I have no idea where long term rates are headed but this is an interesting quote from a Bloomberg daily email that I get
“Joe Lavorgna, chief US economist at SMBC Nikko, looked at the six inversions since regular two-year Treasury auctions started in 1976:
The average duration of these half-dozen cycles is 13 months. At present, the curve has been inverted for seven months beginning last July. Eventually, the curve must normalize because the financial system cannot function if the cost of borrowing exceeds the rate of interest on issued loans. Every time curve inversion reversed, it was the result of falling interest rates. Yields on both two- and 10-year notes declined, with the former falling more than the latter. In no instance did the curve un-invert because the yield on the 10-year note went higher. This is important because some investors speculate that the yield on 10-year Treasury notes will go up from their present level, perhaps matching or piercing last October’s 4.24% high.”
So the implication is that if history is a guide, the fed funds must drop, rather than the 10 year rise, to reenable the positive slope on the curve.
Thanks so much for this. I mentioned last week that it was entirely possible for the inverted yield curve to uninvert without longer term rates increasing, and they can even decrease. This data indicates that this type of scenario is quite likely in light of historical experiences.
There was a comment awhile back about not buying bonds over par. Besides the obvious loss from a call or risk of default, as long as the yield to maturity/worse is okay, then I don't understand why purchasing over par is an issue.
I think there is one important thing to keep in mind if you are considering a bond with a make whole call provision. According to a representative at Vanguard's fixed income desk, the yield to maturity/worse does not include make whole calls. They can't calculate a yield to worse without knowing the date or the conditions at the time of the make whole call. So, you definitely can lose money buying above par even if the stated yield to maturity/worse looks okay. I'm staying away from any above par purchases, especially when there are make whole calls.
Market timing is not evil. It actually works with fixed income trading and appropriate. Nothing Powell said today that he is cutting rates in June like the "market" was forecasting. The message to me was "don't expect interest rates to go down anytime soon".
Market timing is not evil. But, it often is based on predictions, not certain facts. The more certainty, the better. But asserting something as fact rather than the prediction it is doesn't change the nature of that decision. I do appreciate hearing everyone's explanations for their predictions.
There is reinvestment risk with bonds. And the significance of that reinvestment risk is going to be more important to some than others.
Powell has been saying for months that he believes that rates will not be cut for some time and there has been no reason, based on what he says, to think that there will be cuts in 2023. The markets aren't listening. The stock market was up today despite Powell's comments. The bond market was up only a little, but it is down overall over the months that Powell has been making it clear that the Fed rate isn't coming down any time soon. It's frustrating.
+1
I tend to give more weight to those who know enough to say that they could be wrong.
Me? I have a decent ladder out to 5 years. But, the 3-5 year steps have too many callable bonds/CDs for my tastes.(It doesn't help that several contributors to this discussion have had 6+% bonds called within a few months of buying them.) My goal is to beef these steps up with non-callable issues. But, it's hard to buy a 3-5 year CD or bond that is yielding significantly less than a 12 or 18 month CD. How many current dollars do I give up in the next year or two to
perhaps beat the lower rates in 3-5 years? Darn! If only my Time Machine had not broken.
ITA. I'm having the same dilemma, though I'm not buying 12-18 month CDs. I
think that money market yields
probably are going to yield as much or close to those CDs in the end and having money in the money markets leaves me with cash in case some good offerings come up.
I'm trying to buy a time machine on the secondary market. But, I
think I may get a better deal in a few months, so I think I may wait. I'm not sure, though. I may be passing up some relatively good time machine deals. the pundits and experts I've consulted have conflicting opinions on whether and when to buy a time machine.
