Some on Wall Street say the Bond Market is the smartest due to the fact that participants are only focused on repayment risk and time of that repayment. Compared to the Equity (Stocks) market were there are flows of capital, tons of complication with financials and mood swings by participants.
Given the Bond Markets high IQ status, when it speaks people listen….
Inverted Yield Curve as Bond Market Beats it Chest with a Warning
As a quick refresher, a normal yield curve will have lower rates for shorter terms and higher rates for longer…. simply because the longer the term the greater chance of a problem/stress/default …
Pardon my free hand, but it looks like this… the longer the time the greater the cost/interest rate
When the Bond Market turns upside down/inverts, it has a very good track record of predicting a R- Word!
Note on this long term chart, as the line drops below zero, the Bond Market is Beating its chest and inverting…. also note the grey area that follow are R-Words…
Using a shorter term chart, last week marked a strong inversion of about -.25% and closed the week off at -.20% note those are point 25% and point 20%…. far right below the line…
So it looks like the R Word is in the cards, not to worry we have been talking slowdown since December of 2021… so we are prepared….
Remember, Equity Markets are forward looking and will sniff out the recovery before it is seen…. Also, recall, headlines are the worst near the end…. Still a Ways to Go though!
Next up — Why the Fed is in a pickle and may only have an R- Word way out!
The extra speedy move of interest rates upward have put pressure on “Safe” assets, notably bonds or fixed income.
As reviewed here in great detail and with a special video on the subject, as rates rise, headwinds are created, BUT the opposite is true…. rates stabilize or even lower, big tailwinds…
Have Rates Peaked ?
Using the 10 year treasury as our marker for this review, after peaking 3.15% a few weeks ago, rates have come in and are now around 2.76% …. Progress and stability!
Here is a zoomed in chart….
Just like the change from Winter to Spring to Summer, it rarely occurs in a straight line…. remember also this longer term rate (10 years) is a measure of economic growth and will not be directly effected by the Federal Reserve overnight rate increases (thats our checking accounts)…
With multiple comments over the last few weeks and a pick up in headlines concerning interest rates, we decided to do an analysis and review! We also have added a video to help explain some of the complexities associated with rates and bonds … as while at face value bonds are a simple animal, their movements can be puzzling.
The main reason for the increased headlines and comments are when rates go up, the value of bonds goes down initially, and rates have really jumped dramatically for various reasons.
Briefly as a reminder, Bond aka Fixed Income aka corporates aka treasuries aka high yield aka Fixed Income instruments are nothing more than a note with an income stream to the purchaser of the bond! There is a saying the bond market is “Smart” because you only have to worry about the ability and willingness of the lender to pay… nothing else…
Rates and Bonds – I Go Up, You Go Down
The Green line is the yield on the 10 year treasury… The red is a huge bond fund from Vanguard called the BND….
No doubt that this is an almost perfect inverse relationship.
One detail worth mentioning, longer term bonds are more volatile, both up and down than shorter term i.e. A one year bond will not move near as much as a 30 year. This makes sense because the longer the term, the more payments that are owed and the more change in the prevailing rate effects the bond.
Fast Fast Fast Movement
In true, be careful what you ask for fashion, (we have long been positive towards higher interest rates) rates have moved incredibly fast, especially Mortgage Back Securities which are pools of mortgages used for determining current new rates…
This is the average 30 year fixed rate mortgage…. as of yesterday, this rate was well over 5%…this rate is almost double the rate just a few quarters ago…. With eventual supply, our home asset is facing some headwinds !
Much of this rate movement is coming from Federal Reserve Bank Presidents public comments…..
Why would they do this? To slow the economy… if they can get the market to move rates up, their job is easier ….heck if they can get market participants to do all the work, the Fed would hardly need to do anything… plus markets are much faster to react than the FOMC (Federal Open Market Committee)
Bigger Coupon
Once interest rates move, a new bigger income stream is the net effect… New purchases or re-investments are met with bigger income payments…
This continued higher income payment begins paying back the headwind of the drop in value as shown in the first chart…
Clipping that coupon will be nicer as rates increase!
How Far Can they Go? Rates and the FOMC?
Here comes is the sizzle…. be careful on extrapolating higher rates into the future… this extrapolation has garnered a lot of headlines as of late …. Whoaaaa
This is about a 35 year chart… go back farther, to a much younger demographic, there was a time when the FOMC raised interest rates to the roof… think 15-18% to tamp out inflation….
With an economy today of much more debt to service and older (more savers, less spender) demographics the last four decades have been a slow but continued lower longer term rate….
Note the top of the prior interest rate cycle looks like the top of the FOMC rate hike…again the last four decades….
Stall Speed
With the afore mentioned cycle high repeating as the following cap on rates, looks like, although very fast rate movement recently, the majority of the move is likely over….and therefore less headwind for the value of bonds and bigger coupons….
Lastly… a slowdown in economic times or a rush for the safety of our simple friends usually leads to a reversal in rates and a repeat of the afore mentioned process…but in reverse… lower rates, higher prices!
Have a Great “Bonds and Interest Rate Analysis” Day!
The third post of a neat (well we think so) new idea, series we discuss “Protection Planning” !
This series is a review of the basics, and will serve as somewhat of a semester study of the Financial Planning foundations all the way to more advanced topics later in the series…. We plan on a mid month release of each part and somewhere south of double digit parts…. possibly with a video added to each for additional insights…. thanks in advance for sharing with those who may find this series helpful….
In this Debt Planning section we cover from a high level …
The Good, the Bad and the Ugly Forms of Debt
Yes there are some debts that or ok, but there are also some that are very much sinners….
Review that Social Security Statement
In this annual reminder post, receiving a weekend email alert directly form the Social Security Administration our review was set in motion and a new post was born….
Happily as mentioned in the post, the SSA had updated the site and there are really neat new features such as a graph for delayed benefits and a neat spousal calculator.. Well done guys!
Please be sure to take 5 minutes and review that your hard earned earnings are being credited to your Social Security Benefit/Number!
Capital Market Comments
Interest Rates Jump Ahead of Fed – Short Term Pressure on Bonds Long Term Gain
While this post concerning how the bond markets, more specifically the two year and ten year treasuries front run the FOMC (Federal Open Market Committee) we also want to remind that such movement, especially seen in the two year treasury puts pressure (lowers) on the value of the bond but also ups the income from the bond……
So initial headwind, and eventual tail wind…yay
Re-Review “The Anatomy of a Slowdown/Recession” the Snap Back
With market jitters creating headlines and lower values, in this post we reviewed our luckily timed lead article in our Q 1 2022 Newsletter article, called the “Anatomy of a Slowdown”
The main purpose of the article and the re-run is to remind everyone INCLUDING OURSELVES, slowdowns (markets dropping in value) do occur, and while we don’t want them to, they do anyway!
In this post, we review three very large what we coined snap backs…. large rallies of 5%-to over 10% which are for some reason very confusing during slow down times and also tend to totally ignore headlines…
No idea for sure WHY they happen, just know they do … thought worth reminding as some great questions came in on the subject.
Have a Great Day, Talk to You at the End of March! Going fast this year!!!
On Friday, August 6, 2021 the BLS (Bureau of Labor Statistics) released the prior monthly (July 2021) employment related report. It is worth noting these are preliminary and will be adjusted in future months, but usually major adjustments are not in the picture….
Bottom Line:
943k hires in the month of July … NICE
5.4% Unemployment Rate as of July …Getting there (lower is better of course)
10 Year Treasuries Took note
BLS Unemployment Report for July 2021
The following Chart from the BLS may look unenthusiastic at first glance….. but hold on!
With the DRAMATIC volatility from the past year, the longer term chart does not give a true recent view…. Let’s look a little closer …. Much Better!
In much the same vein as above, the year view of the Unemployment rate does not look like a big deal as can be seen by the next chart!
On second thought, again with a closer view….. NICE! (We want a downward trending chart when measuring Unemployment)
10 Year Treasuries Wake Up
A measure of future expected growth, after some wrong sided players (shorting the 10 year in expectation of much higher rates faster) blew up pushing yields possibly incorrectly lower….
We have been watching interest rates closely as well as a local born inflation gauge called the Trimmed Mean put out by our Own Dallas Federal Reserve….
Interest rate movement can be a predictor of better times ahead… Think reopening and also of future inflationary waves…
Here is a shorter termed graph of the 10 Year Treasury Yield….
Purposely a shorter term graph to exaggerate the recent movement…
Next up, we fly much higher to the ten thousand foot level to show you while rates are moving, they are far from sky high….
Higher rates can be a headwind to markets… fast moving higher rates would have a high probability of disruption…
Slower, gradual, less jittery rates may be just what the Dr. ordered… not too hot, not too cold…
We spotted this neat chart last week from our friends once again at Visual Capitalist … here
Worth noting … we were close to these levels in 1945 as can be seen on the chart…
While the above is a more descriptive 200 year chart, we just could not help ourselves in showing a much shorter but encouraging one month chart of the same ten year treasury noted above …. again, VERY short time frame, but we like the upward movement….
We crow a lot about interest rates, but they really are VERY important…
Alright, if the title did not scare you off… hope not, we wanted to review the current state of interest rates, with some helpful (in our humble opinion IMHO) comments !
Here we go!
Deep Dive on Interest Rates
First up the US 1 Year Treasury
Think of this as your checking account interest with a little extra earnings … hence the one year time frame.
Seems long ago with all the worlds events, but not too long ago we were in the mid 2% range, currently at .12% ….
Many say we will be in this lower range for a long time, short sighted in our minds, but time will tell!
Next up the US 10 Year Treasury
Think of this as our proxy for mortgage rates, long term inflation and general economic growth expectations.
Not so long ago, in the mid 2% zone looking like we were headed to 3% … today .64%.
Many of the same folks saying we will be here for a long time. We will see!
10 Year Treasury Versus 90 Day Treasury – The Recession Predictor
Not sure if it was luck or just prophetic markets, but when this chart drops below zero (AKA Yield curve inverts) frequently a slowdown comes !
Inversion much of 2019 and then again during the early stages of the lock down.
Take special note of the spike in late March… recall that was when investors tossed their “safe” fixed income investments out the door because they had not other assets they wanted to sell … after the initial spike, normalcy returned.
US versus UK One Year Rates
Thought this was very interesting ….
This most recent interest rate cycle was shallow compared to historical norms, notice how the UK rates were even more shallow.
Many other countries could be inserted here as well with the same result
There you have it, a deep dive on domestic interest rates, yield curves and international comparisons….
Last Friday a new “Block Editor” was forced upon us … think of it as a makeover for all publishing/editing tools on our blog – initially HATED it….but upon further review we are getting used to it and hope you like some of the new fancy features – Like the Big A to start the post!
Hello and Welcome to our February 2020 Financial Planning and Capital Market Update!
If you are too busy to read, feel free to listen as we describe our post and thoughts in friendly podcast audio format as well as Video!
Break In – Cool New Feature – In the past we have done our videos on YouTube and this video will also be on our Channel there, however, we have added new features to our site here, that allows us to embed the video here, AND you will not get hit with tons of advertising after the video…. hope you enjoy!
Newbies –
We like to articulate our thoughts and review on a Monthly basis our Financial Planning Tips, Capital Markets and current events!
Hope you enjoy!
February – 2020 Video
Financial Planning Tip (s) –
All About the ETF (Exchange Traded Fund)
In an abbreviated three part series, a preview to our extended Q2 Newsletter Article, we discuss the origination of the very first Index ETF called SPY nick named the Spider and then the proliferation, and finally in part 3 of our series the dangers of non liquid ETF’s during stress,… never knowing stressful times were just around the corner.
While the FOMC (Federal Open Market Committee) led by Jerome Powell have been lowering short term rates, see notes by us here, here and here….
Until just recently, longer term rates were following short term rates down…
Good News From Interest Rates
While the FOMC does control short term rates, they have much less control of longer term rates and actually by lowering short term rates they were hoping for this….
Higher long term rates are our friend … Possible reasons:
Market participants way of being more positive
Tariff talks proceeding
Less fear
Expectation of future growth
10 Year Treasury Rate
If we showed a longer term chart you would see it still has a ways to go as we are only nearing 2% – half full guys… have to start somewhere… For now, good news!
Newsletter Under Way
We have some really neat items under way for the Q 1 2020 (yikes- did we just say that) Newsletter… we have found some great Government Public sources of information that we think you will really like – now on to pulling it all together for brevity and clarity — never thought those research paper skills would be so used – Sorry to all the English teachers that did not get full effort..yes you told me so! haha
Today is a chilly Friday and Thanksgiving is just around the corner…
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, please consult your financial advisor prior to investing!
Background
The is the vocal portion of J.K. Financial, Inc. a Dallas Texas Based Fee Only Total Wealth Financial Planning Firm. Founded by John Kvale, a Dallas Texas Fee only Financial Planner and Total Wealth Manager.
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Bond Market Beats its Chest … Invertedly/Upside Down Yield Curve …. R – Word Predictor (Recession)
Some on Wall Street say the Bond Market is the smartest due to the fact that participants are only focused on repayment risk and time of that repayment. Compared to the Equity (Stocks) market were there are flows of capital, tons of complication with financials and mood swings by participants.
Given the Bond Markets high IQ status, when it speaks people listen….
Inverted Yield Curve as Bond Market Beats it Chest with a Warning
As a quick refresher, a normal yield curve will have lower rates for shorter terms and higher rates for longer…. simply because the longer the term the greater chance of a problem/stress/default …
Pardon my free hand, but it looks like this… the longer the time the greater the cost/interest rate
When the Bond Market turns upside down/inverts, it has a very good track record of predicting a R- Word!
Note on this long term chart, as the line drops below zero, the Bond Market is Beating its chest and inverting…. also note the grey area that follow are R-Words…
Using a shorter term chart, last week marked a strong inversion of about -.25% and closed the week off at -.20% note those are point 25% and point 20%…. far right below the line…
So it looks like the R Word is in the cards, not to worry we have been talking slowdown since December of 2021… so we are prepared….
Remember, Equity Markets are forward looking and will sniff out the recovery before it is seen…. Also, recall, headlines are the worst near the end…. Still a Ways to Go though!
Next up — Why the Fed is in a pickle and may only have an R- Word way out!
Have a Great “Inverted Yield Curve” Update Day!
John A. Kvale CFA, CFP
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Posted in Clients/Clients Only, Economy, FOMC, Forecast, Interest Rates, Investing/Financial Planning, Market Comments
Tagged 10 Year Treasury, 2 Year Treasury, 2-10's, FOMC, Interest Rates, Inverted, Yield Curve