Interest Rates on the Move! (Finally)

[audreyh1]

Quote:

Originally Posted by Lsbcal The markets are constantly giving us lessons. It seems stepping back a bit the intermediate term bonds have been pretty flat this last month. We seem to be still in positive returns on a 12 month basis (ignoring inflation). Here is a comparison of 3 funds for the last year: VFIDX - intermediate term investment grade VBTLX - total bond market VFSUX - short term investment grade Hopefully the increased yields will result in a somewhat better picture 1 year from now.

Interest rates peaked in early February last year and then dropped through the summer before climbing again.

Now they are 0.6 to 0.4 % higher for the 10 year and 5 year compared to the Feb 2017 rates.

[Lsbcal]

Quote:

Originally Posted by audreyh1 Well that’s one pat explanation by the media - they just pull the reason du jour out of the air. The trade stuff has been going on door q while, and the latest was announced yesterday of the day before, yet rates went up. DOW down 700 suddenly - hmmm, something more is going on.

Bloomberg seems to equate the market decline with today's tariff announcement from Trump's administration.

I'm not sure markets need a complete set of reasons for going down at this stage of the business cycle. Some nasty declines way back in history have taken around 3 months to work their way towards a stable upward movement. But there aren't many data points in this observation so this is just my pet idea. If we took 3 months then this time it would be around early May before we get out of this downward churn.

[audreyh1]

Wow - huge retreat in interest rates over the past few days. 10 year trading where 5 year was, etc.

Quite a reversal.

[Freedom56]

Quote:

Originally Posted by Freedom56 My take on interest rates: Short term rates will rise and the yield curve will continue to flatten and eventually invert signalling a recession. It's not a matter of if, but when. There is far too much debt out there for long term rates to move up meaningfully. Banks margins are being squeezed by a flattening yield curve and large defaults in commercial loans. The regional banks are will be impacted the most. It's a matter of time before banks start selling off. There are far too many stores, malls, and chain restaurants in this country. The retail sector is going to go through more pain than anticipated and as the year progresses will become more apparent. Remember, the market is driven by fund flows (supply and demand) in the near term and can behave very irrationally near market tops. This was the case in late 1999 and also 2007. Many sectors are already in a deep bear market - retail, REITS, energy, and some industrial stocks. If you hold individual bonds and notes to maturity, you can ride out this interest rate cycle. If you own bond funds, you are exposed to market risk and will suffer capital losses. I sold all my perpetual preferred stocks and long duration notes off in December since they were trading at a high premium and the capital gain covers the next two years of dividend income from those securities for the next two years. I hold a lot of cash now and corporate notes with maturities from 2019 though 2028. I plan to hold those through maturity and they will provide my income stream. High investment grade notes (A and up) and bonds are grossly overpriced and have started to correct. Any short term interest spike will cause a sell-off of bond and preferred stock funds into a fairly illiquid bond market which will cause some significant price swings in individual note and bond issues. That is the best time to buy notes, bonds and preferred stocks - when the passive funds are liquidating.

I stand by my forecast on interest rates from one month ago. The yield curve has flattened even more. Retail sales are weak. It's a matter of time before we see a rate inversion.

[REWahoo]

Freedom56, your interest rate/financial forecast is well-reasoned and entirely logical. Indications are it very well could be spot on and completely accurate.

I really dislike forecasts like yours because they tempt me to try to time the market, something I know (for me) is a losing proposition. So thanks for the heads up, but I'm not going to do anything more than watch, wait and rebalance when necessary.

[jazz4cash]

NASA FCU has 11 mo CD @2.25 apt w/ 20k min for taxable or IRA.
Their 15 mo CDs are at 1.95 apy w/ 5k min.

[njhowie]

Quote:

Originally Posted by Freedom56 I stand by my forecast on interest rates from one month ago. The yield curve has flattened even more. Retail sales are weak. It's a matter of time before we see a rate inversion.

+1

What is most eye-popping/frightening is if you look at the curve/table and take a moment to look at the spreads, really understanding what it's telling you, it is mind-boggling. Look at the 10-year/30-year spread - just below 0.25% - you take 20 more years and you are being compensated with a rate not even 1/4 point higher - and there are folks/institutions buying up 30-year maturities. Almost the same situation/spread going from 5-year to 10-year.

So, the question becomes - at what point do the longer term rates need to rise, widening the spreads? If we really invert, history tells us that we're extremely likely within striking distance of the next recession. As fixed income investors, where does that leave us? Looking at the abyss ahead of us once again? Buy up the short-term CDs while these 2%-3% rates are still here? Start buying up 5 and 10 year maturities even though those too will only get us 3%, as the Fed will once again have to be lowering rates? Begin grabbing some longer term fixed income instruments like preferred stock and bonds?

[audreyh1]

Of course it's a matter of when, not if. Recessions always occur eventually. But that's not particularly actionable, because it can take a long time, it can take a short time.

Sure, we're very likely late in the business cycle, with the Fed raising rates and this time also doing quantitative tightening, and other pressures on bond prices like rising debt. Usually the Fed gets us close to the edge, but it often takes another unexpected event to trigger it.

So I just stick to my AA, and rebalance after the SHTF.

The curve had actually been steepening since the end of Jan. Now it's flattened a bit again. There is a definite tug-of-war going on. It's not all in one direction.

[Freedom56]

Quote:

Originally Posted by njhowie +1 What is most eye-popping/frightening is if you look at the curve/table and take a moment to look at the spreads, really understanding what it's telling you, it is mind-boggling. Look at the 10-year/30-year spread - just below 0.25% - you take 20 more years and you are being compensated with a rate not even 1/4 point higher - and there are folks/institutions buying up 30-year maturities. Almost the same situation/spread going from 5-year to 10-year. So, the question becomes - at what point do the longer term rates need to rise, widening the spreads? If we really invert, history tells us that we're extremely likely within striking distance of the next recession. As fixed income investors, where does that leave us? Looking at the abyss ahead of us once again? Buy up the short-term CDs while these 2%-3% rates are still here? Start buying up 5 and 10 year maturities even though those too will only get us 3%, as the Fed will once again have to be lowering rates? Begin grabbing some longer term fixed income instruments like preferred stock and bonds?

No investor in their right mind would buy a 30 year bond or even a 30 year corporate bonds rated at AA or higher. The coupons are far too low for their duration. This is why bond funds are a bad idea. They buy/sell based on term allocations in their portfolio and inflows/outflows. They make or lose other peoples money while collecting their fees. The yield on most bond funds are pathetic given their market risk.

You can get about 4% yield on a one year note from Ally Financial or 3.5% yield on a one year note from Ford and their default risk for the remainder of their term is nil. If the preferred stocks that I sold in December (JP Morgan, Bank of America, Wells Fargo, Citibank, Capital One) drop below par, I will jump right back in.

[copyright1997reloaded]

I have progressively reduced my longer term bond holdings over the last few years. Almost all of my fixed income allocation is in relatively short duration instruments (1-4 years) or TIPS/i-bonds (inflation adjusted).

However, even if we do get a yield curve inversion it doesn't necessarily mean that the recession is here or Mr Market will immediately tank. Most market peaks come 12-18 month AFTER the inversion.

However (to the however), I continue to pare equity holdings a little at a time as a way to limit risk. I was well north of 70% equities in April 2016, pared down as one of my bigger holdings was bought out mostly in cash, and I have continued to pare a bit at a time starting mid-January 2018. Now at about 65% equities.

[calmloki]

Quote:

Originally Posted by Freedom56 ... You can get about 4% yield on a one year note from Ally Financial or 3.5% yield on a one year note from Ford and their default risk for the remainder of their term is nil. If the preferred stocks that I sold in December (JP Morgan, Bank of America, Wells Fargo, Citibank, Capital One) drop below par, I will jump right back in.

So what is a one year note from Ally Financial? Not CDs or demand notes as far as I can tell - because the current rates are more like 2% and a demand note is for Ally employees or connected family only.

[Freedom56]

Quote:

Originally Posted by calmloki So what is a one year note from Ally Financial? Not CDs or demand notes as far as I can tell - because the current rates are more like 2% and a demand note is for Ally employees or connected family only.

See below:

Bonds Detail

Ally has many corporate notes with maturities in 2018-2022.

[calmloki]

^ Thanks - we lend on property, but bonds and stocks I'm pretty clueless about.

[njhowie]

Quote:

Originally Posted by audreyh1 Wow - huge retreat in interest rates over the past few days. 10 year trading where 5 year was, etc. Quite a reversal.

10 year is now 2.719%...I bought 3 year CD at 2.9% earlier today.

[SoReady]

Where have you found 3yr CD's at 2.9%?

[njhowie]

Secondary market.

[audreyh1]

I expected the 10-year to exceed 3% and even reach 3.1% soon.

What’s blowing my mind is seeing the 5 year so close behind at 2.9% already!

[brucethebroker]

Schwab has CD's:

2.75 2 years
2.95 3 years
3.20 5 years
3.30 10 years

It appears that 2 to 5 years is where the action is....

as of today.

[njhowie]

Quote:

Originally Posted by audreyh1 I expected the 10-year to exceed 3% and even reach 3.1% soon. What’s blowing my mind is seeing the 5 year so close behind at 2.9% already!

If you want even more mind blowing, look at the 30-year in relation to the 10-year.

Flat yield curve.

[audreyh1]

Quote:

Originally Posted by njhowie If you want even more mind blowing, look at the 30-year in relation to the 10-year. Flat yield curve.

Yeah, for sure!