Federal Reserve

Big Rate Cut By Marketplace Today Hints At Stock Crash To Come

   Today the Federal Reserve held a two-day meeting and released a statement. They didn’t change their rates but the marketplace changed the rates dramatically downward. The ten year Treasury bond yield dropped from 2.61% to 2.525%, a drop of 8.5 basis points, several times a typical day’s movement. The technical traders who follow chart patterns have felt the rate might never go below 2.62% and would instead go above 3% and stay above that, thus the decline significantly below 2.62% is a shocking technical indicator matter, implying the “Invisible Hand” of the market “knows” that a recession will soon come. The futures market estimates a 50% probability of an eventual Fed easing of the Fed’s official rate. The drop

2019-03-20T18:01:03+00:00March 20th, 2019|mayflowercapital blog|0 Comments

Federal Reserve Ending QT Policy This Year

   The Federal Reserve intended to reverse the effects of Quantitative Easing by selling off its bond portfolio in an act called Quantitative Tightening (QT). The program started in late 2017. Only about 7% of assets were sold since then and now the Fed has suddenly decided to cancel QT this year. At this rate perhaps 11% of assets will have been sold, instead of the intended 100%. Most of the assets are intermediate term bonds or mortgage backed bonds that likely will “run off” (be prepaid) in a few years. The prepayment will occur if a recession triggers rate cuts that motivate borrowers to refinance, thus prepaying their loans. Thus, assuming a recession is coming soon, the portfolio will

2019-02-27T15:39:09+00:00February 27th, 2019|mayflowercapital blog|Comments Off on Federal Reserve Ending QT Policy This Year

QE And NIRP Monetary Policy is a Dangerous Trap

My concerns about QE: 1. It was a placebo that won’t work next time thus creating a surprise, not yet fully discounted by the stock market. 2. QE and associated polices of NIRP and bailouts, including the Japanese and Swiss central bank’s purchase of equities have created moral hazard that encourages speculators to operate in a riskier manner thus building up a higher degree of hidden risk that eventually will bubble to the surface and disrupt the economy. Imagine investors seeking to make income from writing naked put options. If they were lured into a false sense of security that they are entitled to a perma-bull fantasy of central banks bailout of markets then they may act recklessly and take

2019-02-20T19:26:13+00:00February 20th, 2019|mayflowercapital blog|Comments Off on QE And NIRP Monetary Policy is a Dangerous Trap

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|Comments Off on What Is The Proper Level For 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

Hedge Funds Are Failing: Regime Change

    A webinar by a prominent hedge-like mutual fund offered no good reason for their underperformance. I suspect they incorrectly assumed they were diversified, but they failed to realize that during a bubble, most assets have their correlation rise to be nearly fully correlated. The only quality diversification tools (especially during bubbles) are low duration Investment Grade bonds, or buying puts, etc. and thus they weren’t as diversified as they thought. They say their losses are in middle of the pack of peer group competitors but since they greatly underperformed a short term bond index (like the bond ETF AGG which lost 1.31% in 12 months, versus the 9.85% loss of a hedge-like fund in 12 months thru 9-30-2018) and

2018-10-19T17:29:14+00:00October 19th, 2018|mayflowercapital blog|Comments Off on Hedge Funds Are Failing: Regime Change

Bond Ratings Wrong Again

   Investment Grade bond prices haven’t been doing very well in the first half of the year. One reason is because rates went up, lowering the value of bonds. Another reason is that the Investment Grade (IG) sector is now 50% in BBB rated, the lowest rating for IG and thus only a tiny step above falling into junk category during a recession. The ratings agencies, once again, are not doing the right thing in rating bonds. The problem is that corporate bonds rated BBB may have a true value of one notch lower (the truth to be exposed during the coming recession). The bond market experts sense this and have begun to sell off this niche, making the price

2018-07-03T15:18:23+00:00July 3rd, 2018|mayflowercapital blog|Comments Off on Bond Ratings Wrong Again

Fed Raises The Rate: Nothing Happened To Bonds

   The Fed raised the Fed funds rate by 0.25% to a mid-level target of 1.625% today as expected. The 10 year Treasury Note ended the day unchanged at 2.88%. 3 month Libor floated up to 2.25%, implying that the marketplace, without Fed controls, wants rates to be at that level. I expect that the yield curve will stay roughly the same for rates between 2 years to 30 years maturity and the changes to take place will be that the short end of the yield curve between 1 day to 2 years maturities rises to about where the two year Treasury yield is now at 2.32%.   If you own a 90 day Treasury and short term rates rise

2018-03-21T15:20:52+00:00March 21st, 2018|mayflowercapital blog|Comments Off on Fed Raises The Rate: Nothing Happened To Bonds

Good News About Rates

    Trying to estimate what are a fair level of interest rates, I feel today’s rate are fair. A 2016 article by the Fed says real neutral rate is close to zero and use PCE inflation rate so that implies 1.5% nominal short term rate is OK, we are at 1.42% Fed Funds now, so no problem with rates. See August, 2017 Bloomberg article. The neutral real rate declined to negative 0.22 percent, from 0.12 percent in the first quarter of 2017. Recently is has increased to negative 0.1%.     James Bullard of @stlouisfed (President of the St. Louis Fed) concludes desire for safe assets is the largest driver of the drop in real natural rate of interest. Today he

2018-02-26T18:46:27+00:00February 26th, 2018|mayflowercapital blog|Comments Off on Good News About Rates

Rising Yields: Will Bonds Crash?

This week the Federal Reserve gave many hints that they will raise rates at their March 15 meeting. How much does the Fed need to raise rates to fight inflation and prevent inflation from getting out of control? The 10y10y forward rate (a derivative of what the market thinks rates will be for the ten year in ten years) is 3.6%, which implies it will increase 1.1% over the next ten years from the current spot 10 year Treasury yield of 2.49%. This is a 0.11% increase a year. The implication is that after subtracting inflation that implies the “real” neutral rate is 1.6%. Assuming that the slope of the yield curve remain in a traditional upward slope then this

2017-03-21T15:03:06+00:00March 3rd, 2017|mayflowercapital blog|Comments Off on Rising Yields: Will Bonds Crash?