What happens to T bills when the Fed has their next rate increase?

[Graybeard]

I don't know if this is as cut and dried as "when interest rates rise bond prices decline". That is bond math and it is how it works so that is cut and dried but what about this?

The Fed will meet July 27 and they may rise the overnight rate 50 bp but 75 is perhaps more likely. Let's say they go 75 bp just for the sake of this discussion. How should or could or would that effect the coupon on a 3 month, 6 month and 1 year T bill? I doubt all 3 would raise their coupon by 75 bp. Is it possible that is already baked into rates and the coupons only increase a small amount like say 4 bp on the 3 month, 7 on the 6 month and 12 bp on the 1 year? Those are just numbers for discussion sake, I am not thinking those would be the increase of the coupons. Do these coupons have to increase close to what the Fed's increase is or can they just remain pretty much where they are?

 

[Dash man]

I don't know if this is as cut and dried as "when interest rates rise bond prices decline". That is bond math and it is how it works so that is cut and dried but what about this?



The Fed will meet July 27 and they may rise the overnight rate 50 bp but 75 is perhaps more likely. Let's say they go 75 bp just for the sake of this discussion. How should or could or would that effect the coupon on a 3 month, 6 month and 1 year T bill? I doubt all 3 would raise their coupon by 75 bp. Is it possible that is already baked into rates and the coupons only increase a small amount like say 4 bp on the 3 month, 7 on the 6 month and 12 bp on the 1 year? Those are just numbers for discussion sake, I am not thinking those would be the increase of the coupons. Do these coupons have to increase close to what the Fed's increase is or can they just remain pretty much where they are?

The coupon rates don’t change. It remains the same until maturity. It may affect the price you’ll get if you sell the Treasury bill/bond, or buy others.

Personally, I only buy treasuries I intend to hold through to maturity.

 

[Graybeard]

The coupon rates don’t change. It remains the same until maturity. It may affect the price you’ll get if you sell the Treasury bill/bond, or buy others.

Personally, I only buy treasuries I intend to hold through to maturity.

I am asking how the Fed rate increase would effect new issue T bills after the July 27 meeting. Their coupons will either decrease (I doubt that), remain basically the same (is that possible) or increase (I assume this but would it be close to the 75 bp used in the example).

 

[Dash man]

I am asking how the Fed rate increase would effect new issue T bills after the July 27 meeting. Their coupons will either decrease (I doubt that), remain basically the same (is that possible) or increase (I assume this but would it be close to the 75 bp used in the example).

I see, my bad. Honestly, I’m not sure anybody knows with this crazy market. Rates on treasuries have been dropping, perhaps in a flight to safety. Since new issues are set by auction, the huge demand could keep the rates down. The Fed rates do not directly affect the interest rate of treasuries immediately.

 

[aja8888]

The FED controls interest rates on the short end. What they decide to do will be based on demand for new treasuries and how they feel when they get to the office that day.

 

[daylatedollarshort]

Real interest rates on Treasuries are sill significantly negative. Usually to fight inflation the real interest rates will have be at inflation or higher to encourage saving over spending. I think we will see Treasury real yields increasing as the Fed keeps racheting up interest rates this year, at least until inflation indicators start showing significant drops. It may not happen with this next Fed increase since that was previously announced, but I think the market in general is not pricing in how high interest rates may go yet this year. Whether the worst is over or just beginning for bond prices depends on the next inflation report and the Fed's resolve. At this point it is anybody's guess.

 

[COcheesehead]

The market decides the majority of interest rates. So it depends what the market sees. Right now yields are dropping.

 

[pb4uski]

Yes, the Fed/FOMC only sets the fed funds rate... the rate thaat it charges to banks for overnight loans... but by setting that as the safest and shortest rate it has a ripple effect on other rates but the ripple effect is impacted by supply and demand for longer bonds.

 

[Graybeard]

So perhaps with demand high for short term treasuries, that may keep the coupons basically where they are.

Because the Fed can only effect short term rates, I questioned how another 75 bp hike would effect them. Rates really need to be higher but as they increase so do the cost of the national debt re increased borrowing costs. I think interest rates really can't go up that much so rates on the 10 yr may never reach 6 or 7%, we may be locked in a lower rate environment for a long long time.

Of course whenever someone says things like that, the opposite happens but with a $30T national debt I think the desire to keep rates low will be the driving factor for many years if not forever. The national debt will just increase as time goes by and it will never be paid down so what was once considered to be "traditional" levels of rates just isn't happening since most of the budget will be going to pay interest.

The reason I started this thread is I am debating whether to take advantage of the 6 month T bill rate now in case 3 and 6 month coupons start to go down even as the Fed will hike for the next 2 meetings. The 6 month has a better coupon than the 3 month unless rates go up and rolling over 3 month bills would get you into a higher rate sooner. It probably is a moot point since the return is far below the current inflation rate.

 

[pb4uski]

... Because the Fed can only effect short term rates, I questioned how another 75 bp hike would effect them. ...

I think it affects short term rates because lenders generally expect some premium for the risk associated with lending longer... that is why the yield curve is typically upsloping.

So if the federal funds rate increases from 1.75% to 2.5% and I'm a bank, unless I expect rates to decline sometime soon, why would I do any short term lending at anything less than the 2.5% that I can get through the fed... so if a customer wants a 6-month loan, then it needs to yield more than 2.5% in order for it to be worthwhile to me. And the effect just ripples up through the yield curve.

However, supply and demand impacts it was well and may cause the yield curve to flatten or steepen, partially muting or accentuating the impact of the increase in the federal funds rate.

 

[JoeWras]

So perhaps with demand high for short term treasuries, that may keep the coupons basically where they are.

Because the Fed can only effect short term rates, I questioned how another 75 bp hike would effect them. Rates really need to be higher but as they increase so do the cost of the national debt re increased borrowing costs. I think interest rates really can't go up that much so rates on the 10 yr may never reach 6 or 7%, we may be locked in a lower rate environment for a long long time.

Of course whenever someone says things like that, the opposite happens but with a $30T national debt I think the desire to keep rates low will be the driving factor for many years if not forever. The national debt will just increase as time goes by and it will never be paid down so what was once considered to be "traditional" levels of rates just isn't happening since most of the budget will be going to pay interest.

The reason I started this thread is I am debating whether to take advantage of the 6 month T bill rate now in case 3 and 6 month coupons start to go down even as the Fed will hike for the next 2 meetings. The 6 month has a better coupon than the 3 month unless rates go up and rolling over 3 month bills would get you into a higher rate sooner. It probably is a moot point since the return is far below the current inflation rate.

Then do a little laddering.

As for the desire to keep rates low to help the debt... I believe we already saw that. It was tried, and failed. The Fed waited too long.

Don't get me wrong, that is part of the calculus. But it is more than just two things. Remember on the opposite side of the equation, rampant inflation raises tax brackets hence potentially decreasing income (thank goodness they indexed them in the 80s legislation), could break social security due to auto raises there, and so on.

Then there is societal unrest, political sparring over the issue, and so on. There's a lot going on if inflation is let go to run as it pleases. But, hey, all kinds of debt melt away due to it being devalued, even student debt. Whoopee!

 

[COcheesehead]

Trying to guess rates is challenging. As the above post states, ladder them.
I have been laddering bonds for years. I have doubled the yield of the ladder just since spring, by reinvesting maturing bonds on the long end. I am glad I did since rates have been dropping.

 

[Montecfo]

I don't know if this is as cut and dried as "when interest rates rise bond prices decline". That is bond math and it is how it works so that is cut and dried but what about this?

The Fed will meet July 27 and they may rise the overnight rate 50 bp but 75 is perhaps more likely. Let's say they go 75 bp just for the sake of this discussion. How should or could or would that effect the coupon on a 3 month, 6 month and 1 year T bill? I doubt all 3 would raise their coupon by 75 bp. Is it possible that is already baked into rates and the coupons only increase a small amount like say 4 bp on the 3 month, 7 on the 6 month and 12 bp on the 1 year? Those are just numbers for discussion sake, I am not thinking those would be the increase of the coupons. Do these coupons have to increase close to what the Fed's increase is or can they just remain pretty much where they are?

The shortest rates should rise from here. You have the 30 day t-bill at 1.28 pct presently. That is definitely going to rise with a 75 basis point increase. Now the 10 year and 30 year could in fact drop or stay flat, if the market interprets the FED is very serious about reducing inflation.

The adjustments may already be underway, as the 30 day t-bill rose about 16 basis points over last couple of trading days. I expect we will see that rate rise throughout the month especially as clarity on the amount of the raise becomes clear. So don't expect a huge jump the day of the Fed meeting. Cake may be largely baked by then.

For example, from June 1 throug June 16 (last Fed meeting) the 30 day yield rose 40-45 basis points.

Demand and flight to quality could cut the other way but I would expect rate rises from here.

 

[aja8888]

At age 79, if the FED ever lets the 10 year get to 7%, I am putting everything I own into those bonds. Period. Think about why I would do that!

Maybe folks much younger would not do that?

 

[Freedom56]

The rate hikes have been pretty much discounted by the bond market. Despite all this talk about hyper inflation, long rates really have not moved much higher. The bond market at this time is not anticipating the Fed funds rate to move beyond the 3.8% in 2023 planned by the Fed. There is far too much debt outstanding for rate to move up meaningfully. Governments, businesses, and consumers are far more leveraged than they were in the late 70's and early 80's. So don't expect CD yields to move up to 7-8% anytime soon. If that did happen, we would see the S&P 500 trading below 1000. That being said, there is too much low coupon debt outstanding that is mispriced versus current treasury yields. The pain will continue for funds holding all that low coupon debt.

 

[Freedom56]

At age 79, if the FED ever lets the 10 year get to 7%, I am putting everything I own into those bonds. Period. Think about why I would do that!

Maybe folks much younger would not do that?

If the 10 year reached 7%, the S&P 500 would be trading below 1000.

 

[aja8888]

If the 10 year reached 7%, the S&P 500 would be trading below 1000.

I couldn't care less about the S & P if that was the case. But I do agree with you on that.

 

[daylatedollarshort]

At age 79, if the FED ever lets the 10 year get to 7%, I am putting everything I own into those bonds. Period. Think about why I would do that!

Maybe folks much younger would not do that?

Might be a good idea. I have also been thinking of buying 20 year TIPS on the secondary market. I noticed they have been up to at least 1.22% real yield, which would provide close to a risk free 4% safe withdrawal rate. Our current withdrawal rate is less than 1%, so I think that would work well for us no matter what direction interest rates go the rest of the year. Our principal would keep up with CPI inflation to leave to the kids and we could live on the interest.

 

[aja8888]

Might be a good idea. I have also been thinking of buying 20 year TIPS on the secondary market. I noticed they have been up to at least 1.22% real yield, which would provide close to a risk free 4% safe withdrawal rate. Our current withdrawal rate is less than 1%, so I think that would work well for us no matter what direction interest rates go the rest of the year. Our principal would keep up with CPI inflation to leave to the kids and we could live on the interest.

Sounds like a plan to possibly go with. My 7% bond would double the initial investment in 10 years with dividends reinvested.

 

[Graybeard]

At age 79, if the FED ever lets the 10 year get to 7%, I am putting everything I own into those bonds. Period. Think about why I would do that!

Maybe folks much younger would not do that?

At age 79 I do get it but I'm just 72 though I'm catching up fast!

 

[daylatedollarshort]

Sounds like a plan to possibly go with. My 7% bond would double the initial investment in 10 years with dividends reinvested.

7% could be great, though we don't know if interest rates will return to their new normal of recent decades or go back to 80s style rates right now.

 

[aja8888]

7% could be great, though we don't know if interest rates will return to their new normal of recent decades or go back to 80s style rates right now.

I wouldn't care if rates dropped to 1% after I bought the 7% ones.

7% would double my funds in 10 years. Buy the 10 year 7% bonds and not look at another investment again. Priceless!

 

[daylatedollarshort]

Here is a related link that popped up today about real interest rates, which I have been posting about but with more detail and a nifty chart - Are markets underestimating how far the Fed must go to tame inflation? - MarketWatch - "But will such a brief stretch of tighter policy be enough to help defeat inflation? As Reid points out, if the expectations turned out to be accurate, this would raise an interesting issue for the Fed: it would mark the first time in 70 years that the level of the Fed’s benchmark interest rate target failed to surpass the rate of inflation during the entirety of a rate hiking cycle...Right now, markets expect that in “real” terms — that is, when adjusted for inflation — the Fed Funds rate won’t reach positive territory at any point during this tightening cycle."

The Fed likely either has to raise interest rates above inflation to tame it based on history, which is much more than is priced into bond yields right now, or give in to a much higher target inflation than 2%.

 

[JoeWras]

The 13 week T-bill auctioned at 1.885% today. That's up 0.1% since last week.

4 weeks ago it was 1.25% We had a rate hike in between.

 

[Graybeard]

The 13 week T-bill auctioned at 1.885% today. That's up 0.1% since last week.

4 weeks ago it was 1.25% We had a rate hike in between.

I am concerned that if rates drop today's rates may be better so I bought some 26 week T bills. Not sure of the coupon yet but guessing around 2.55%.