DQOTD: What's Baked Into Bond Fund NAVs Already?

[Montecfo]

1. The FED has announced its planned interest rate hike and has done them according to schedule. That is the plan and no other has been announced.



2. The door has been opened to an August rate hike if deemed necessary.



3. QT has commenced and the FED has started rolling off MBS's (when they are paid off) and treasuries (when they mature). The FED has NOT started selling bonds or MBS's yet, but have the option. QT will kill inflation quickly as that pulls liquidity directly out of the economy.



4. The FED is looking for a "soft landing" type recession and we will have an landing, for sure, as inflation is deadly to the economy.



5. Powell's legacy is at risk as he doesn't want be remembered as the guy who let inflation kill the U.S. economy and potentially lose reserve status of the currency.



6. Dem's don't want to be in office if inflation kills the economy. Instructions have been forwarded to Powell already.[emoji23]



There is nothing DOVISH going on now.

Those are all interesting in theory and logical. But the Fed's hike plan does just what I said, leaves rates at 3.8 percent by end of 2024. Dovish with inflation north of 9%.

Powell's statement that future hikes would likely be less than 75 points. Why say this? Dovish.

As you said, Powell wants to engineer a soft landing. I do not disagree but to do so requires dovish tactics. Which are the tactics we are seeing, go slow, keep hikes low relative to inflation.

Powell declared the Fed funds rate had reached a "neutral" setting, which many economists criticized as not accurate given the inflation situation. Again, dovish.

I could go on. His rhetoric has been hawkish, actions mostly dovish. Now his rhetoric is ALSO dovish. That really concerns me.

Perhaps he knows something we don't. But Fed tactics this entire cycle going back to the pandemic suggest quite the opposite. And Congress keeps goosing spending which fuels inflation. He should consider the fiscal side also.

I hope he the economy either slows more or he adjusts his tactics, or this could become a long slog, like the Fed under Arthur Burns.

With interest rates still low and QT underway, he has a lot of tools and I agree caution is in order. But he should be making strong talk and actions at this point.

 

[youbet]

The FED seems to be moving back to dove mode.

Really? How are you drawing that conclusion? Their rhetoric certainly doesn't support it. I could accept "less hawkish." But definitely not "dovish."

 

[all4j]

I would think the web would not have a shortage of info for and against EMH & over time I know I've seen multiple versions as to what it really means. For example, is efficiency either 0% or 100% or can it be somewhere in between according to the theory?

But in the case in front of us, I for sure have issues. Knowing the fed is intervening in the market without regard to the underlying value....that is, "we'll buy bonds regardless of price & whether a good value or not". Knowing the bond markets & stock markets are pricing in different views of the future...both markets supposedly efficient....

Time will tell I suppose

 

[audreyh1]

Didn't seem like a dumb question at all to me. I wonder the same, bonds have really taken it on the chin, so will declines remain proportional with what happened in the 1H as rates rose or is something baked in and the declines be more muted? In other words, does the duration metric continue to hold fast with further rate increases.

I agree, not a dumb question. Unfortunately too much uncertainty to know the answer. Lots of opposing forces in play.

 

[OldShooter]

I used to believe the efficient market idea as well until this year when many of us on this forum sold off our bond funds when the Fed rate increases were announced and much of the market reacted only after the rate increases actually took effect. So it has made me question what other general maxims about the market we've been led to believe are 100% wrong?

As you say, when Mr. Market goes crazy it is hard to believe in the EMH. The recent rise and fall of ARKK is another example. I think the answer is that the EMH has to be the guidepost, but that the behavioral finance influence cannot be denied. Here is an interesting video of Fama and Thaler discussing pretty much your question. Fama really digs in his heels on the EMH and Thaler has a good time with him. Interestingly, at about 3:30 Thaler agrees that the EMH is "a good working hypothesis for any investor."

 

[Montecfo]

Really? How are you drawing that conclusion? Their rhetoric certainly doesn't support it. I could accept "less hawkish." But definitely not "dovish."

See post right above yours where I made the case.

but already, things are changing. See below.

 

[Montecfo]

It is starting to happen

The FED is now making some non-dovish noises.

Fed governor Bowman just said she would support 75 basis point increases until inflation is subdued.

If adopted that would be a sharp change from JPowell's recent statements.

I do welcome it, though it will likely dampen stock prices and juice short-to-mid interest rates.

https://www.cnbc.com/2022/08/06/fed...es-ahead-after-three-quarter-point-moves.html

 

[Closet_Gamer]

I don't think the Fed is dovish but I do think they are being overly complacent.

I would like to see them push rates up much more quickly -- sign me up for 100bps moves at a time and keep them coming for a while.

These 75bps moves are bringing a knife to a gun fight and it will cause us to live in this daily angst of "inflation or recession, what will it be?"

Break the back of inflation even if it gives us a recession. Recessions come and go ... but prices tend to stick around.

I will let you know if Powell calls me....

 

[Montecfo]

I don't think the Fed is dovish but I do think they are being overly complacent.

I would like to see them push rates up much more quickly -- sign me up for 100bps moves at a time and keep them coming for a while.

These 75bps moves are bringing a knife to a gun fight and it will cause us to live in this daily angst of "inflation or recession, what will it be?"

Break the back of inflation even if it gives us a recession. Recessions come and go ... but prices tend to stick around.

I will let you know if Powell calls me....

Complacent,.not moving rates quickly enough but not dovish.

Got it!