investments and economics. I suspect the emotions of the Fed members is such that they may seek to reach the traditional 2% real rate for bond yields and seek to pop the stock market bubble and also empty out their holdings of bonds bought during QE. Assuming they blindly persisted in this, then rates would go 1.2% higher than I forecast regarding the goal to get a 2% real rate, plus rates would go up an additional 0.5% for the effect of unwinding QE. This implies Fed funds rates go

2018-06-15T13:59:04+00:00June 15th, 2018|mayflowercapital blog|Comments Off on Fed Tightening Can Continue Longer Than Expected

Rate Hiking Cycle 83% Done: Long Term Bond Yields To Be Stable

    Yesterday the Fed raised the rate 0.25%. The Fed started its first rate hike of the cycle on 12-16-2015. I expect they will hike again every three months by 0.25% each time until December, 2018. That means we are 83% of the way through the three year hiking journey (based on time) that started in 2015. Since 83% of the hiking part of the current cycle has occurred it now becomes more clear in trying to estimate the outcome. Assuming that the most recent San Francisco Fed estimate of the natural real neutral rate of 0.5% is correct and then if one adds that to my own adjusted inflation rate of 1.95%* that implies a Fed Funds overnight rate

2018-06-14T10:51:14+00:00June 14th, 2018|mayflowercapital blog|Comments Off on Rate Hiking Cycle 83% Done: Long Term Bond Yields To Be Stable