It’s certainly true that when Chairman Volcker worked his inflation fighting magic decades ago he was not staring such massive government debt in the eye as we confront today.
How the Fed will unload $9T of government paper without severe discount, hence raising the effective interest rates of that paper, I dunno. I certainly wouldn’t want any of it at the original very low coupon rate.
It’s a mess!!
For anyone wanting an alternate link to the piece onenote posted, which is worth a read, here you are. This might be more accessable:
like many here I have been distracting myself by trying to get a few more basis points interest for my short term savings. But that really is a distraction.
I’ve also been buying Energy VDE and materials VAW stock ETFs. They’ve done well recently but I don’t think they can escape a general stock market collapse.
I also on some gold ETFs but the usual WellStreet argument is that gold does not do well in a rising interest environment.
Well, as a bonds/CDs person, I likely will stay with them. But NOT now. Not with the sorts of interest rate hikes which today appear likely in 2022.
As we are discussing, it remains to be seen whether or not the Fed will be able to hike rates as they MUST. But we have to make room for that possibility. Hence:
Stocks right now do not appear to me a good choice. Longer bonds do not appear to me a good choice yet, though they might become a great alternative before the end of 2023. Gold and silver appear, for now, to be languishing. I expect gains there, if any, will come in spurts.
“Keep it short, keep is safe” is counsel worth considering, but never more than at a time like this with rising rates. Those with “dry powder” down the line will find opportunities in my view. How far down the line is always the question. When you feel inflation breaking, that is the time to go for the long bonds and lock in high rates to the max. Timing . . . is everything.
U.S. Bond Market Gives Notice It’s No Longer a One-Way Street
(Bloomberg) – Traders of U.S. government debt were dealt a stern reminder last week not to sleep on a market that’s been headed in one direction for a long time.
TD Securities recommended buying three-year Treasuries at yields near 2.75%, anticipating a decline to 2.25%.
The thinking is that if tighter monetary policy – combined with pandemic containment measures and global fallout from Russia’s invasion of Ukraine – limit growth, the peak in rates may be lower and nearer than previously expected. Futures markets currently price in a peak of just over 3% in mid-2023.
“It’s not clear what central banks will do when we’re left with little growth and inflation above target,” Faranello said.
Sounds to me like stagflation!!
Bond traders are left expecting a more contested market in the weeks ahead. The stakes are high. The first quarter was the Treasury market’s worst ever, and the second is off to an inauspicious start.
One month after a forgettable and mediocre 2Y auction, moments ago the Treasury sold $48 billion in 2y paper in what was a clearly stellar auction, surprisingly so despite the sharp drop in yields across the curve which meant no concessions for buyers. Yet even so, at a high yield of 2.585%, the auction stopped 1.1bps through the When Issued. That said, this was one of the highest 2Y auction yields going back to the financial crisis, and was just shy of prior cycle high of 2.88% hit in Oct 2018, just bbefore the Fed was forced to end its tightening plans.
[This item is from today’s Wall Street Journal. The presentation here is intended to circumvent the WSJ paywall, for those who might not have a subscription]
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Someone has to step up and buy the treasuries the Fed is going to sell. Now there is an alternative- 2-3% for your medium term bonds instead of nothing, and avoid stock market risk. Now if inflation was 2% it’d be a lot better…
Except rates are destined to go up, which will put a lot of pressure on the high-flying prices. And if we do get into a recession, that usually means higher unemployment, could even put pressure on rent prices, which puts more pressure on RE prices…
That makes the 5 year breakeven inflation 3.24-.07 = 3.17% according to the Bloomberg data. That is an underestimate in my opinion so I will be buying some.
Edit. Corrected calculation
Also, a five-year tips auction will be announced on June 16 and the auction will be June 23
Were RE prices as high as they are today? IIRC there was a RE price deflation around '91, so mid-90’s was a good time in terms of prices (relatively and in hindsight).
I’m finally seeing asking price reductions for existing listings in the areas where I’ve been watching (SoCal). RE prices are as nuts today as they were in 2006, IMO, and the mortgage rates are finally starting to have an effect. At the bottom ~2.6% for a 30-yr fixed super conforming, borrowing $100K cost $400/mo. Now at 5.2% it costs $550/mo. At 7% it’ll be $665/mo. Market rent (again in SoCal) hasn’t kept up with the RE price increases (I’m pretty sure tenants just can’t afford it), so from an investor standpoint the high prices make less sense than ever. The “experts” I listen to don’t envision a drop of more than 10%, if at all. But I’m thinking we’re due for 20-30% here, especially if mortgages keep going up. More if there’s an actual recession (or even an expectation of recession that leads to large companies freezing hiring or even preemptive layoffs).
