First Trust FTSE EPRA/NAREIT Developed Markets Real Estate Index Fund
Reverse repos **Banks** don’t use the RRP, it makes zero sense for them to do so and the facts show they don’t. https://imgur.com/a/acjg1V7 In addition, banks have access to the IORB which is operationally less expensive and pays 10 basis points higher than Fed’s RRP. (3.9% vs 3.8%). Unless you can somehow tie in your thesis on inflation towards money market funds (the largest users of the RRP), you’d be better off deleting this portion. Libor/SOFR You realize the “spike” you are seeing is simply the increase of the Fed Funds rate. Your point is valid, if Libor/SOFR spikes, it’s a sign of trouble. However, it has to spike in relevance to Fed Funds. Take your data points for Libor/SOFR and then subtract the Fed Funds rate at the time. Simply Libor/SOFR - FFR. If you see that spiking, then there is a cause for concern, such as the events of 9/2019. However, we you do this for the “spike” period you have charted, basically since the Fed started raising rates, you’ll be very disappointed. A little hint, you’ll rarely if ever see a spike in SOFR **and** the Fed’s RRP being used at the same time. They exist in opposite market situations, basically they oppose one another. You will see the RP facility, now known as the SFR, being used when SOFR spikes. They are directly correlated to the same market conditions. But the RRP occurs in an opposite environment.
4100 right now is high, but I think this rally is different and should have a lot more macro support: 1. Fed slowing down and pausing at 5% as inflation seems to be exhausting by itself, 2. China's stance on reopening is definitely softening, probably not a sudden reopening but a slower approach that would provide global growth support without making inflation much worse. I also highly doubt we actually get a bad recession as 5% FFR isn't really historically uncommon. It's just that high rates affect asset values more than the actual economy, so there is potential for volatility as you can see almost all tech is down a lot.
Cleveland nowcasts are still over .4 MoM. That's still close to 5%. There's still alot of way to go. Lumber prices are normalized because new home demand is evaporating. As I said earlier, diesel is going to go higher, which impacts all inflation readings. The Fed will inevitably overtighten because they are data driven off lagging data. As such, the FFR will end up over 5.25-5.50 or 5.5-5.75.
If the Fed won’t get up to 6+% FFR in this current cycle with inflation running at a generational high, will they ever in the foreseeable future? It feels like the answer is no and you have to take that into consideration when valuing the market going forward
The cuts that are being priced in are cutting to 4.75%-5.00% down from 5.00%-5.25% by December 2023. We are currently at 3.75%-4.00%. This isn't that crazy of an expectation. The Fed isn't going to keep rates above 5% for longer than they have to in order to get inflation under control. Expecting the FFR rate to be .75% higher than it is today isn't being in denial.
Surely you cannot be this regarded right? Surely you realize that fed isnt going to pause the breaks right? Surely you understand what FFR is and how it affects equities right? Surely you know why it fell back then and how it can, yet again, right?
JPOW stated before that the terminal rate has increased to ~4% Terminal as in the end AFTER we loosen from the tightening. To me that implies we'll see ~6% FFR, and everything he said today is in line with that. Inflation lag from Fed action seems to be a year, so significant reduction in inflation will be ~EoQ2. Expect 6% FFR before then, and then reduce to 4%... In what world is that bullish? This shit isn't even cloak and daggered in fedalese... He's basically straight up said it. 🅱️ividiots just gonna idiot.
The year is 1002000 and core CPI has come in at 1.3% year on year, 0.1% month on month. Supreme Chair Powell, first generation immortal cyborg has determined to hike FFR by 25 bps to three million and a half percent. Inflation, he reasons, may yet return as trade relations with Andromeda have deteriorated severely and it would be premature and dangerous to assume we're out of the woods.
The issue with waiting to buy post 2% and buying now is really....kind of the central tenant in all of finance. The market compensates you for two things - committing capital and **bearing risk**. Of course prices are going to go up once CPI / inflation data becomes "public information" - it's exactly how EMH states assets are priced in an efficient market. What the market does *after* inflation has been reigned in, doesn't necessarily say that gains will persist.......the whole objective of what the Fed is trying to do is, more or less, restrict capital to the point that demand starts to falter >> demand for labor subsides from capital-needy businesses going under >> unemployment rises >> recession ....although I feel like the whole crowd clamoring for a 500 bps FFR increase once FOMC minutes come out sort of miss that last bit above......
As long as the ambiguous "media" is your source, I think you're in for a few decades of confusion. And of course they lowered the FFR, because over-tightening caused problems and they tried to correct it before the bubble popped. The standard is they over-tighten, stop, then hang-on or loosen just before shit goes down.
“We’re expecting the Fed to end its Fed Funds increases into the beginning of next year, so we are expecting mortgage rates to come down to 5.4% by the end of next year and then to come further down to 4.5% by the end of 2024,” Mortgage Banker Association VP Edward Seiler said, referring to the average rate on a 30-year fixed-rate mortgage.” I just don’t understand how anyone can forecast a 5.4% mortgage by end of 2023. If the historical spread of Fed funds rate to 30 ur mortgage rate is ~3% then that would imply a FFR of 2.4%. How can anyone make this call with any credibility. But yet I see this on almost a daily basis now. WHAT AM I MISSING? WHAT DO YOU PIVOTERS SEE?
This one is a silly one, but every time I've been laughed at for mentioning an investment decision or called crazy or yelled at, sometimes in all caps, it's going to be an insanely profitable trade. Note that this isn't a contrarian point of view. It's not doing the opposite of the majority or anything like that. It's more a fanboy / hype indicator. When people are most hyped up and drugged on the greed they will get actively aggressive at the slightest hint there might be weakness there. Some examples: - Zoom had an insane, absolutely insane P/E, and I didn't like their product. I said I was considering shorting it. Then around a month later someone had saved my comment to message me and laugh at me about it. "Oh thanks for reminding me." I shorted it. The top was 3 days later. - Someone on bitcoin was a mother of 3 who talked about selling her 401k to buy bitcoin and was asking if there was a tax efficient way to do so. I mentioned I had been buying bitcoin since it was $5 a coin, so I'm not anti bitcoin, but it looks like it's forming a topping pattern and you may want to short it instead. I got a bunch of angry responses. The top was in 1 week later. - I mentioned shorting bonds was a no brainier and how people should be getting out of bonds. I got downvoted, but not much of a response. I kept saying this off and on. Three weeks later two different mods threatened to ban me for saying the FFR is correlated to bond prices and on another sub people started rationalizing it, "But bonds are at all time highs." Then one week later I mentioned I was shorting bonds and I got yelled at in response in all caps. I forget what. Something like, "BONDS WILL NEVER GO DOWN!" or something like that lol, but more insulting and angry. - I was doing a Tesla analysis with someone else just idly chatting about a deep dive of details about the company. When the details came out it surprised me. I said something like, "Wow! Tesla is fucked!" and then got a handful of angry responses. The top was already in a bit before that. The angry responses and downvotes were mild so I thought it was just me and didn't consider shorting TSLA. Opps. And so on. People get aggressive during the top of this hype cycle. I wonder if people were the same way in the 90s.
You can easily calculate the point where it break even (consider tax on income). It's relatively small $. The more salient factor is the likelihood of other HYSA or similar offerings being near that APY once you factor another couple FFR increases, even if dec is 50bps, come spring.
long bonds are less affected by FFR, but you could be right. Back in the 60s-80s look at FFR vs 30y bond. Sometimes Fed funds rate was twice the yield of the long bond. I think inflation and growth expectations are more important to TLT performance now vs FFR. QT could be an issue
The Fed kinda has a bad rep for their truthfulness over the years, which is why you’ve got folks that are going to choose to fade them after 11/30 and the December meeting. I think there’s a good chance it stretches out to 2023. They want those cuts that are priced in the latter half of 2023 out, but I’d side with the FFR curve over them, just because of their rep. Of course…many on here are going to think the Fed’s inability to tell the truth means that Bullard was the one guy near the truth and we’re going to 8%+ on the FFR next year instead of my opinion.
Nope, the FFR curve is of more interest here (sorry, I do not have a source here to track it, I've just seen it in Twitter posts lmao). It still has cuts priced in the latter half of next year, which the Fed is likely extremely displeased with. But I'll tell you what, one of the bond guys I saw on Twitter said they're going to use any reversion done by the Fed's mouth in the near term to buy dips in bonds for 2023 now. Shows you the belief in the Fed to stick to the script. It's not there. This guy did believe they'd ratchet it up for 2022 by the way, but doesn't believe they stick with it for 2023.
>But what is going on with the market this year? The Federal Funds Rate (FFR) went up at an extremely fast clip ​ >Everything that I have, crypto and stock shares are in the red every single day Speculative assets perform well when there aren't many other alternatives (e.g. when treasuries are paying nothing, bank accounts paying 0%, etc.). People tend to move out of these assets when there are other options available. There are, of course, less volatile things that you can invest in which are performing OK this year (e.g. are not deep in the red). This works both ways though, as you lower your risk profile, your returns will reflect that lower risk. As you increase your risk profile, your returns have the potential to be much greater than working in a low risk context. Good luck!
If things don't get out of hand in treasuries again and 3490ish sticks for the year for SPX, I'm thinking that we make a long term low in the market in Q1 next year. I really don't trust that this is going to be the case quite yet. Suspect the Fed's very unhappy with the long end being inverted with the FFR (even though you can arguably say it's on them honestly), and this is why Powell is speaking on the 30th. An unscheduled Jackson Hole to look to jack up financial condition tightness and un-invert the long end from the FFR. Not much time left in the year but considering that we're in an illiquid environment...the S&P can easily wind up losing the 15% it's gained from the 10/13 panic low to wind up at the dead lows if 11/30 is the late fall version of Jackson Hole...
"As soon as the Federal Reserve lays off the rate hammer, the Dollar index will start plunging, sending commodities skyrocketing" Uh, peep where oil is with the dollar struggling like mad right now. "I don't see a pause.. I see continual 50 basis point hikes until we get to 7%" If this is serious, then imagine taking Bullard, the guy that recently had an ethics violation (private event with Citi's higher wealth clients I believe), seriously, when even the FFR market did not take him seriously on that day. What a freaking joke...I've seen two too many takes on this board that take him very seriously if so. I'm sorry, but this crap ends early next year. Everyone that said that the Fed was just going to continually grow tougher and tougher in 2022 won big time this year (and it was on the relatively few side to boot as well), but they're going to lose next year. December is going to be the last hurrah here. We will see another goalpost move by the Fed (and my thought is I'd follow GS's expectations here), but that will be that after that. Period, end of story. And in case this is needed, I wasn't a September pivoter or pauser. Saw a small chance of it but was always more focused on early 2023. Pause likely early in 2023, then the Fed's 0-fer on telling the truth on what they're going to do likely stretches into 2023 in the latter half (when you put out a dot plot that has few to no hikes in 2022 late in 2021...yes...you're getting a 0 for your truthfulness on 2022 plans).
There is still plenty of puts that are still open and still some people are long volatility that haven’t capitulated yet. Yes we are closer to it ending but not yet. Also check FFR for 2024. They are literally cutting every rate hikes they price in for 2023. Literally 100 bps of rate cuts in 2024. That’s why long duration bonds have support to go higher
The Fed’s RRP program is one of two facilities that bookend the Fed funds rate in attempt to keep daily funding in and around the FFR. The RRP is where the Fed lends securities, borrows cash in order to sop up excess liquidity and create a floor for funding. *Usually* this rate is set below 5 bps below FFR. However, on 6/17/21, the Fed raised to to FFR + 5 bps (FFR was zero at the time) to deter daily funding and short rates from going negative. The Fed has not lowered the award rate to below the FFR, even after raising rates. They’ve never commented as to why in meeting minutes (though we have some due today). If/when they lower the award rate to FFR - 5bps, you’ll see the RRP drop in usage. 1. About 7% of its use is GSEs who simply moved excess cash from Fed account earning FFR to the RRP earning FFR + 5bps. 2. The bill is used by money market funds and the Fed is the best quality customer they can have on their books. Their usual customer base for repo are dealers but since the Fed’s rate is equal to what a dealer will pay, they’ve dropped a ton of dealer business. (Simply Google monthly holdings of any large MMF and compare 2013-2020 vs any month after 7/2021) What will happen when the award rate goes to FFR - 5bps, daily funding will settle closer to FFR and the rate offered by dealers will be higher than the rate offered by the Fed. One reason why the Fed may be continuing with the award rate above FFR is for balance sheet reasons. If they can backfill the excess demand for short paper with the RRP, the treasury can issue fewer bills and lower balance sheet.
Not perfectly fine but the primary issue with QE is that eventually you reach a point where it becomes self-defeating and blunts traditional monetary policy tools. In order to increase rates you have to continually service all the excess liquidity in the system with facilities like RRP and increase IORB lockstep with FFR. Ironically, in order to "tighten" monetary policy you have to keep throwing ever more amounts of money into the system and bribe liquidity from fleeing to short-term debt and bring prevent interest rates from free-falling. There's also a lot of evidence that financial institutions are efficient and rapidly adjust to excess liquidity. However, they seem to struggle when it disappears and it creates an endless hunger for more and more liquidity from a central bank when reality it should be organic and banks should rely upon each other to shed or receive liquidity. No one actually has the faintest clue what the "optimal" reserves level in the system is and that's the problem.
Treasury yields are determined on the open market. Say a 10 year treasury is worth $1000 in 10 years. As of today, the going price would be $690 (3.76% annual return for 10 years). If that is an attractive return, people may be willing to pay more for, driving the yield some. For instance, if someone is willing to buy it 700 instead, the end value remains the same ($1000) but the annual yield drops to 3.63%. When the yield curve inverts, its because the annual return on a longer term vehicle is less than that of a shorter term one. This is typically a sign that economic trouble may be on the horizon and as a result the Fed may lower the FFR which serves as a "floor" value for all others. If the FFR drops, then all others should to an extent. Essentially, the market is stating that the rates you are seeing now may not last so the demand for treasuries of longer duration rises, increasing prices, dropping yields, inverting the curve.
You've got it backwards. Lower yields implies more demand for those bonds. More investors are demanding 10y bonds than short term bonds, and because of high demand, they are willing to accept a lower rate. Why do they want to lock in 3.5% for 10y instead of rolling over 4.7% 6mo bonds? Because they don't think that 4.7% is going to last forever. The market knows the Fed is jacking up yields at the shortest end of the curve (their FFR) in an attempt to take money out of the system and stunt demand. This inversion implies the market is betting on the fact that at some point, the Fed will either feel they succeded in curbing inflation to the point where they are comfortable easing up, or they'll go too far and and send us deeper into a recession to the point where they'll feel the need to switch to a looser monetary policy. Either way, the first thing they'll do is drop their FFR which will bring down the short end of the curve with it. When your 6mo rollovers are only yielding 1.5%, you'll wish you locked in 3.5%.
Doesn't the SOFR more or less follow the FFR? As long as the Fed keeps target rates high, the SOFR will remain relatively high too. Also, lower yields on 10 year treasuries means higher demand for them. Not sure why you are claiming it means strong demand for short term liquidity while people are actively buying up longer term treasuries.
You might be right. Hard to say. From my understanding, the long end is more controlled by the market and runoff than FFR though. It's possible it stays lower than FFR if economic outlook gets worse and inflation moderates. So I think it's theoretically possible Powell says higher rates longer and tlt still holds or rises because people flee to safety. Who am I kidding though. Probably just hopium because I built a position under 100. Maybe I should set stops on the 30th
Compound interest plays out over long time periods. For 10 years: 200/ month for 10 years roughly net present value: $18,500 Invested at 4% annually: 18500 * (1.04 ^ 10) = 27,384 final value Spending dividends: 18,500 final value Difference over 10 years: 48% more Also, in today's environment dividends should be more than 4%. On average equity risk premium is ca. 4% over FFR, which would mean dividends + buybacks on the order of 8%.
We're slowly going to 2600 on the SP. Not this year. Once the next earnings season hits. And less profit. Lower guidance. Then, wait for companies like AMZN and FDX to also say the same. Many Non Financial Enthusiast people who don't look at the market, but have to spend more on food and utilities have less income for many other things. Housing is down big. Rates for a 30y mortgage at 6.6%. No entrepreneur land lord's are trying to buy/flip/rent at those rates. Fed Funds rate will also slow down car sales. My last loan was 4% when FFR was 2.5%. car is paid off. I want a mid life crisis sports car. Not at 5-6% brand new. Many financially intelligent people will just wait on the side lines. The financial illiterate will use CC to keep consuming. The well will run dry. FTX was the "Lehman Brothers moment". Remind me in 9 months. IDC. Still buying into SP 500 index funds. Small/Mid cap VEXRX. Still holding my shares in a Cash account. It will go down to 2600 before we see 4800 again.
Sorry mate, I simply don't buy the QT or FFR. I know they push that thing down our throat non-stop on MSM, so we have to assume this is right? After looking deep at the data, those measures have close to ZERO effect on the market. For example, take a glance at the 3-month treasury yield and compare it with the FFR. You'll see that the FFR is ALWAYS delayed. Is that coincidence?
the technical things that caused the inversion in 2008 are nothing like what is causing this one ? you have Fed doing QT, market trying to decide if Fed will actually get inflation down to 2% or if Fed will back off before shit fucking economy and just keep FFR at 5%, which makes long term expectations become less anchored etc. Sprinkle in BoJ and BoE dumping treasuries to defend their currencies and that's how we end up where we are idk what was happening in 2008 but neither do u, using just one data point without considering how the curves got inverted to begin with seems like a losing strategy IMO
Shocking and scaring the market would be holding a FOMC meeting with zero communication before hand. Release the PR announcing new target FFR rate and let volatilty do the rest. Broadcasting the FOMC's current view on where prices *are* vs where prices *need to be* is doing the opposite. Like how tf is the intent "shock and scare" the market when 1/12 of the FOMC's voting power is making public statements about how they're thinking about rates and, indirectly, how they're thinking about where their vote will land in the next time they're setting interest rate targets?
Man, it sure is interesting to see how convinced the crowd is in the Fed continuing to ratchet it up for a while. You might get one more small goalpost move in a month. You’re not getting a 6%+ FFR. Nope, sorry. Unless wages are a problem, and they haven’t been for some time now, we have seen peak CPI, and the question is how long it takes for it to get down. I have some doubts about it being 2 by EoY 2023, but I think it’ll be on its way. I wouldn’t be surprised if Q1 was the same death march look this year has been, but 2023 is likely to look very different to 2022, just like how 2022 has looked very different to 2021…as long as 10/13 was the low of this year.
Duh. I am just saying we already knew inflation had peaked heading in to both prints. It still looks like it's peaked. Fed Funds rate at 4.5-5 will obviously cause inflation to fall. I think the change I am looking for is the change in peak FFR. That's what will determine how much downward pressure exists on earnings for next year.
If you really believe that, then why would you think about traditional bonds? The only bonds you should consider are TIPs or floating rate notes. Better yet, you can make a fortune shorting Treasuries and betting on Federal Funds Rate futures. I also think equities would get decimated if the Federal Funds go that high. Equities markets tank when expectations for the terminal FFR increase to 5% from 4.5%. It they get to 8-10, there will be a bloodbath along the way.
I view this as a 4060 - 4120 head fake. I'll buy puts a few weeks out. Nothing crazy WSB-style, but we've got a lot of pain left to go. If the market turns around and rallies to 420.69 and beyond it will increase corporate & investor profits, increase spending by businesses and consumers, unfreeze hiring, and then...well, we'll actually be worse off than we were before the FFR increases because we'll be able to do less about it yet still see 8%+ inflation. I understand no one wants to lose jobs and 401k balances, but if you win now, and I mean "like it's 2020 - 2021 again" we all lose in the end.
It will probably take a 20% FFR to fix inflation. The only reason we are pretending it won't take that is because we redefined how we measure inflation to pretend inflation is low. But changing the definition of the problem doesn't change the solution needed to fix the problem.
The Vanguard Federal Money Market (VMFXX) is over 3% at this point, that should be the default money market in your sweep. From there I'd just buy some treasuries with rolling durations on your brokerage account. Half 3 month, half 6 month, then roll the 3's into 6's when they mature. VBIRX and VSBSX are also shorter-term alternatives, but are not a guaranteed preservation of capital. You could do a portion in here as a yield play in case we do see a dip on the FFR before your purchase date. If rates continue higher, these will underperform the others listed above.
We do this about every decade in finance cycles, and honestly it kinda sucks for anyone out there just grinding that doesn't know better. I'm far more concerned about the 40-year FFR curve added on top. Most people working and investing today have never known constant rising interest rates. It affects everything from cars to houses to businesses.
https://www.reddit.com/r/wallstreetbets/comments/ynnx2w/jpow_comparing_grocery_prices_inflation_isnt/ Imagine if cuties ever ran into JPow at the grocery store. He would spend the next 5 hours showing him all the price increases to convince him to go to 10% FFR immediately.
No offense, unless that’s video of the Challenger launch I believe your wrong for so many reasons. One, Biden is just about out of oil to release which has been propping up the industry. We are at one of the lowest days supplies of diesel in decades. JPowel had raised the FFR to 4% and it hasn’t dented inflation. Housing market is starting to show some major cracks. All these open jobs that politicians keep touting in speeches are low wage jobs, nothing like the bigger and bigger layoffs of white collar job happening. Many many other reason but these are just a few of the bigger reasons. Oh and personal savings are at decades lows.
All good man. It’s a new era when I’m actively considering putting savings into T-Bills (which is why I knew the 1-year rate off the top of my head). Wealthfront is offering 3.3% on a checking account and is passing most of each FFR increase to their customers. Ofc no tax advantage, but you get full liquidity in comparison to T-Bills. I looked at the IBKR program and it offers worse interest than Wealthfront (even with large cash deposit), but you get the advantage of having the cash sitting in a brokerage account where you can buy options, futures, individual stocks, AND ETFs vs. just ETFs for WF.
>Before you said a 1.5 to 2% drop, which would take us to march 2020 levels, lowest in history What? How does a 1.5%-2% drop in yields bring us back to the lowest in history? The lowest since March of this year is more like it. I don't know what you're looking at. The 10-year is at 4.16% and the 30 year is at 4.25% - subtract 2% from that, where do you get to? ​ >Now you are saying a 0.5% drop for 15% upside, which is more likely. I threw out a random number because you earlier said the appreciation would be "trivial" when it wouldn't. I was trying to illustrate how duration adds to return potential with rate decreases (and the opposite of course). Just this year when rates took a breather, from June 11th to July 23rd, TLT added 5% in return in one month - that wouldn't be trivial if we had an outright flight to safety in long bonds. ​ >But long term rates are still in line with long term inflation expectations. Not really - 5y5y forward inflation expectations are at 2.26% right now. 5-year breakevens are at 2.56%. Real rates are positive across the curve except at the very front because inflation right now is much higher than the FF rate right now. The inflation-indexed (real) 10-year is at 1.57%. That's the highest since '09. Maybe you're using 1-year expectations? and if that's the case, that's not a good barometer of real rates if you're looking at a longer-term investment. ​ >if inflation and FFR ends up ballpark 2%, which is supposedly the fed's target, then a long term bond at 4% are really not any more attractive then they were when FFR was 0% and long term was 2% This is where I was questioning your bond knowledge (and not trying to belittle you whatsoever). If I buy a 4% yielding long-term bond today, and then whenever in the future it happens, the FF rate is down at 2% and inflation is at 2%, then that means long-term yields are no longer at 4% - they're likely much lower. So I've added significant capital appreciation along the way as that bond's price increases. So if that bond matures in 10 years and inflation remains around 2% until then, I've essentially gotten 2% real yield and 4% nominal over the whole period I've owned the bond. And that 2% real yield doesn't even account for the appreciation, so add that on and I'm way above 2% real yield for the 10-year holding period of that bond. This assumes inflation does come down relatively quickly which is a whole different animal to debate. But on the other hand, what are your investment options in the opposite scenario? What do you buy, then, if inflation is going to stay high and the Fed is going to continue to hike rates? Equities won't work, bonds won't work, maybe commodities work off and on. ​ >If your trade is to bet on a historic, massive yield inversion and a decade of deflation, then I don't disagree with your preference for longer bonds, I just think its very unlikely scenario. Using this then, what is the likely scenario? Almost every other scenario is what's happened already this year - there won't be many trades that do work. And I don't do "sit in cash and wait" I don't have that luxury with assets I direct. That's also a guaranteed way to miss meaningful rallies and recoveries when they do finally come. What I'm saying is the magnitude rate increases thus far has created far more opportunity in bonds than it has in equities. We've seen this before in equities. We've never seen this before in bonds. If you believe that the Fed will pause/pivot/reverse whatever you want to call it at some point in the next year, you have to consider bonds at these levels. In my eyes.
You say I don't know how bonds work, but don't I agree with you on the mechanics? I am just disagreeing with the likelihood of the magnitude of the drops you expect in long term yields. Before you said a 1.5 to 2% drop, which would take us to march 2020 levels, lowest in history. I think its safe to say that is unlikely to happen after this inflation shock that woke investors up to inflation. Now you are saying a 0.5% drop for 15% upside, which is more likely.But is it "safer, faster, and higher" than equities like OP stated? Its risky because rates can still go higher. You are trying to catch a falling knife in a sense. Bonds are still overvalued in my opinion. Higher rates aren't good for stocks either but stocks will eventually recover from inflation while bonds won't. My point about real yield is in response to your idea this is a new regime where bonds have returns comparable to equities. But long term rates are still in line with long term inflation expectations. For example if inflation and FFR ends up ballpark 2%, which is supposedly the fed's target, then a long term bond at 4% are really not any more attractive then they were when FFR was 0% and long term was 2%. Or maybe what you're thinking is that 4% has more upside than 2% just because you think rates can't go below 0%, but in the past a bunch of people were buying long term bonds under 2% because they though the fed would go negative and there was upside.
Short term yields are more affected by volatility in Fed Funds rate. Fed say they are planning to return to 2% inflation target. So, long-term bond markets assume that FFR will revert to the mean over time. Also, risk-free rate (long-term bonds) should converge with nominal GDP growth on long timeframes. Therefore, a good estimate for long timeframes (10, 20, 30 years) would be estimated nominal GDP growth. If we assume inflation to come back down, then US nominal GDP growth would probably be something like 2-4%.
It's possible there's a rally next week just in general, but I'm losing some hope. Reasoning on why is the election premium in the VIX getting taken out might lead to a quick move under 20 (that doesn't stick as I think it should probably stick around 20 or higher these days) and it should mean rally, although it managed to be deep red today with SPX -1%, so maybe not. Now I might just be too focused on the election and not CPI considering things. I expect the GOP to flip at least one chamber and my thought on that is that it means fiscal gridlock and some of the commentary on terminal rate might be BS for next year because growth collapses (inflation likely does too). But then I've been wrong here, and I really don't see a middle pathway there where what's currently priced is correct. In 6 months at the latest, either it's going to get proven that this economy can't function with a 4%+ FFR for a multitude of reasons (and there are some more cracks showing lately that might fully show by January when we see December jobs), or those that think all is fine outside of inflation will be proven right and we'll likely end up with a 6-7% FFR next year. I personally lean to the former, which likely means it'll be the latter.
I also have a gigantic pile of financials for that purpose. These banks were able to be exquisitely profitable during the ZIRP period, they should be able to be massively profitable when the FFR is at 5%. Eventually, their I-banking divisions will start producing again as more consolidation of industry occurs during the downturn. At the end of the day, every central bank in the world is doing the exact opposite of what they did to reboot demand after the COVID shock. You heard Powell today, the plan is to get inflation down by any means necessary. Nuking demand in a proper fashion will absolutely impact oil prices in the same way that boosting it did. Really, I just don't see that much more upside for energy. It was an awesome trade, and I am sure there is some left to be had, but the way I see it, the big move is behind us.
> Funny enough, that is an actual goal the fed has with raising interest rates. ....are there people that don't know this? Actually, probably the aggressive hardo hawks clamoring for a 500 bps FFR because, to them, that's the financially responsible thing to do. .....gonna go out on a limb here and say those are also the redditors most likely to lose their jobs once high rates do start pulling back demand.....
I mean, if we are talking about the past then in hindsight, we can blame them for worshipping the asset prices ever since Alan Greenspan took over as the fed chair in the late 80s and started normalizing once a decade bubble-bust cycle but talking about more recent times, the fed should have begun normalizing rates from end of 2013. By Q3 of 2013 employment, stocks and even housing had fully recovered from the great recession losses. They waited until 2015 to increase rates, and even then, it was in baby steps. By 2018, the nascent increase in FFR had to be reversed again due to political pressure and here we are. People always question if fed had the printing press on for 12 years (2009-2021) why did it not result in inflation earlier? Well, there was inflation, just that the inflation was more obvious in the asset prices and less pronounced in the goods and services. All said, expect the feds to come under tremendous political pressure next year to begin cutting rates. There is no ways we will go into 2024, an election year, with these rates.
The 3 month yield decides what the Fed Fund Rate will be. The FFR is currently at 3.0% with .25 flexibility, so a 1% raise would put it at 4.0% with .25 flex. Considering the US 3 month finished at 4.19% today they don't have a choice. ? Anyone think this holds in the feds choice
What they need to convey is the near certainty of a 75 basis point raise in December and that the FFR will continue to rise, albeit at a slower pace; in 2023 if inflation remains high and does not start angling down consistently. Apparently the market has attention deficit disorder and is addicted to dopamine.
Generational wealth is built when both earnings and multiples are increasing. So why would you buy with a 3% FFR, going up to 4.5%, and earnings just barely starting to come down? Don't be a dumb bull, wait for like 12 months we'll be in the 200s.
That depends on what you mean by pivot. There’s a chance of 75 points then 50 points, which some might call a pivot because market expectations are 75 and 75. I’m still bullish long-term on most Treasuries, and I’m not trying to get too cute on timing, because sometimes Treasury rates peak before the FFR. In 2000, Treasury yields peaked almost 6 months before the last rate hike. In 2018, they peaked two months before the FFR. There’s a decent chance that happens this time. Despite all that, I think it will be a bumpy ride down, and there’s a good chance you’re correct on near term trends, so I reduced my position a fair amount this AM as prices rose.
> Whats the difference between a coupon and interest rate. A coupon is the payment, the interest rate is what % you get. > What does bond price mean? Is it the price you can buy it at? yes > Does this price increase or decrease in the future or is it fixed? The price fluctuates in the secondary market, but if you hold to maturity, you get what was promised, regardless of the secondary market price. > If I buy a bond today and sell it tomorrow without holding it for 30 years or 3 months how can I make money? With luck :) > Do I need yields to go up or down in order for it to be in my favour? Down. If your bond is 10% and the current market for new bonds is 9%, then people are willing to pay up to 1% more for your bond, since it pays more than new issues. > How would a swing trade work for the bond market? Currently, in the rising rate environment, terribly. Unless you have some bonds from the late 70's and early 80's that were paying double digit %/yr yields. > Why would anyone ever want to buy the 3 month bond it has the lowest interest rate it makes no sense for anyone to buy it. Because they need the money in 3 months. > Why does the 30 year yield have lower interest rate then the 12 month yield? It's called an inverted yield curve, it's rare, and has historically preceded a recession. > Isnt it best just to buy the bond with the highest yield get the first instalment and sell the bond? No, it's best to buy the term you need and just accept the yield you are given. > what do the plus number for 1 month and 1 year show on the website? I am completely stuck and there is no explanation I can find What website? show an example please. But I'm guessing it's showing the price difference. > are the " Federal Reserve Rates" the same thing as interest rates? Basically, yes.. sort of :) The FFR(though more technically the IORB these days) is the rate the Federal Reserve is willing to pay banks for money held overnight with the Fed. So they set the risk-free overnight lending rate with a duration of 1 day. Everyone else sets their rates(or via auction the rate is set for them) based on that rate. Bills, Treasuries and TIPS are US government debt, which are all auctioned at various duration(term). They pretty much always go for some premium above the IORB(the fed rate). > I cant understand how they move and what they mean for the economy. Just like with all financial things, they move based on how much someone is willing to pay for the income stream they generate. They account for about 40% of the entire publicly purchasable global asset classes(stocks and bonds).
I don't know why this "argument" is repeated ad infinitum despite not making any sense. Why ? Because in this world, people (wether it is companies or actual people) will have to take debt again in the future, sooner than later actually. And if the Fed lets inflation run wild without raising rates, it will be costly for those people to do so. If inflation is high, it doesn't matter whether the central bank raises their rate or not, interest rates are going to climb regardless because investors are not utterly blind. Just look at what happened to the bond market before the Fed finally raised rate on the 16th March, the 10y rate went from their lows of 0,63% in 2020 right up 2%. This significant rise happened while quantitative easing was still going on and the FFR was still capped at 0,25. Take a look at this: https://fred.stlouisfed.org/series/BAMLC0A4CBBB Spreads **and** rose so fast that for an average company, the coupon payments might be 100% higher to what they were in the past. While their old debt lost what ? 10% because of inflation.
Just buy 8 or 13 week t-bills for now. T-bills are very straight forward because they are zero coupon, meaning you get paid the entire yield at maturity. Wait on buying longer term bonds because those are depreciating at the moment due to the FFR going up.
The market does. You're confusing yield with coupon payment. Coupon Amount / Face Value of Bond = % interest the lender is paying the borrower, and is fixed Yield = The return you make by buying a bond on the secondary market and receiving those coupon payments until the face value is fully paid off Say you buy a bond at issue for $1000. The bond pays a $40 coupon per year, for 10 years, at which point the principal is paid off in full at maturity. Let's say you didn't buy the bond at issue, you decided to buy it on the secondary market a week later. Well, between then and now, the Fed raised the FFR 50 basis points. That means the 4% interest on the fact of the note doesn't capture the risk you're bearing (since it was issued when baseline rates were 50 bps lower), and so, to compensate buyers for that additional risk you're not getting compensated for by way of coupon payments (you're still receiving $40/year no matter what), the seller lowers the face value of the bond at which it sells it for. So instead of paying $1000 for a bond a week ago, you're going to get a discount and pay $950, since that's the price the market demands. Your "yield" is the total return on investment, which would have cost you $1000 at issuance, but you waited a week, so that cash outlay is lower by $50, thus increasing your total return on your risked capital.
Thanks. I was indeed treating the Fed and Treasury as the same thing I need more time to absorb the info, but it says "To raise the FFR, the Fed decreases the supply of reserves by selling U.S. Treasury securities in the open market.6 The decrease in reserves shifts the supply curve left, resulting in a higher FFR." "U.S. Treasury securities: Bonds, notes, and other debt instruments sold by the U.S. Treasury to finance U.S. government operations." I'm taking this as Treasury issues bonds, Feds buys quite a bit of them, so when in times of need they will have some to sell of Treasury Bonds? Otherwise they wouldn't have them to sell, right? Anyway, just thinking out loud. I shall spend more time digesting the link you shared. Thanks again
Here you go clown. Just look at the report from September 2021 and you'll see how good the [projection](https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20210922.htm) is. You can see they projected 0.125% to 0.625% for the FFR for 2022. I hate to break it to you, but it came in a little higher.