Federal Reserve

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

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?

Federal Reserve Unable To Bailout Investors In The Next Crash

The Federal Reserve is trapped in a situation where they wish they could raise rates just so they could have some ammunition in terms of the future ability to cut rates during next recession. They will need to cut rates 4% (which would result in rates at negative 3.5%) to stimulate but to do so they have to first raise them 3.5%. But that would create a recession and destroy their credibility. During the next crash they might be tempted to think that propping up stock prices by buying stocks would somehow help the economy. To do this they would need to get the law changed. But Republicans  in the House of Representatives tend to be Hard Money types that

2016-10-21T11:20:39+00:00October 21st, 2016|mayflowercapital blog|Comments Off on Federal Reserve Unable To Bailout Investors In The Next Crash

Fed’s Declining Gravitas Implies Their Put Option Has Expired

The Federal Reserve had a meeting today and decided not to raise the rate. They raised the rate December, 2015 when the 2 year Treasury Note was 1% and haven’t raised it since then. Now the 2 year T-Note is 0.78%. So the free market is saying rates needed to come down 0.22% since the December rate rise! This is amazing because short term Libor went up a lot this year in reaction to a tightening of bank regulations that raised the cost of capital for banks and money market funds. Even with rising Libor, the 2 year T-Note yield dropped! On December 16, 2015 the ten year-T was 2.3%, now today it came down and is at 1.66%. Japan’s

2016-09-21T13:27:19+00:00September 21st, 2016|mayflowercapital blog|Comments Off on Fed’s Declining Gravitas Implies Their Put Option Has Expired

Why a Fed Rate Increase Might Not Damage The Economy

There is speculation that the Fed will increase the rate at the September 21 meeting. If they do, it won’t hurt the economy because when people make business decisions they use a hurdle rate composed of many limiting factors that the proposed project must jump over, or cross, the hurdle. Interest rates are not that terribly important when ranked along with other components of a hurdle rate. The other components are risk premium that the proposed venture will fail, difficulty in paying the amortization of loan principal (remember paying loan principal is not a “cost” in accounting), difficulty in making a profit due to factors others than interest expense. Stocks tend to produce a return of 4% more than bonds

2017-01-10T23:32:53+00:00September 13th, 2016|mayflowercapital blog|Comments Off on Why a Fed Rate Increase Might Not Damage The Economy