Whatever Happened To Our Rising-Rate Environment?

Bozo | Jun 3, 2017 | 1,375 posts since 2011

Today was emblematic, with the yield on the Ten-Year plunging (again) to a near-term low, settling at 2.16%. For those keeping score, the Ten has shed some 46 bps since it hit a near-term high in mid-March of 2017, at 2.62%.

To add to the mystery, equities keep on a tear, setting another all-time high.

My earlier hysterics about bond funds being poor investments, well, that's why I call myself "Bozo". For those doing the math, bond funds have done quite well since mid-March, 2017.

The FED will do what it will do, but the fact remains that the yield on the Ten is down. Way down.

Your garden-variety 5-year CD at 2.35%? Well, it's looking quite competitive these days.

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Kaight | Jun 3, 2017 | 1,192 posts since 2011

Myopia leads to ruin. Bond funds are a must to avoid, regardless how they have fared recently; unless you're a bond fund trader, of course. Most of us here are not traders.

As for the rising rate environment:

Interest rates are a measure of the demand for money. On November 9, 2016, after eight years in the Obama doldrums, there was real hope for an economic breakout under President Trump. But the Obama forces had, and continue to have, other ideas. And Trump has failed to weed his garden, ejecting the Obama holdovers in the executive branch as quickly as necessary. Add to that the courts and the at best timid congressional Republicans, and the bloom is substantially off the rose. Trump deserves credit for doing nearly everything he is empowered as President to do on his own. But he is an obvious threat to establishment elites of both political parties, and to the Washington establishment itself. And the establishment, unlike Trump, places its own survival and prosperity ahead of all else, and ahead in particular of the general welfare of America.

Trump has not given up and he is relentless. But rates will only rise further when possibility of his gaining the upper hand once again surfaces, if it ever does surface. Until then, while we're not quite back in the doldrums, your point about the stock market being duly noted, neither is the American economy today free to fly high.

hank | Jun 4, 2017 | 110 posts since 2016

Trump deserves no credit for anything.
Inflation remains low. Trump's chaotic team has been unable to come up with a sensible plan for tax cuts that Congress can support. Similarly, all the talk about an infrastructure fiscal stimulus has gone nowhere. And the market believes now that these things are going nowhere and that's why rates are going down. Furthermore, the administration's obstruction on Russia has cast a cloud on the administration and who knows where that will lead

Bozo | Jun 6, 2017 | 1,375 posts since 2011

hank, the Ten-Year Treasury notched another short-term low yield today at 2.14%. As I noted in another thread, I certainly don't have any explanation. Folks on one side of the political spectrum argue it is because everyone has decided Trump is a "very loose cannon on deck", and thus are snapping up Treasuries to guard against the inevitable melt-down (think: flight to safety). Folks on the other side (such as our friend Kaight), would submit it is merely because Trumponomics has been throttled. I submit the issue might be more nuanced.

Bond yields fall, and fall dramatically, when institutional investors, hedge funds, and other large players plop huge amounts of money into Treasuries. They might do this as a rotation (out of equities), which we have not seen, or merely because they are swamped with in-flow dollars and have no better option. Is a 2.14% yield on a Ten better than 0.70% on a German bund? I think you get my drift.

For bond traders, dollars are fungible. If a foreign investor can change Euros, or Pounds, into dollars and still beat the "home rate" after conversion, then dollars will continue to pour into our bond market until it achieves equilibrium. The conversion rate is impacted by a rising or falling dollar. So, to a degree, lower rates have a cascading effect.

The good old USofA, despite it many faults, is still regarded as the safe haven for money which absolutely, positively, has to be there in a week, a year, or a decade.

Bozo | Jun 6, 2017 | 1,375 posts since 2011

Back twenty years or so, I remember the great Asian meltdown. Asian economies were imploding, and Asian investors couldn't get their money fast enough into dollars, and thence into Treasuries or American real estate, both of which were considered "safe havens", along with the stock market. While that didn't turn out as well as those Asian investors might have hoped, it illustrates my point. When all else appears to be failing, buy American assets. Asian investors do, Russian oligarchs do, Euro bond traders do. And, if you have a balanced fund with Vanguard, Fidelity, or Schwab, you do so as well.

I suspect the only reason more American assets have not been snapped up by now was the conversion rate of the dollar. With the Ten on a downward spiral, that may change.

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