Bonds & Interest Rates

The Risk Pension Funds Can’t Escape

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Posted by John Rubino - Dollarcollapse.com

on Wednesday, 21 February 2018 12:30

A must read to discover why Stocks are the biggest risk to pension funds and will trigger the pension crisis sooner for two simple reasons.  Robert Zurrer for Money Talks.  

The “pension crisis” is one of those things – like flying cars and nuclear fusion – that’s always coming but never arrives. But the reason it hasn’t yet happened is also the reason that it will happen, and soon: 

The Risk Pension Funds Can’t Escape

(Wall Street Journal) – Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks.

That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9, according to figures provided by the system.

The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017. It gained back $8.1 billion through last Friday as markets recovered.

“It looks like 2018 is likely to be more turbulent than what we have experienced the last couple of years,” the fund’s chief investment officer, Ted Eliopoulos, told his board last Monday at a public meeting.

Retirement systems that manage money for firefighters, police officers, teachers and other public workers are increasingly reliant on stocks for returns as the bull market nears its ninth year. By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier, according to figures released earlier this month by the Wilshire Trust Universe Comparison Service.

Those average holdings were the highest on a percentage basis since 2010, according to the Wilshire Trust Universe Comparison Service data, and near the 54.6% average these funds held at the end of 2007.

One reason public pensions are so willing to bet on stocks is because of aggressive investment targets designed to fulfill mounting obligations to millions of government workers. The goal of most pension funds is to pay for those future benefits by earning 7% to 8% a year.

“Equities always take up a disproportionate share of the risk budget that any plan has,” said Wilshire Consulting President Andrew Junkin, who advises public pension funds. “You can never get away from it.”

That stance paid off during 2017’s market rally as public pensions had one of their best years of the past decade. They earned 12.4% in the 2017 fiscal year ended June 30, according to Wilshire Trust Universe Comparison Service.

But the risks are sizable losses during market downturns, which then can lead to deeper funding problems. The two largest public pensions in the U.S.—California Public Employees’ Retirement System, known by its abbreviation Calpers, and the California State Teachers’ Retirement System—lost nearly $100 billion in value during the fiscal year ended June 30, 2009. Nearly a decade later, neither fund has enough assets on hand to meet all future obligations to their workers and retirees.


Many funds burned by the 2008-2009 downturn tried to diversify their investment mix. They lowered their holdings of bonds as



Bonds & Interest Rates

Red Alert: 10-Year Yields Move into Overbought Territory

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Posted by Bob Hoye & Ross Clark - Institutional Advisors

on Thursday, 15 February 2018 12:56

Dead right on rising Bond interest rates have been Bob Hoye & Ross Clark of Institutional Advisors. From their alert at July 2016 yields have risen from 1.8 to yesterday's close of 2.91%, a big move as you can see below. But that's not all. Read this report for what is expected after the overbought situation cools down - Robert Zurrer for Money Talks

Click Chart for Larger Image


Red Alert: 10-Year Yields Move into Overbought Territory



Bonds & Interest Rates

No Bond Vigilantes: Just Record Short Futures Speculators

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Posted by Mike Shedlock

on Wednesday, 14 February 2018 07:37

A reader asked me about 'Bond Vigilantes' after reading this article: 'Bond Vigilantes' are Saddled Up and Ready to Push Rates Higher.

  • There's reason to be concerned about bond vigilantes, who are no longer under "lock and key" and are free to push yields higher, Ed Yardeni told CNBC.
  • Yardeni coined the term "bond vigilantes" in the 1980s to refer to investors who sell their holdings in an effort to enforce fiscal discipline.
  • People are looking more at the domestic situation and saying, 'You know what, maybe we need a higher bond yield,'" Yardeni says.

This is complete silliness. There are no "Bond Vigilantes".

Fundamentally, there is no way to dump holdings to enforce "fiscal discipline" because someone has to hold every bond issued until it comes to term.

However, there is a record speculative building up against bonds in the futures market.

Hedge Funds Push Record Bets Shorting Treasuries

Hedge funds and other large speculators are more convinced than ever that the 2018 bond-market rout will resume in the days ahead.

The group, known for trading on momentum, boosted short bets in 10-year Treasury futures to a record 939,351 contracts, according to Commodity Futures Trading Commission data through Feb. 6. That means the violent market moves on Feb. 5, when the Dow Jones Industrial Average suffered an unprecedented drop and 10-year yields fell almost 14 basis points, weren’t enough to dissuade wagers that rates are headed higher. The next gut-check comes Wednesday, with the latest read on consumer prices.

Speculators’ positioning matters because it can push momentum to extremes, and can serve as a contrarian indicator since these traders are among the quickest to switch directions when prices turn against them. By contrast, longer-term holders like asset managers are seen as more likely to stay the course. Their net long in 10-year futures is the highest since October 2015.

30-Year Long Bond Positioning




Bonds & Interest Rates

The Fed’s Impossible Choice, In Three Charts

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Posted by John Rubino - Dollarcollapse.com

on Monday, 12 February 2018 06:02

Critics of “New Age” monetary policy have been predicting that central banks would eventually run out of ways to trick people into borrowing money. There are at least three reasons to wonder if that time has finally come: 

Wage inflation is accelerating
Normally, towards the end of a cycle companies have trouble finding enough workers to keep up with their rising sales. So they start paying new hires more generously. This ignites “wage inflation,” which is one of the signals central banks use to decide when to start raising interest rates. The following chart shows a big jump in wages in the second half of 2017. And that’s before all those $1,000 bonuses that companies have lately been handing out in response to lower corporate taxes. So it’s a safe bet that wage inflation will accelerate during the first half of 2018. 

The conclusion: It’s time for higher interest rates. 

The financial markets are flaking out



Bonds & Interest Rates

Get Out of These Investments Now

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Posted by Paul Mampilly - Banyan Hill

on Wednesday, 07 February 2018 06:33

“When is the cheapest time to buy a Christmas tree?” I asked my kids.

My kids guessed that the earlier you bought it, the better.

Trees should be cheaper if you bought them earlier because, well, they have little use until Christmas, according to them.

For them, a Christmas tree means Santa and presents.

So it’s of little value to them until Christmas Eve, when its value spikes up.


It took a bit of explaining to get them to see that trees crash in price as Christmas approaches.

If you’re in the business of selling Christmas trees, you know there is no market for trees after Christmas Eve.

Though my way of looking at it is less exciting than my kids’ way of seeing things, it’s the way things actually work for Christmas trees — and in financial markets.

In simple terms, it means looking at supply and demand.

Right now, demand for certain investments is set to plummet. When that happens, you’ll see the prices of all these things drop through the floor.

Here’s why this is going to happen starting now…

Supply and Demand and Corporate Bonds

You see, the Federal Reserve started raising interest rates regularly starting late in 2015.

Since then, the interest rate for one-month government bonds has rocketed up from essentially zero to a high of 1.33%. And these interest rates are continuing to go up.


It took a bit for these short-term rates to start affecting bonds that go out longer. However, by late 2016, interest rates on longer-term bonds like 10-year government bonds started to go up too.

The 10-year bond is used by professional investors to gauge the attractiveness of all investments and set the price of all assets.



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