Reddit Posts
FOMC next week: summaries of every Fed speaker's comments since the June meeting
FOMC Crib Sheet: Every Fed comment since their last meeting summarised
Occidental Petroleum Redeems 6.5% of Preferred Stock Held by Berkshire Hathaway: the mechanics of this redemption
Those Who Opposed The Fed Sank In The Titanic
Wall Street Week Ahead for the trading week beginning January 16th, 2023
Wall Street Week Ahead for the trading week beginning January 16th, 2023
Profiting from the yield curve: The 2s10s steepener trade
Why this is a weird time and the market is erratic and volatile
Wall Street economists are divided on FFR projections
The Fed is going to be lowering rates sooner than most people think
Bonds are massively undervalued and are pricing in a higher average FFR than what the Fed itself expects. We are in bond panic and much of it is oversold.
Bonds are massively undervalued and are pricing in a higher average FFR than what the Fed itself expects. We are in bond panic and much of it is oversold.
The Federal Reserve Announces 75bps Federal Funds Rate Increase
We are 100% on track to 4%+ on federal funds rate in the near future (potentially 6%) Why are/aren't we in store for a "Powell Shock" (Volcker Shock 2.0)?
Can someone explain the Federal Funds Rate to me?
Can someone explain the Federal Funds Rate to me?
Please tear my uneducated DD to shreds
Visualize how the Fed's forecasted tightening schedule has changed since September '21. A look at Dot Plots!
I predict no recession in 2022. So tired of the doom & gloom every time central banks tighten policy.
Inflation: What to Expect and How to Defend Yourself $TBT , $UVXY
Inflation: What to Expect and How to Defend Yourself
Current Stonker Market Outlook - Consulting Actuary - Bespoke DD Inside
Cramer says: Heed Brainard, Sell Stonk
Why can’t banks loan from the Fed Window and buy 1 year treasury?
If You Think Inflation Will Stay Around Longer Than Your Dad, Buy $TLT Puts
Black Scholes Risk Free Assumption in Rising Rate Environment
Mentions
If you research the historical pricing of JNK, you'll see that the NAV doesn't have any pattern behavior on the ex-dividend dates. It's unclear when you can sell for a profit because the NAV is reactive to market conditions, which includes not just actual changes in the FFR (i.e. the Fed's actions), but also investors' *speculation* about what might happen with the FFR. Also the type of bond and duration both matter. Junk bonds (high yield corporate) aren't as sensitive to the FFR, whereas U.S. Treasury bonds totally are. Longer duration is more sensitive than short.
Meshflesh40, seriously, how old are you? Do you know what the current inflation rate is on an annualized basis? Do you know what the inflation rate was in March of 2022, when the FED started its hiking policy? Powell has given ZERO indication of QE, rather, he has signaled that if inflation continues to come down then it would be appropriate to adjust rates to a "neutral" level, which, historically speaking (with inflation in the range of 2-3%) would put the FFR at 4-4.5%. You raise a VERY valid concern on the national debt, which is an argument you DID NOT make in your opening post. If you wanted to comment that the government spending $1.6 trillion more per year than they bring in (for context, the US brings in about $5.0 trillion and are spending $6.6 trillion) and you are worried about the sustainability AND the stimulating effects that brings, then I am all ears and, in general terms would agree with you, but that's not the argument you made above. Lastly, you ask "Does it sound normal", the answer is, again in generalities, yes. The Fed raises rates and lowers rates. The FED has always increased and tapered their balance sheet. The Treasury has always increased and decreased the money supply, depending on economic conditions and world conditions. This isn't to say that markets only go up, but, what I would say to you is remember 2022? That entire year was painful, the market did nothing of substance and consistently, and constantly it felt like, traded down. I suspect you weren't around in 2008-2009 but that one was a fun one too. I remember the talk on business shows being how the world was about to come to an end, from a fiscal policy perspsective. As folks from the early 2000's if markets go down, etc...etc... We are in a bull run right now. I own the SPY (as I have since 2007). The reality is that markets go up, markets go down. The difference now is that governments, world-wide, are more active, these days, in extinguishing significant consequential fires than those in the 20's,30's, 40's, etc...
It's a made-up narrative. Market is not really pricing in a lot of cuts. 6 month is 5.35% which is above FFR. So market doesn't even think a single cut will happen by August.
Yea fuck FFR, that doesn’t matter at all 
I'm sorry that statement, in my personal view is completely wrong. >"Don't look at economics to predict the future. If you spend 13 minutes a year on economics, you've wasted 10 minutes. Focus on your companies." The reality is that stocks are a finite good with incredible demand but extreme scarcity. It's called inelastic market hypothesis, likely leading to a Nobel Prize. Another poster provided these links, I'll repost them here: [In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis by Xavier Gabaix & Ralph S. J. Koijen](https://www.nber.org/papers/w28967) [The Inelastic Market Hypothesis: A Microstructural Interpretation by Jean-Philippe Bouchaud](https://arxiv.org/abs/2108.00242) As long as economy is booming, jobs keep being added, trillions in buybacks, 401k passive investing, etc. will relentlessly push market up unless something causes a shock of liquidity. Second, valuations are totally reasonable. NVDA has forward PEs in the 30s which is nothing considering its future growth and potential. You don't like NVDA? **GOOGL at 24 PE** is DIRT cheap assuming long-term FFR of 2% and historical term premia of 1.5%. Do a DCF just like Buffett's method and YES you will find it way, way below IV.
I'm sorry that statement is totally wrong. >"Don't look at economics to predict the future. If you spend 13 minutes a year on economics, you've wasted 10 minutes. Focus on your companies." The reality is that stocks are a finite good with incredible demand but extreme scarcity. It's called inelastic market hypothesis, likely leading to a Nobel Prize. [In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis by Xavier Gabaix & Ralph S. J. Koijen](https://www.nber.org/papers/w28967) [The Inelastic Market Hypothesis: A Microstructural Interpretation by Jean-Philippe Bouchaud](https://arxiv.org/abs/2108.00242) As long as economy is booming, jobs keep being added, trillions in buybacks, 401k passive investing will relentlessly push market up unless something causes a shock of liquidity. Second, valuations are totally reasonable. NVDA has forward PEs in the 30s which is nothing considering its future growth. **GOOGL at 24 PE** is DIRT cheap assuming long-term FFR of 2% and historical term premia of 1.5%.
The Fed has never maintained an FFR this high without a recession following shortly. Unless the Fed wants to blow the 'soft landing' and push us into recession, rates must come down. Not to zero, but (my guess) to about 2.5 to 3.0%. This is probably the correct long term equilibrium overnight rate. Given the current altitude of FFR, that's probably going to be about 6 cuts of a half point to a quarter point each. This being an election year has nothing to do with it (despite the fact some people will assume the incumbent always wants to goose the economy in their final year.) Inflation is the question. I think inflation is a dead horse: exclude lagged data from the CPI and it's well under 2%. However some well known economists like Larry Summers either disagree, or at least want to hedge their bets. This is the sole valid argument against immediate FFR cuts, imho. And yes, struggling overseas economies will benefit to some degree from US rate cuts. The US economy lifted the world out of the post GFC doldrums, and appears poised to do it again. How long that takes, I haven't a guess.
BTFP borrowing rate was originally set at 1 year SOFR. Not Federal Funds Borrow Rate (5.5%). Until January 20th, 2024, banks could borrow at 4.75% and lend back to the Fed at 5.25%. A guaranteed spread with no downside risk. Pure arbitrage. So the Fed on January 19th announced an immediate change to the terms of the program to prevent this arbitrage abuse. They changed SOFR to FFR.
only way out of inflation waves is liquidity crisis. Fed isn't going to go past the current FFR.
What are you talking about. Treasuries should go way down not up. Why would Fed do 3 cuts and just "stay there"? They literally said they are trying to get to 2% FFR.
What are you talking about. Treasuries should go way down not up. Fed isn't doing 3 cuts and staying there. They literally said they are trying to get to 2% FFR.
He’s guaranteed a hard landing at this point by not stamping out inflation when he has the chance. FFR has been paused for half a year, he can’t hike again without causing panic. He can’t cut or else inflation resurges with a vengeance. Fed fucked up really bad
We're talking about 3-4 cuts, not the FFR going back to 0%. Big difference between 0% and 4%.
Except rate hikes didn’t really slow down the economy, so it’s pointless argument to make. Consumer is spending and the economy is growing with about 5.25% rate, so the question should be, if the economy is working just fine with high rates, why neutral rate is at 2.5%? Cutting the FFR to 4.5% isn’t going to cause hyperinflation. It will actually cause nothing. There are a lot of disposal income in the economy and employment is at all time high, that is what matters.
Right because rates are still high. But Fed's long term target FFR is 2-2.25%. Once the cycle of cutting begins it starts a countdown where cash gets worse and worse.
Plus doesn’t a restrictive FFR hurt small businesses too?
Has literally no else noticed that this stupid ass chart is 14 months old? And FFR is at 5.5 unlike what this chart shows? Likely that this market is more analogous to 1994 than 2000; rates will stay elevated and real companies will do just fine.
Well, Yields are directly tied to FFR, but only inversely correlated to economy Right now, you get to pretend you’re a top economist and pick which you think is driving the yields, and in this moment, you’ll be right even if your wrong It’s nice
We're seeing yields spike again so the question is, are they spiking in response to FFR being at 5.5 or are they spiking because as u/alfapredator said economic growth is strong?
The only thing I saw, was the 10y following the same up trend from 1950 to 1980 then a non-stop downtrend to today, closely mirroring the overall downtrend of the FFR. And FFR is downtrending since 1975, because the US economy sucks rotting dick
BIL holds the shortest duration Treasury bills. These are bonds, yes, but since they have such short duration, they behave more like cash in that there is almost no price volatility. Look at the 5 year chart for BIL, which includes the run-up in rates since 2022 but also the Covid near-zero period: [https://finance.yahoo.com/quote/BIL?p=BIL&.tsrc=fin-srch](https://finance.yahoo.com/quote/bil?p=bil&.tsrc=fin-srch) It's pretty much as flat as can be. So you can see, because the duration of 1-3 month T-bills is so short, fluctuation in the Federal funds rate (FFR) doesn't do much to the NAV of this fund. Investors can get out as quickly as they can get in. What will happen when the Fed cuts rates is simple - the dividend paid out by BIL will drop accordingly by a similar amount. That's about it. Zoom in on the chart and you'll also see that it rises and falls predictably every month based on the ex-dividend date. But the NAV doesn't react dramatically to the FFR. In short, you 're not really a bond investor holding this. It's a cash equivalent for all intents and purposes, albeit at a higher rate than typical bank accounts, and with the benefit of being state tax-exempt.
Why compare other countries? Well it’s to illustrate it wasn’t a US only problem. The last round of stimulus was a tiny drop in the bucket compared to the overall stimulus, most of which were the business loans and extra added to unemployment. The stimulus checks sent to everyone were a tiny percentage of money given out. It would make sense for Biden inheriting a country in the middle of a pandemic to spend more than Trump who inherited a country on a long bull run, to spend more. During the bull run years Trump should have raised taxes, trimmed spending, and helped reduce deficit. Just like people save when years are good, to have buffer when things go badly. But trump threw a hissy fit when the Fed was raising the FFR.
Do you think the Chairman is the only person responsible for the FOMC committee's decision making on the FFR.
They're restrictive in the sense that economic activity was heavily, heavily spurred and skewed by ZIRP and QE. Raising them as quickly as they did and eliminating QE in favor of QT has created an environment where lots of cheap debt across all sectors has to now be serviced with much higher costs associated with continuing to carry it. As for how they stack up historically, an FFR of 5.5% is definitely pretty normal for the last fifty or so years but very, very high when compared to the last fifteen since the GFC.
Keep buying NVDA and META then. Let us know how it works out for you when the FFR remains unchanged until June lol.
The Federal Funds Rate is the rate that banks are borrowing reserves from each other overnight. It is the US Federal Reserve's benchmark interest rate that they target when conducting monetary policy with the dual goals of maximum employment and stable low inflation. For the purpose of my comment above, it is the current interest rate on cash. Similar rates I could have used are the 3-month T-Bill or SOFR. The 10 year treasury is a tenor of bond that the US Treasury issues to borrow money. They also issue various shorter bills and notes and longer bonds, up to 30 years, but the 10 year is a commonly used benchmark of intermediate term bond yields. BND tracks the aggregate bond index, which is a mix of US treasurys, agency backed mortgages, and investment grade corporate bonds. Overall it has an intermediate duration and its yield and price action will be fairly similar to the 10yr, though the Agg does have more of a credit component. I use the 10 yr as a proxy for what the market expects cash interest rates like FFR to average over the next 10 years. It's not a perfect comparison because longer term bonds can have a term premium over cash (that is, they yield more than cash because of the higher risk), but close enough for a initial estimate. For a more precise account of the markets expectations for interest rates over the next year or so, we can look at federal funds futures: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
That makes sense that it’s already priced in. Could you elaborate on the FFR and 10 Year Treasury?
The market is already pricing rates to fall. Effective FFR is 5.33% and 10 year treasury is 4.06%. If rates fall below 4%, BND would rise in value. If rates do not fall that low, BND would lose value.
spoken like someone who doesnt actually understand bonds the collapse of the bond market in 22 was intermediate and long term bonds, effective duration of 6-20+ years USFR contains floating notes, which adjust to the FFR + a spread. BIL invests in 1-3 month treasuries, which technically do contain a duration risk. If the rate were to increase 100 bp, the value of a 3 month treasury would decrease by 0.25% (calculated as 1% * duration of (3/12) years). However, this is just paper, if you hold it to maturity, there's no loss. amazing that redditors are upvoting your comment tho
It comes from fed funds futures. You can go look at implied FFR from various futures contracts. That’s the what the CME fedwatch is based on.
More people should read this. Like everything else… there is a market. People are actually putting money on FFR futures contracts and that pricing is creating the table above.
Only getting away with this because the dollar is the reserve currency. Who knows how long the fed can keep the market up. We know that the market can not withstand 6% FFR. It’s funny because that is a very low historical average. So what in 10years with more debt we won’t be able to withstand a 3% FFR? I believe overall the turning factor is still our US Deficit and ~34B debt and growing fast. The fed has been able to prop the market up but at what cost and for how long.
Also the higher rates get in a relative sense, the more likely for a flat or inverted yield curve. If no one believes the fed will ever go above say 20% and the FFR is at 20%, then the longer term maturities will have no risk. When rates were at essentially 0, there was a lot of risk for rates to move up since they are low. So it would be almost guaranteed to have a positive yield curve
Yes 20 years. You can infer it from the yields of tbills/notes but I think usually people are using FFR futures which CME publishes a nice dashboard for https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
> Wouldn’t the risk of easing off too soon and running into raging inflation again be greater? "Raging" inflation? No one is talking about going back to 0 FFR (or world wide supply chain disruption). Inflation quickly dropped from ~8 to ~3. The biggest risk now is overshooting and entering a deflationary spiral.
I think it is a separate number - the FFR minus inflation. It is supposed to represent what we really get from short-term inflation interest when we factor in the loss of purchasing power. So it was negative at times, which pushed investors to equities and to leverage real estate. Short term yields (<3 months) seem to be the same as the FFR.
The real rate of interest is the nominal rate (the 5.25% FFR) minus inflation. So if inflation (fed measures are CPI and PCI) drops, it causes the “real rate” to go up. Powell stated it (the “real” rate) would then be overly restrictive, and the FFR would need to be lowered. I don’t know what Powell thinks the “real” rate should be.
The debt ceiling being increased simply means the government is allowed to pay its bills. It does this via the U.S. Treasury. T-bills are sold to institutions and investors purely to put funds into the U.S. Treasury to pay our bills. The point I was making is the Fed may slow QT. They may not. What it appears they will not do is more QE , more stimulus or lower interest rates before they meet their mandate of lowering inflation to the 2% target. We are in pretty dire straits due to the already unorecedented unlimited QE that occurs. Getting out of where we got to intact is a totally untested theory. I can say with confidence I wouldn't buy the "soft landing" narrative. The economy is an incredibly complex machine and the FFR an incredibly blunt tool. Trying to fix a computer with a hammer usually doesn't result in anything more than having to pick up more pieces. All of that said, I'm ultimately not sure what the point of this post actually is. Just to tell us liqudity is sloshing around? Or an attempt to explain the process of how we got to an insolvent Fed? Again, if there was a purpose, it isn't clear.
I'm not sure if this was a simple typo or it flaws your thesis but the first rate hike wasn't until 2022, in your points above you indicate this occurred in March 2021. Additionally, as the Federal funds rate rises, the ON RRP yield rises alongside it. It's quite literally tied directly to the FFR. You could conclude quite simply that less and less dollars entering the ON RRP facility since June 2023 simply means those dollars are either going into other investments (very likely given that bond and t-bill and other long term, low risk yields rise alongside the FFR) as well as there simply being less total liquidity in the system due to ongoing quantative tightening resultijg in the shrinking of M1/M2 money supply. As for what Fed presidents say, you'll quickly find they often act as politicians more than bankers. Their job tends to be soothing markets and keeping everyone guessing more than it is to let you know what's coming next.
You mean a straight bet on the FFR? Or just replace the short-term treasuries with SOFR?
If you extend the timeline then yes, you can say that the US market never falls but goes through periods of minor correction. But even minor correction ( or "crash" in our parlance) are now rare not only because of big bag institutional buyers but primarily because of the feds. Post 2009 the fed indicated they are now willing to jump in and drop money from helicopter if needed to calm the markets. This is why we've seen four rounds of QE, 10+ yrs of near 0% FFR and a fed balancesheet which went from around $700b to $8.3T. They can continue to play this game for years or even decades until USD loses the global reserve currency title, but that is something people 50 or 100 yrs from now need to worry about and not us.
JPow already said rates will start to be cut long before inflation hits their 2% goal because they are afraid of overshooting and being blamed for yet another recession. When is long before inflation hits their 2% goal? Very soon at this pace. Do I think we're going down to 1% or 2%? No. But in 12 months we'll have a FFR below 4.5% unless China invades Taiwan.
So... a lot of this does related to the tbill market but I think you have some things wrong in your interpretation and the history of how we got here. What really drove the ONRRP facility to start growing in the first place was a shortage in the supply of short term debt for institutions to put cash in along with an increase in credit issuance due to people refinancing debt at historically low rates back in 2021. Without going into too much detail we ended up with a situation where everyone took on excess debt at low rates due to fears over COVID causing credit market freezes or the need of a huge level of government spending to get the economy through the crisis. Neither of which was really needed and led to a shortage of overall debt issuance, but particularly short term debt issuance as companies and the treasury looked to take advantage or low rates. As a result the summer of 2021 saw short term tbill rates basically hit zero and start causing a ton of pain for banks which would eventually culminate the bank runs we saw last year. There's a long explanation for how that all unfolded but the relevant part here is that the entire goal of the ONRRP was to suck up excess cash in the system and help balance the supply of treasury bills with demand for them. This can actually be verified by going through H4.1 filings from the Fed and looking at the total amount of bills they're holding, it's actually slowly decreased over time. Now a big aspect here is what caused the huge demand for short term debt in 2021 and it was simply well founded concerns about inflation and the FFR having to increase going forward. This continued throughout 2022 as a high pace of rate hikes did come to pass and everyone wanted short term debt to insulate themselves against it. Things started shifting in 2023 as inflation subsided the pace of rate hikes slowed and stopped. As the consensus shift towards rates peaking issuers looked to take advantage of the expected fall by issuing more short term debt which provided a good alternative to the ONRRP facility and allowed the Fed to wind it down at a blistering pace. But it wasn't just the the Fed's ONRRP that was seeing a decrease in deposits but another very large part of the financial system I've neglected up to this point: banks. Banks started seeing their deposits and asset levels decrease as people moved money out into higher yield investments. Another big function of the Fed is provide reserve accounts for member banks and with their deposit growth slowing and shifting as well that allowed for a net drawn down in assets on the Fed's balance sheet. But there's a certain level of bank reserves the wider financial system needs to actually function and deal with shocks as those same reserve balances are also required to do interbank settlement, settle payments to and from the US treasury and provide a super liquid asset to meet regulatory requirements. That's where the hesitancy is coming from in doing QT at too rapid a pace once the ONRRP has reached a low enough level. For it's part the ONRRP was always temporary and the Fed always participated in the short term treasury market directly to actually enforce its rates via its day to day open market operations so it can always just buy short term treasuries if the ONRRP vanish, but that does ultimately increase the size of it balance sheet too and impact the pace or viability of QT. Essentially when it came to balance sheet reduction the ONRRP was the low hanging fruit, it could be done rapidly and without much concern as long as short term rates remained within the Fed's target window but if overall bank reserves get too low it can risk financial instability and drops in liquidity like the repo crisis we saw back in 2019 when the Fed's last QT operation essentially allowed reserves in the system to run a bit too low. Currently the Fed runs what's called an 'ample reserves' system to administer rates to enforce their rate target via ONRRP as a rate floor mechanism (this is why they expanded it in 2021) and IOR serving as an anchoring point. There's actually good series of how this works from the Federal Reserve here: https://www.federalreserve.gov/econres/notes/feds-notes/implementing-monetary-policy-in-an-ample-reserves-regime-the-basics-note-1-of-3-20200701.html It is about keeping short term credit rates stable but not really about the Fed directly purchasing tbills so much as its ability to provide alternative places for cash via reserve balances and the ONRRP.
At least for the last 3 years that I’ve been tracking FedWatch, their 3-month FFR estimates have been 100% accurate. They have been wrong about further out but that’s also harder to predict.
FRN's are paying like 5.12 still. https://digital.fidelity.com/prgw/digital/research/quote/dashboard/distributions-expenses?symbol=USFR 13 weeks are at 5.22 https://finance.yahoo.com/quote/%5EIRX?p=^IRX&.tsrc=fin-srch TL;DR overnight rate and FFR are still at that level. All longer duration yields are forward-looking and the market effectively "bets" what rates will be at that time, more or less. This is called a yield curve inversion when short rates are much higher than long rates, and generally a yield curve inversion precedes a recession, but not always. Yields tend to make more sense when the curve is linear and duration risk payout is actually positive.
All good until papa Jay plunges us back to a FFR of 0.0% and those MMFs pay .01%, even at the depths of COVID, HYSA still yielded around .5%.
Rates on treasuries will still be pressured to at least stay near current rates even if the FFR is cut slowly due to the amount of QT left to be done (i.e. over a trillion in treasuries held by the Fed that needs to come off their books). As those and the treasuries from the Treasury *itself* are sold into the market to fund government activities (and new bills from Congress), the demand destruction (or oversupply) should be reflected in the rates.
I think the problem is that you're not being clear in your explanation and in describing the behavior you expect. My first reaction is that your justification for the behavior is off because it basically comes down to "efficient market hypothesis" and about pricing in expectations, which the market doesn't really fully work that way to the extent that efficient market hypothesis suggests and there are conflicting mechanics. Now aside from my quibble with your explanation, the problem ultimately comes down to the fact that after reading several of your comments, I don't actually know what you expect the market to do... Do you expect it to sell off once we hit a bottom, or run until a tightening regime? The way your argument is phrased, it makes it sound like you expect a sell-off at the rate cut bottom just because of market expectations and not because of any external event, and I think that's what people are having an issue with. Or are you expecting that we'll have a short decline when rates drop because of fear of an economic issue, and that will turn into a further bull run? That's a little more interesting of a perspective if that's what you're saying. My gut also says you should stop leaning on that chart. Correlation is problematic when you're trying to argue for causation and I picked a few periods in the past 20+ years and it didn't seem to me that the S&P and FFR chart were telling your story exactly even if the trend correlation matched with the expectation. And that's important because 99% of the people in here are trying to time the market. But I may be completely misunderstanding you and there are added complexities that we're having a miscommunication on... but if you explain the pattern you expect with more detail, it may help.
I mean RKT is also a mortgage company and mortgage rates have dropped as well. I don’t think the FFR will drop anytime soon it’s why if I had to take a position in fixed income other than rolling t bills right now it’s be to short TLT
>I don't think the Fed needs to cut if the economy is running hot, since that just invites more inflation? Fed should only cut rates if economic growth is slowing. My soft landing, I mean a time when the economy is not running hot - so we are in agreement here. But if I said something that seems to the contrary, please flag it. >I also think US government interest expenses is a big factor. This is where it gets interesting. The Fed might cut the FFR all they want, and the 2Y will kinda respond to that, but the 10Y and higher durations will price a whole lot of other things in. If Treasury issues more debt than expected, the long end will go up from all the supply, irrespective of what the short end does.
> and reduce the purchasing power of Americans. That’s ignoring plenty of elephants in the room. > we've kicked the can down the road by dropping interest rate the entire time Rates are set by the market and influence by the FFR. *We* didn’t do anything. >We've now somewhat reversed course and raised rates, which is why it's actually starting to cost us. We didn’t reverse course on anything. The economy ran hot and the Fed raised their lending rate to as a means to cool it off. 2 years of elevated rates is a blip over a 40 year period.
Never underestimate the feds! I have been predicting crash/recession/pull back every year since 2012, and i have been proven wrong every single time! No one in 2009 could see fed cranking their balancesheet from $700b to $8.5T ! No one thought they'll keep FFR below 1% for almost 10 yrs! No one thought we'll increase our money supply by 27% in just months during the pandemic! Bottomline, don't underestimate the feds. If there is a significant risk of a prolonged recession or crash, they will carpet bomb the market with liquidity! If you are young, then stay invested in index or quality stocks and ride out the turbulence. S&P has returned an average of over 10% since 1957.
>Buying stocks, pushes stocks up. > >Buying bonds, drives yields down, which also makes equities look better, so equities get driven higher too. > >Am I following? Correct. ​ >Ok. Here's where I lose it. At no point here, have equities actually become legitimately "cheap." Why is money jumping back into stocks at a, say, 5% earnings yield, when bonds, despite being bought like mad, are still at a 4% yield? Why don't bonds get bought down to 3% let's say. Because "cheap" isn't the only factor for buying risk equity. In fact, it's the worst factor. Most gains come from trending momentum positions. "Cheap" hasn't been the way to buy stocks for about 30 years (and even then that was debatable). In fact, most strategies that chased downward heading stocks against fundamentals in that period lead people into value traps rather than gains, and often worse into DCA'ing into stocks that were in decline. Now I know you're talking about trading against positive cash flow and earnings and all of that, but the earnings yield doesn't predict the valuation... it's the other way around. Valuation front-runs earnings, and then corrects once earnings come out.... but it still only corrects to a relative position that relates to the addressable capital in the market. ​ >"Well, because the FFR is 5.5% and inflation expectations are 2.5% so, one, there's a nice MM option, and two, there has to be a real yield." > >Ok, so why doesn't money come out of stocks and bonds into MM? See 2022 for that I guess. Although most of that was probably checking accounts. > >So the heart here is that more capital means more money chasing assets and lower yields for those assets, especially stocks. Right? > >I just don't entirely understand why that is the case. For every dollar that goes in (buy) a dollar comes out (sell), right? So someone is selling every time someone is buying. But the buyers are bidding up. Stop thinking about it as a purely zero sum game. It isn't. I know we tend to talk about it that way, but it isn't. There's capital sloshing around in bank reserves, slowly being released to investment houses. There's capital (a LOT of it) in those money market funds. And all of it relates to institutional and personal portfolios. (And most of that money is institutionally managed, NOT checking accounts...) You have to think about these things as portfolio components in long term holdings, since institutions own 80-90% of the market at any given time, and that's how they manage their positions. What happened in 2022 is all part of the same process: When the Fed began raising rates, the projected risk-free rate of return went infinite, for all intents and purposes, as a risk function against the portfolio. Note: I \*never\* said that money can't come out of stocks and go into money market accounts or bonds. I never said that, not once... what I said was that there was no obligation to push everything down to those base valuation levels Hussman is assuming (and has continuously wrongly assumed) that everything has to come down to by virtue of fundamentals alone. When the risk-free rate went infinite (unknown) they \*needed\* to liquidate portfolio risk assets to make room for hedging with MMs and bonds, but also to cover reduction in long term bond devaluation, so that the portfolio doesn't get offsides on the bond side. That explains 2022. Again, I'm not arguing that risk equity premium isn't a thing, I'm arguing that it's a cycle and that addressable capital to the market is a variable in that cycle, and it is. But this process also explains 2023, which those betting on the return to risk premium in 2021 and 2022 got washed out during... because they missed the multi-cyclical aspect to the process. And it makes a lot more sense if you think about all of this as components in a long term portfolio having to work against each other based on a return strategy rather than a binary choice between bonds and equities. Keep in mind, the market is not a barometer of the economy or corporate earnings, those are just components to how some people trade. The market is literally a market where the product is return, and return isn't just profit, it's speculative, it's potential, it's technical, it's based on hopes and dreams and momentum. That's enough to chase. There can be no fundamental reason for a stock to be going up, but people - including money managers - will still chase it because of market parity, competition, greed, etc. You're trying to rationalize the market. The market doesn't care if it's rational. What the market is... is mechanical. ​ >It basically appears that stocks are being valued with no risk premium, and there is no historical precedence for this outside of bubbles, but the capital flush justifies this somehow. Why, exactly? It's not that there's no risk premium, it's that your historical observations about risk premium and bubbles come from periods of flat money supply. Once you realize that money supply is not evenly distributed (I.e. primarily institutions and the wealthy can address it, and they primarily use it for investment) and that the money in the market does not match the money in the economy playing into fundamentals, and once you realize that return projections aren't solely based on earnings but also other factors... the contradiction you're citing dissolves. Bubbles burst because no more capital can enter them, not because they're "expensive compared to 100 years ago." As long as the money is going up, and the money chasing the market is greater than earnings returns, then the dollar per earnings dollar in the market must also go up. That's why the CAPE ratio mean is going up over the past 20+ years. Basically, people saying this is a bubble... do not understand what makes a bubble a bubble. ​ >I don't think that is a valid assumption. It is not hard to imagine a reality where capital is flush but equity risk premiums still exist. Or am I crazy. If I am, please make it evident to me. Appreciate the discussion. The good news is that your perception that it's a bad assumption comes from a misunderstanding, as the argument is not and has never been that risk equity premiums don't exist, it's that the mechanics of market fundamentals change in a market with differing capital supply traits and my argument is not a refutation of risk equity premiums, but rather based on how they work and how institutions actually trade positions.
Ok, I read this again, let me see if I'm following and how it lands. So, cash is everywhere. That cash goes into assets to find a home. When buyers flood into bonds, that buying bids them up, yields down, and makes equities more attractive again. Since there's so much capital, there's plenty left to chase equities back up. More cash, means more money buy all assets. Buying stocks, pushes stocks up. Buying bonds, drives yields down, which also makes equities look better, so equities get driven higher too. Am I following? Ok. Here's where I lose it. At no point here, have equities actually become legitimately "cheap." Why is money jumping back into stocks at a, say, 5% earnings yield, when bonds, despite being bought like mad, are still at a 4% yield? Why don't bonds get bought down to 3% let's say. "Well, because the FFR is 5.5% and inflation expectations are 2.5% so, one, there's a nice MM option, and two, there has to be a real yield." Ok, so why doesn't money come out of stocks and bonds into MM? See 2022 for that I guess. Although most of that was probably checking accounts. So the heart here is that more capital means more money chasing assets and lower yields for those assets, especially stocks. Right? I just don't entirely understand why that is the case. For every dollar that goes in (buy) a dollar comes out (sell), right? So someone is selling every time someone is buying. But the buyers are bidding up. It basically appears that stocks are being valued with no risk premium, and there is no historical precedence for this outside of bubbles, but the capital flush justifies this somehow. Why, exactly? I don't think that is a valid assumption. It is not hard to imagine a reality where capital is flush but equity risk premiums still exist. Or am I crazy. If I am, please make it evident to me. Appreciate the discussion.
What I gather is that more capital means lower valuations across the board, right? It makes sense to a degree. Yet, we don't see this in bonds. Perhaps the FFR sets the floor there. Idk, it still seems like no matter how much capital is in the market, returns are relative, risk exists, and a rational investor is still going to compare the yield of stocks vs bonds and look for a risk premium in the former because they're clearly more volatile. Maybe things are fundamentally different in a way neither Hussman nor myself understand, but more likely is that whatever further upside we see is just a precursor to some event(s) which normalize valuations. I'll be hedging both sides until then.
Inflation isn’t 4% and 6% unemployment isn’t the terminal point. Unemployment shocks are nonlinear and generally difficult to predict. Inflationary pockets can be targeted and excised by other means besides the sledgehammer that is the FFR. If you paired unemployment spiking with a credit crunch and housing way pumped like this, you’d be looking at an outcome worse than 2008 easily.
Duration is a function of the amount and timing of the bond's future cashflows. Price change is approximated by duration times change in the bond's yield. The bond's yield is influenced by expectations of future FFR among other factors. Note that expectations of the average FFR over the next ten years can fall at the same time that FFR itself rises. Hiking rates tends to cool inflation and economic growth, which would then lead the Fed to lower rates later on.
>Duration is how much proportionally the price of a bond changes in response to a change in its own yield. Correlation between a bond and the Federal Funds Rate, is how closely changes in its yield mirror changes in FFR. Thanks again for you explanation and time. I am still confused on this. Following your definitions, isn't duration indirectly impacted by the FFR? My logic is that a bonds own yield is a function of the FFR..no?
> I'm also sure on the backend the Fed could keep up or accelerate the pace of QT even if the FFR comes down. True but it's extremely confusing messaging. Honestly I have a bit of whiplash myself.
The Atlanta GDP Now forecast gets most accurate like 2-3 weeks before the data actually gets released, usually 1% as the root mean square error the day before. We get that on January 26th, so probably min-January is when it really gets telling. We only get the final estimate for Q4 on March 30th. I'm also sure on the backend the Fed could keep up or accelerate the pace of QT even if the FFR comes down. Whatever happened to the TGA refill or CRE slow-moving crisis? I'm sure there will be some disinflationary forces still working their way through. And energy being a dud will help. Another point is that 3% inflation and a roaring economy is a big boost for elections and may keep out orange man. (If that is something you care about) Versus generating a recession.
Summary of Economic Projections they released right before the press conference. It forecasts a median FFR of 4.6% by end of 2024, which is essentially penciling in 2-3 rate cuts.
The FFR could go lower than that and sooner if they need to spur growth and spending. I’m basically saying the Fed dot plot is wrong which isn’t exactly brave of me.
Sometime in 2026 is the target for 2% inflation and 2.9%FFR. Do you really think they will wait 3 years or is it more likely they refinance?
A while back I posted all the Treasury purchases as part of QE4 during Covid from data here: https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details Unfortunately I can't find the link and the drive I had it stored in died. But basically around 70% of QE wasn't long-dated but short-dated. In other words, $6T in QE was required to suppress and help maintain FFR + short yields, not just long-dated! I don't think Fed will be able to cut without printing again. The fact the debt is short-dated won't help as it matures quickly and they are faced with the same problem but bigger in short time. Obviously if deficits close this won't be a problem. But $2T a year in deficits is just effectively QT on steroids.
Duration is how much proportionally the price of a bond changes in response to a change in *its own yield*. Correlation between a bond and the Federal Funds Rate, is how closely changes in its yield mirror changes in FFR. A 30yr bond with 17yrs effective duration may not be very sensitive (correlated) to changes in Federal Funds Rate expectations, but may still move more in price than a 2 year bond which is very correlated to FFR but only has 1.5 years duration. https://imgur.com/a/naGl9sK
So you think the Fed sets rates. How quaint, LOL. Look at a historical chart of the 2YR Treasury and FFR. The market leads, the Fed follows.
Just because the FFR is 0% doesn't mean longer term rates will drop to 3% or less. However, I kind of agree with you for a different reason. I think deflationary pressures still exist in the global economy relative to the US, and will re-assert a lower rate environment (at least down to 4 or 5% if not lower) for a while. I don't see that going away until about a decade from now... at which point I expect inflation and rates to increase at least a point or two each.
Well, the Fed told us last meeting. https://imgur.com/a/ZCkwzvt If you don’t like to read Fedspeak, there are two main factors to why it dropped. 1st - short bill rates moved higher than the RRP award rate. It’s more attractive for money market funds to pick up extra basis points by purchasing longer maturities. (Remember MMFs avg maturity right now is around 30days so think 1-2 month bills when they buy) 2nd - whilst the Fed was hiking, often short bill yielded more than the RRP but MMFs held off. Their avg WAM back in January was under 10 days. Why? Because if they bought longer maturities and the Fed tightened, those purchases would be underwater (relative to yields available after the tightening). When the Fed signaled they were likely done tightening, which was end of May if I recall correctly, watch the RRP use plummet. It was safe to swim in the longer maturities and thats what occurred. And after hearing the Fed comments today about tightening further if needed, keep this is mind when looking at the RRP. If market thinks Fed will tighten again, RRP use will rise. The opposite will occur if they think an ease is coming. And finally, unless both the Fed and the SEC change things, the RRP is **never** going back to zero. Two reasons… 1. Back on 6/17/21, the Fed raised the award rate to 5bps **above** FFR. This allows GSEs (Fannie, Freddie, etc) to park their excess cash in the RRP and get the extra 5bps versus earning FFR at their Fed accounts. Since that date is over 2 years old, you can historical search the data before and after 6/18/21 and see the difference and the exact amounts by each GSE. It’s usually around ~120bln but that money will never leave the RRP unless the Fed lowers it. 2. The SEC changed then amount of cash a MMF is required to hold in cash each morning in case of withdrawals. Went from 10 to 25%. The RRP occurs at 1pm EST, so MMFs can have the cash on hand through the morning and reinvest at the RRP. So sadly, there is going to be perverse interpretations of the RRP for many years going forward.
The most likely outcome for stocks 12 months from now is positive returns. However, the risks are high. FFR is still above 5%, and the line between cooling inflation and crumbling economy is thin. The real questions are whether the risk and reward is balanced, and how much relative exposure to equities does that justify. Valuation measures which have accurately predicted 10 year returns have been flashing red for a few years now and the expected path is absolutely negative, and significantly underperforming t-bills. Timing this however, even in a 12 month horizon, is impossible. Yes the market is very expensive. But the most common “next step” for an expensive market is to become even more expensive. No one knows when or what will cause a reversal. Unlike market gains, which come like an escalator, marching up over time, market losses come like an elevator down - fast and swift. The median wall st 2024 target for the S&P is ~ 4900 per my observation. That’s about 7% higher than we are today. For my money, I’m holding funds like JAAA which pay me 7% with a fraction of the downside exposure of equities. I’ve also been holding some regional banks like KEY and WAL which have represented enormous asymmetric upside this year. They’ve carried my portfolio to a 25% gain Ytd despite my 65% allocation to safety. In my retirement accounts, I still hold the indexes, but it’s dialed down from my typical exposure. TLDR: The median outcome for 2924 is positive but the average outcome likely has asymmetric risk. The 5-10 year horizon is worrisome given very high valuations, and the risks of both persistent inflation and thus persistently higher rates, and an economic slowdown where we see both higher unemployment and an earnings recession.
It seems like we're not out of yield curve inversion territory yet. You could lock in 5's or 10's, but according to the Fed they aren't really intending on cuts soon. Something like USFR and hold would have outperformed up until October of this year since the market kept pricing in cuts that never came. That could continue to be the case, and you'd make a 1% premium for betting on "stable at 5%" for the FFR. However, if the inverse is true, and something major breaks, a 5Y or 10Y is a really good hedge to be able to buy the dip, since your return would multiply by the remaining duration * expected future rates.
"ATHs at 5.25-5.50% FFR" was not in my play book this year
The pause is already here. Last 6 months of core PCE prints: 0.3, 0.2, 0.2, 0.1, 0.3, 0.2. JPow, friend of Wall St, will not take the FFR to 5.75% with inflation running at 2.5% annualized.
Not when you’re well above inflation target and have plenty of FFR buffer to loosen credit conditions.
Opportunity cost: Simple solution is to get a bond with a coupon. You get the risk free rate for taking no risk and so there's no opportunity cost. Deficits: I actually think QT is stronger medicine than rate hikes. Look at the timing - QT started in June 2022 and inflation started falling the month after that, when the FFR was still <1%. More importantly, if 5.5 - 5.8% deficit is inflationary, what happened in 2010, 2011, and 2012 when deficit/GDP was much higher than it is now and inflation was minimal?
I’d add that as inflation further decreases, the delta between the FFR and inflation widens. The Fed should cut rates to maintain the same delta, in order to maintain the current level of restrictiveness in the market. If the Fed maintained the rate at 5.5 and inflation went down further, the market would feel that as a more restrictive environment compared to current levels.
So, first, your premise is wrong. Falling interest rates do NOT generally lead to higher equity values. The fed most often only cuts aggressively when the economy is in serious trouble. 0-1% FFR is not stimulus. High unemployment and credit contractions are far more impactful to corporate earnings. The answer to your question is dependent on your timeline. If this is money you can invest for AT LEAST a decade: Yes, put it all in VOO. If this is money you want to be liquid within 5-10 years, consider putting half in VOO (or COWZ) and half in BINC or JAAA. If this is money you might need very soon, do not even consider it. Needing $130k soon is probably unlikely right? It is most likely in your best interest to DCA into higher returning assets. Just don’t think falling FFR and a recession make it some amazing time to buy equities which are on the upper bounds of historical valuations. Be bullish America, but on a long time frame.
If this is going to be judged on short term performance, dude, TAKE YOUR PROFITS. After this performance with these economic risks, and 5.5% FFR, what else do you want?? Take profits and redeploy into QQQ, VOO, or my favorite, COWZ.
Being SPY Bullish now at around $27 from the ATH with Fed Funds Rate at their '07 highs seems nuts. During SPY's ATH in Jan '22 FFR was 0.08% 
>They are pushing the stimulus pedal right now...lol. There's a massive difference between ZIRP stimulus with net interest costs at 1.6% of GDP and doing it at 5%+ FFR with net interest costs of nearly 3% of GDP (and growing), *"lol"*. While I'm bullish short term, that doesn't apply at all going into spring and the new year as far as I'm concerned. My current focus is uranium, which is up 60% YTD. I've been building and reinvesting penny positions in that industry since 2019, so rather than enjoy the brief window of pseudo-stimulus we've got going on now (compared to the authentic stimulus we had 2 years ago), I'll stick with stagflationary plays instead. [You should be careful going too heavy on the long side](https://twitter.com/dampedspring/status/1726240176425582756), especially on microcaps, if your timeframe is longer than intra-week/month. While there is definitely money to be made in microcaps overall now, the phrase "Picking Up Pennies in Front of a Steamroller" comes to mind. Different strategies for different environments.
u/tachyonvelocity Yesterday you claimed that it might actually be wise to bet on leveraged long-term bonds. IMO bonds are terrible and stocks are still the play. https://fred.stlouisfed.org/graph/fredgraph.png?g=1byco Here's historic spread of 10Y to FFR. As you can see, we have started to uninvert and uninversions tend to continue into positive territory and tend to keep going that way. Often peaking at a spread of 3.3 or even higher 3.9. Assuming that 3% FFR is the lowest Fed will go given their target of 2% inflation, 10Y is very much FV, perhaps even overvalued.
Not sure what you're looking at, if you compare FFR to the 2-year yield over the last 2 times the FFR was this high, inflation lower than FFR and some period after the last rate hike (5.25-5.5), 2001 and 2006, the 2-year yield was usually at least 25-50 bps inverted to the FFR. This means if inflation isn't going parabolic again, the 2-year should at least be capped at 5%, it is currently at 4.9%. In fact with all the hand-wrigging the past months about inflation going up again, 4.9% rGDP, US debt levels, international selling, bond vigilantes, government shutdown, the 2-year hasn't really gone anywhere and did not dis-invert to the FFR. It was only long duration that moved up, which made a lot of sense as this move was likely due to high rGDP. I posited that the 30-year could not move past much higher than 5% as long as the 2-year did not move higher and this was confirmed with the 30-year holding above 5% for only a few days. So no, bonds are surely not "priced for 3% FFR." Since the Fed is likely to hold for at least 6 months, it's possible the 2-year yield will test 5% again and that would be a decent buying opportunity for a nice equity hedge. As for the argument that "we aren't going to 0 interest rates again," we don't need to, as only a mild recession like 2003-2004 would cause FFR and the 2-year yield to fall to less than 2%.
Problem is arguably bonds are already priced for 3% FFR.
Seven months of FFR above 5%… not sure folks understand what’s happening under the headline surface…
I want him to raise FFR by 15bps and say "I am the CEO of SPY, bitch."
I would just add that open market operations are not the primary means the fed uses to adjust the FFR anymore and haven't been for awhile now. https://research.stlouisfed.org/publications/page1-econ/2019/05/03/a-new-frontier-monetary-policy-with-ample-reserves Its mainly the interest on reserve balances and overnight repurchases agreements that the fed uses to adjust the FFR these days since the ample reserve environment we're in now isnt very responsive to the small adjustments in money supply from OMOs.
Guggenheim anticipates 3% FFR by first half of 2024. But even if they don't, once short run rates go down low enough it still makes Treasuries very profitable for banks to buy. They can even arbitrage a bit by borrowing from the Fed discount window at 3% and buy 5% Treasuries if it came down to it. Assuming inflation is 2%-3%, boomers begrudgingly get out of cash into long-term bonds again.
Agreed. Average time between peak and decline on the FFR over the past 40 years is 189 days. That would put us med Feb 2024 when we would start to see a decline in the FFR.
You're spot on here. I was looking at the JPM balance sheet while researching this concept before posting. JPM has the inside scoop on the market, and they see the market tank coming. They put over 20% cash on hand in the past quarter. Because of this, they are staged to buy up regional banks' balance sheets and consolidate the banking system under their name. Because you brought some good info to the discussion, my only advice is to watch the 10y yield and the Federal funds rate. When they are equal, that will be the beginning of the recession and a good indication to go Short banks and hold cash, once the market takes a dip, flip cash for assets Since everything will fall with recession fear and, after the smart money moves, assets will gain due to dilution of the dollar through money printing. The 10y: 4.5% FFR: 5.33% Last note: Notice how the 10 year was growing for the past 6 months and the market was dropping, recently, the 10 year fell from 5.0% to 4.5%, this will give the market a final jump before the markets fall to a full on bear. [Overlay the 1/10y yield with the s and p with a lag, they line up 1:1].
It’s a great deal. But I still prefer my 240 and 360 month instruments that pay almost 5% and appreciate in value 30-50% if the FFR comes down, which is almost guaranteed to happen sometime in the next 20 years.
They’re already higher than the FFR, what you mean
> Do MMMF’s have a correlating relationship with interest rates? Yes. That's the entire damn point. "Interest Rates" is ambiguous. What people tend to care about is the "Federal Funds Rate", or "The Fed Rate" for short, often called "The Overnight Lending Rate". Overnight lending is just that: its a loan for today that's maturing tomorrow. The Federal Reserve offers a rate, and this is the rate that major-banks trade with the Fed itself. Of course, banks trade money to **each other** as well. And furthermore, loans (ex: a 1-year bond), eventually become a 1-day bond (after 364 days, a 1-year bond turns into a 1-day loan), so everything becomes a 1-day loan **eventually**. Money Market Funds are specifically, funds that specialize in the buying, selling, and otherwise trade of this short-term market. Either FFR itself, or maybe Bank-of-America (or other high-quality big commercial bank) loans, albeit 1-day, 7-day, 14-day loans from commercial banks. (Or really: a 1-year loan that's been around for 364 days, or 358 days, or 351 days). Etc. etc. ----------- MMFs are publicly required to publish their holdings to qualify as a money market fund. Part of this requirement is to hold "at least" a certain amount in 1-day loans, and "at least" a certain amount in "within 7-day" loans.
> it takes like 18 months for FFR changes to impact the economy and the fed knows this. This argument is getting tired and old. If it takes 18 months then why don't they wait 18 months after the first rate hike to see how it worked?
it takes like 18 months for FFR changes to impact the economy and the fed knows this. Those decreases in PCE inflation we saw? Absolutely nothing to do with the fed’s policies. The decrease in inflation we have seen thus far has been the transitory bit in the more price volatile sectors of the economy, the remaining elevated inflation is from rent prices which are far stickier and is what the fed is actually trying to tackle. But we won’t know if they went too far or not far enough for another like 8 months.
There are a variety of cash equivalents and they all follow the federal funds rate (FFR) set by the Federal Reserve Bank. How they follow and to what degree is complex and related to exactly what the investment holds. But for a simple guideline, that's the deal. Bank accounts, money market mutual funds, certificates of deposit, and U.S. Treasury bills are the primary vehicles for this. There are also ETFs that hold U.S. Treasury bills. Money market funds can be comprised of anything the manager wants, as long as the fund's NAV maintains 1:1 with the USD. Generally, a bank savings account will lag the other options and will also not react as quickly to rate increases, but (go figure!) will probably react to decreases immediately.
Rates at 0% will eventually lead to inflation or something is very broken. FFR at 2-3% should not cause high inflation unless congress does some kind of stimulus
Fixed income PM here. The fed has been raising rates to combat inflation. But they only have control over the federal funds rate (FRR) which is a very short term interest rate (essentially overnight lending rate). The 2yr is more sensitive to the change in the FFR as well as inflation expectations over the next two years. Meanwhile 10yr rate more sensitive to inflation over 10yrs, maturity premium, and risk premium. The curve was inverted because the fed raised front end rates and also compensating for expectation that inflation would be elevated for longer while the 10yr yield prices in the likelihood inflation will be lower 10yrs from now. Fast forward to today, the curve is much flatter because long end rates have risen. The reasoning is up for debate and has many factors including: -higher economic growth means rates will needs to be higher for longer -less foreign ownership of US debt -federal debt grater than 100% of GDP that has to be funded by the treasury (who’s now issuing more long term treasury debt than earlier this year -and relatedly, the risk premium required for what happens to an economy that has over 100% debt to gdp (and likelihood that will increase to over 130% in coming decades based on CBO estimates) Hope this helps.
I assure you I will not create a new account and I'll eat crow this time next year if I'm wrong. I won't block you either. Take a look at my brand new account's history - I've literally admitted to being wrong multiple times and edited my comments calling myself an idiot several times today. That said, you know what the difference between today and 2020, 2021 and 2022 is? Interest rate hikes. Several of them. We went from an FFR of 0-0.25% to an FFR of 5.25-5.50% and the effects of these hikes literally just started hitting the economy. And man, their effects already, just a few short weeks after finally filtering down, have been _massive._ I'm readily willing to and will admit if I'm wrong next year. I don't think I am though, and I have a lot riding on being right. Will you admit it too, should I end up being correct and you end up being wrong?
Well, it's impossible to be wrong. This is just 2007 all over again. They raised the FFR from 1% to 5.25% in 2006 then held it there for a full year.. it didn't end well.
The 30 year fixed mortgage is closely related to the 10Y… but the 10Y is only loosely tied to the FFR… and as time goes on, that’s going to become more and more clear as our debt is at unsustainable levels.