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Bonds & Interest Rates

Get Ready for an Interesting October Folks - Peter Schiff, Bill Gross, BlackRock

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Posted by Peter Schiff - Bill Gross - BlackRock

on Thursday, 21 September 2017 05:58

5d98e9a2-4f80-11e7-9d92-41080ba20685 600x400The Federal Reserve Is Now Ready to Blow It All Up

Peter Schiff, CEO of Euro Pacific Capital, said that it's "impossible" for the Fed to unwind its balance sheet. In turn, he forecasts a recession in the not too distant future. While that may be extreme, Schiff touches on a key point the feel-good-investor must now consider: we have never seen a Federal Reserve try to unwind a balance sheet of this size before, no less against the backdrop of robo-trading and real-time news. Get ready for an interesting October, folks. 

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Here's what BlackRock says will happen to interest rates when Fed slims down its balance sheet

 

  • The Fed is expected to begin unwinding its giant $4.5 trillion portfolio, and it should not immediately have much impact on interest rates, according to BlackRock's global chief investment officer of fixed income.
  • Rick Rieder says the 10-year yield could get to 2.50 percent this year, but will rise more next year as the Fed increases the amount that it is shrinking its portfolio by to $50 billion a month.
  • BlackRock also sees huge demand for Treasurys, and that should keep U.S. yields low.

 

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Bill Gross: "If they followed their plan … which basically projects over the next two years for fed funds to reach 2.8 [percent] or even 3 percent, a 170 basis point increase, then yes a recession is possible,"

 

  • Whether or not the Fed leads the U.S. economy into recession depends on whether it sticks to its fed funds forecast, Bill Gross told CNBC.
  • On Wednesday, the Fed reduced its long-run target for the fed funds rate to 2.8 percent.

 

"They just have to be very careful because it's a highly levered U.S. economy. It's a highly levered global economy and currencies and the dollar and other related assets like gold will move substantially if the Fed overstates its case," Gross said Wednesday.

 

 

 

 

 

 

 



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Bonds & Interest Rates

Stock market slumps as Fed to kick start ‘great unwind’

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Posted by MarketWatch

on Wednesday, 20 September 2017 12:35

MW-FJ881 yellen 20170406094540 ZHDollar jumps to 2-week high as Federal Reserve says it will start asset next month

U.S. stock benchmarks retreated Wednesday afternoon as the Federal Reserve announced that, for the first time in nine years, it would start reducing the size of its $4.5 trillion asset portfolio starting in October. 

The U.S. central bank kept interest rates unchanged, as widely expected, but said it would start to shrink its balance sheet by $10 billion a month. The start of the asset unwind also places another rate increase before the end of the year by the Fed back on the table, signaling more definitively an end to the easy-money policies in the U.S. and an unprecedented unwind of crisis-era asset purchases that had helped to buoy markets over the past decade. 

During a news conference to detail its policy plans, Yellen described the unwind would be conducted “gradually and predictably.”

“Even though this is a slow and deliberate and thoughtful unwind plan, it is not without its potential to rattle markets,” said Kristina Hooper, global market strategist at Invesco. 

The Dow Jones Industrial Average DJIA, -0.01% was down 41 points, or 0.2%, at 22,337, after hitting a fresh intraday record at 22,399.33.

The S&P 500 index SPX, -0.15% was down 8 points, or 0.3%, at 2,597, after briefly touching its own fresh intraday day record at 2,508.85.

The Nasdaq Composite Index COMP, -0.39% meanwhile, was down a firmer 43 points, or 0.7%, at 6,420.

Meanwhile, 10-year Treasury note yield TMUBMUSD10Y, +1.34%  jumped to 2.28%, compared with 2.23% earlier in the session, with expectations for higher rates and additional monetary tightening, via the portfolio decrease, encouraging selling in government bonds, pushing yields, which move in the opposite direction to prices, higher. The dollar, which draws bidders in a higher interest-rate regime, enjoyed a fillip, up 0.7% at 92.475, based on the ICE U.S. Dollar Index DXY, +0.93% which measures the buck against a half-dozen currencies.



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Bonds & Interest Rates

What to expect from the Fed’s balance sheet runoff

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Posted by Gene Tannuzzo, Senior Portfolio Manager, Strategic Income

on Wednesday, 20 September 2017 04:22

Following the financial crisis, the Federal Reserve purchased bonds as a way to stimulate the economy. Then Fed Chair Ben Bernanke explained the intent of this policy, known as quantitative easing, in 2010:

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.” 1 

But the Fed is now ready for a return to more normal monetary policy. At the Federal Open Market Committee (FOMC) meeting in June 2017, the Fed announced a strategy to reduce the size of its balance sheet by letting the bonds mature, a process called balance sheet normalization. And at a subsequent meeting in July, the Fed said it plans to begin this process relatively soon. Given the recent commentary from Fed officials, we expect this process to kick off at the September FOMC meeting.

It remains to be seen how this change will affect markets. Patrick Harker, president of the Federal Reserve Bank of Philadelphia, described it as the policy equivalent of watching paint dry.2 But we suspect that the effect it could have on markets may not be so boring.

The Fed grew its balance sheet by purchasing primarily U.S. Treasury bonds and mortgage-backed securities. Now, it plans for its balance sheet to decline at a rate no faster than $50 billion per month. This equates to a decline of $600 billion per year.

Growth and projected decline of the Fed’s balance sheet
28 8DVU TannuzzoFedGraph-1024x591
Source: Federal Reserve and Columbia Threadneedle Investments as of June 30, 2017.

But what does this mean?



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Bonds & Interest Rates

Natural Disasters Have Not Caused a Single Muni Default: Moody’s

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Posted by Frank Holmes - US Global Investors

on Wednesday, 13 September 2017 14:37

hurricane-satellite-pixabayFor the first time since we’ve been keeping track, two separate Category 4 hurricanes struck the mainland U.S. in the same year. It should come as no surprise, then, that the combined recovery cost of Hurricanes Harvey and Irma is expected to set a new all-time high for natural disasters. AccuWeather estimates the total economic impact to top out at a whopping $290 billion, or 1.5 percent of national GDP.

With parts of Southeast Texas, Louisiana and Florida seeing significant damage, many fixed-income investors might be wondering about credit risk and local municipal bond issuers’ ability to pay interest on time. If school districts, hospitals, highway authorities and other issuers must pay for repairs, how can they afford to service their bondholders?

It’s a reasonable concern, one that nearly always arises in the days following a major catastrophe. But the concern might be unwarranted, if the past is any indication.

Lessons from Hurricane Katrina

According to credit ratings firm Moody’s Investors Service, natural disasters have not been the cause of a single default in U.S. muni bond history. Even Hurricane Katrina, responsible for a then-unprecedented $120 billion in damages, wasn’t enough to cause New Orleans to renege on its debt obligations.



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Bonds & Interest Rates

Don’t Let the Smoke Out

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Posted by Bob Hoye - Institutional Advisors

on Wednesday, 13 September 2017 06:21

Screen Shot 2017-09-13 at 6.41.09 AM

Screen Shot 2017-09-13 at 6.37.10 AM

Don’t Let the Smoke Out

This article is not about wildfires in California and the Pacific Northwest.

It is about cars and speculative financial markets.

When tinkering with old cars it is best not to go near the wires as there is weirdness there. The red ones are definitely taboo. But if you must fiddle with them, be careful not to let the smoke out. The engine will not run. Sometimes the smoke will come out all on its own – same thing – the car won’t run.

A good thing about new cars is that you can’t see the wires. What you can’t see, shouldn’t worry you. So, new cars run forever. 1

Because they are not widely watched, the wires in the financial markets are not worrisome either. With no visible threats, bull markets run forever.



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