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.



Bonds & Interest Rates

Treasury Snapshot: 10-Year Yield at 2.06%, Lowest Levels Since November

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Posted by Jill Mislinski - Advisor Perspectives

on Monday, 11 September 2017 07:06

Let's take a closer look at recent activity in US Treasuries. The yield on the 10-year note ended the day at 2.06% and the 30-year bond closed at 2.67%, some of the lowest levels since November of 2016.

Here is a table showing the yields highs and lows and the FFR since 2007 as of today's close.


The 2-10 yield spread is now at 0.79%.

The chart below shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since the pre-recession days of equity market peaks in 2007.


....continue reading HERE


Bonds & Interest Rates

D.C. Dysfunction and Central Bank Chaos

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Posted by Michael Pento - Pento Portfolio Strategies

on Wednesday, 06 September 2017 06:34

On September 5th, the members of both houses of Congress of the United States will clean the beach sand from between their toes and return to work. Our public servants who occupy The House of Representatives have been working on their respective tans since July 29th. The Senate has had a little less time in the sun; they held their final vote on August 3rd despite their pledge to stay until August 11th.

Hopefully, they got a lot of rest, because they have a lot to do upon their return. By the end of September Congress will need to pass a budget bill to avoid a government shutdown. Expect Tea Party Republicans to hold their ground on spending cuts while Trump petitions for his wall. According to recent tweets, Trump is pushing for this fight and welcomes a government shutdown. Get out the popcorn this could get interesting. 

Washington also need to increase the debt ceiling, to avoid a debt default that could trigger a global financial crisis. Treasury Secretary Steven Mnuchin can pay the bills in full and on time through September 29th – after that, he will need an increase in the country’s $19.81 trillion-dollar credit limit. Republicans are promising that a default is impossible, but Congress also promised a repeal and replacement of Obamacare within the first 100 days of the Trump Presidency, and Trump himself guaranteed to kill the ACA on day one--so I wouldn’t hold my breath that increasing the nation’s credit limit will go any smoother.

Congress also needs to reauthorize the insurance of 9 million children through the Children’s Health Insurance Program (CHIP) and pass the National Flood Insurance Program (NFIP)—Hurricane Harvey has put extra importance on this provision, as well as aid for the storm itself.

After they take care of those urgent matters they plan to segue back to tax reform, infrastructure and to take yet another crack at making some needed modifications to Obamacare; before the premiums rise to 100% of disposable income. 

And they will have to juggle this full legislative agenda while dealing with North Korea, Russia-gate and Confederate Statue-gate.  

For a body of elected officials who have built their careers on doing nothing they have an enormous amount of legislation to sift through in an incredibly short amount of time.

And all this dysfunction in DC is having an adverse effect on the dollar, which is already down over 9% this year. A strong dollar is emblematic of a vibrant economy. Whereas, the opposite displays faltering GDP growth and a distressed middle class.


click for larger chart



Bonds & Interest Rates

Yellen in Jackson Hole

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Posted by Doug Noland

on Monday, 28 August 2017 06:42

800x-1"A resilient financial system is critical to a dynamic global economy -- the subject of this conference. A well-functioning financial system facilitates productive investment and new business formation and helps new and existing businesses weather the ups and downs of the business cycle." Janet Yellen, "Financial Stability a Decade after the Onset of the Crisis," August 25, 2017

I would add that a well-functioning financial system is critical to long-term social, political and geopolitical stability. Importantly, well-functioning finance would have mechanisms that promote adjustment and self-correction. This is fundamental to market-based systems. I would argue that this is also a basic premise of sound money and finance. Sound finance would neither suppress market volatility nor work to repeal business cycles - but would instead have inherent characteristics that counteract protracted market and economic excess.



Bonds & Interest Rates

Preparing for Pivot Points

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Posted by Pimco - Insights

on Thursday, 24 August 2017 06:53

With critical policy pivots on the horizon, investors should approach asset allocation with full appreciation for downside risk and stay focused on relative value and security selection.

Investors have enjoyed economic stability and positive market returns for years, but stretched valuations and a changing macroeconomic backdrop suggest a change is coming. 

As our colleagues detailed in the essay “Pivot Points,” which summarized our views from our Secular Forum in May, there are potential catalysts for change on the horizon. We discuss those factors and other secular themes in this section, and in the next section we will update our nearer-term views for asset allocation in 2017, including a key change: our move to a more defensive stance. But first, as a quick reminder to readers, the goal of our annual Secular Forum is to determine our outlook for the next three to five years, allowing us to position portfolios for long-term shifts in global trends and asset valuations. At the forum, we debated and analyzed potential outcomes related to the following pivot points:

Monetary policy: We expect Fed balance sheet and policy rate normalization, but less than many think, with a lower New Neutral destination for the fed funds rate. We expect the European Central Bank (ECB) to follow with a couple of years’ lag.

Fiscal policy: We expect that any U.S. fiscal package that passes will be tilted to tax cuts, but light on reform; we see limited fiscal space in Europe.

Trade policy: We expect the U.S. to focus on bilateral deals (e.g., China, NAFTA) and aggressive use of existing authority within the WTO.

Exchange rate and geopolitical policies: Amid populist movements in Europe and beyond, we expect the euro to survive and Italy to remain in the eurozone. The Chinese yuan is likely to grind weaker. 

While the direction of some of these policy pivots may be known, the path that the policies actually take, their impact on the global economy and markets and their ultimate destination are today all highly uncertain. Although we don’t foresee an imminent recession, we estimate its chances are roughly 70% in the next three to five years.

Secular asset allocation considerations for investors

To anchor our secular asset allocation outlook, we start with assessing long-term valuations across major U.S. asset classes – rates, equities and credit – since these tend to drive moves in other global markets. Combining starting valuations with the macroeconomic conclusions outlined above will allow us to set the stage for long-term portfolio construction.

U.S. rates

While the Fed has hiked its policy rate four times since December 2015, U.S. interest rates remain low by historical standards. However, PIMCO’s New Neutral thesis indicates that a combination of debt overhang and modest global growth is likely to keep rates range-bound around these lower levels over the secular horizon, with an expected neutral real policy rate of around 0% rather than the historical 1.5%. Indeed, as Figure 1 shows, while rates may be low, they are currently in this New Neutral range. In this framework U.S. rates remain one of the more attractive portfolio hedges against risk-off events or an economic slowdown, despite the Fed’s hiking path. However, we are keeping our eye on a key risk to this outlook, which is a possible change in term premium as the Fed begins to reduce the size of its balance sheet, even as fiscal deficits are expected to grow.  

PIMCO Asset Allocation Outlook Worah Sundstrom Aug2017 Fig1 1100

U.S. equities



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