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  #241  
Old 05-01-2018, 10:22 AM
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https://www.ai-cio.com/news/corporat...y-yield-curve/

Quote:
Corporate Pension Bond Bulls Could Further Flatten the US Treasury Yield Curve
Fear of a downturn creates a rise in de-risking.
Spoiler:
The yield curve may keep flattening due to more corporate pensions looking to de-risk by moving their assets into fixed income.

According to Reuters and a report from Seattle-based consultant Milliman, the US equities rally of 2017 and larger pension contributions helped bridge the gap for corporate pension plans between assets and pension liabilities by $72.4 billion.

According to Milliman’s 2018 Corporate Pension Funding Study, the average funded status ratio for the 100 largest corporate US plans in 2017 was at 86%, up five percentage points from 2016.

While positive returns kept optimism bright, many plans have decided to shift a chunk of their assets into a lower-risk environment as not to repeat some of 2008’s mistakes, as economists and institutional investors such as Bridgewater Associates Ray Dalio predict a downturn in the coming years.

Reuters reports that equities being converted into long-term debt has increased demand for corporate bonds as well as 10- and 30-year US Treasuries. Although the 10-year Treasury yield broke 3% on Tuesday, the curve is still flatter than it was at the beginning of the year.

According to Reuters, a total $1.5 trillion of corporate pension assets could boost bond rates enough to flatten the long end of the yield curve, which has been occurring aggressively over the past six-12 months.

Michael Moran, chief person strategist at Goldman Sachs Asset Management, told Reuters that although there is some speculation about how much money will go towards fixed income, it’s possible for US corporate pension plans to buy roughly $150 billion in high-quality, long-duration fixed income every year for the next several years.
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  #242  
Old 06-12-2018, 01:28 PM
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https://www.ai-cio.com/in-focus/mark...ast-3-barrier/

Quote:
Warning Sign? A 10-Year Treasury That Can’t Break Past the 3% Barrier
Benchmark bond yield falls short, raising concerns about an inverted yield curve
Spoiler:
For the 10-year Treasury note, climbing above a 3% yield, and staying there, is a daunting piece of aeronautics.

If the 10-year—which is the benchmark for fixed-income throughout the financial world—can’t rise a meaningful distance above 3%, trouble could be in store: A stalled 10-year yield enhances the odds that government bonds would end in the dreaded inverted yield curve.

An inverted yield curve is where short-term government debt yields more than longer-maturity bonds, a condition that signals the onset of a recession.




Threat of an Inverted Yield Curve
When short-term rates are higher than long ones, market sentiment holds that the economic outlook is poor. Every recession since 1955 has been preceded by an inverted yield curve, with only a single false reading (in the mid-1960s), according to the Federal Reserve Bank of San Francisco.

Of course, market dynamics this time around are dramatically different than they have been in previous economic cycles. A decade after the financial crisis, markets are exhibiting many peculiar – even paradoxical – indicators. The prospect of an inverted yield curve comes even as economic activity remains vigorous and the Fed plans to raise short rates. Global uncertainty and safe haven status, meanwhile, is pinning down the long end of the curve.

Still, the inverted yield curve has a track record that merits watching and could be signaling the end of an economic expansion some market forecasters say is long in the tooth.

“The inverted yield curve tells us a recession is on the way in 12 to 18 months,” said David Ader, chief macros strategist at Informa Financial Intelligence, who pointed to “unhealthy signs” that the lengthy economic expansion since March 2009 might be stuttering toward a close.

Current harbingers of such a downturn, he said, are: the prospect of a devastating trade war; corporate products puffed up by the recent tax cut, which otherwise “would be flat”; and companies’ reluctance to significantly boost capital spending or employee pay and training. “That indicates they aren’t optimistic,” Ader contended.

For sure, the curve nowadays is flattening. The spread between the two-year and 10-year Treasurys is 0.44 percentage point. At the end of 2015, it was 1.43 points.

The dynamics of short- and long-term Treasury yields are different, which is a big reason for the spread compression and contraction.

The short-term paper’s yield is driven mostly by the Federal Reserve, which these days is embarked on a campaign to restore short rates to a more normal level, from near-zero in the aftermath of the financial crisis. The Fed wants to set rates high enough so it has room to lower them again to combat a recession, which it did in the wake of the 2008 debacle.

“When the Fed raises the federal funds rate, the two-year Treasury rises almost in lockstep,” noted a research report from Delta Investment Management. Assuming the central bank hikes the federal funds rate by a quarter-point on Wednesday, as is widely expected, you’ll likely see the two-year Treasury move to 2.75% from 2.5%, the paper read.

The fed funds rate now is in a 1.5% to 1.75% band. Four more such increases would put it at 3%, which would mean parity with the 10-year, if the note remains there. And the two-year yield would be higher, perhaps as much as 4%.

The Curse of the Haven Bond
The 10-year yield isn’t directly affected by the Fed. Its yield moves primarily due to two competing influences, inflation and the bond’s haven status.

Upward pressure on the yield comes from prospects for higher inflation, and the Consumer Price Index has been inching upward in recent months. But then there’s periodic downward pressure on the yield from the popularity of the 10-year as a haven bond for international money if conditions get shaky overseas. Big foreign buying, of course, pushes up bond prices, which leads to lower yields.

A recent example of this haven-bond phenomenon came last month, after the 10-year finally crawled above 3.1%. Its stay at that level was brief. An attempted Italian governing coalition fell apart, which shook some investors’ faith in Europe’s common currency. The news created a rush into the Treasury bond, and its yield slid back down below 3%. “Italy provoked a violent flight to quality,” said Chris Brown, a vice president at T. Rowe Price Group and co-portfolio manager of its Total Return Bond Fund.

The Italy development pole-axed some fixed-income investors. Bond guru Bill Gross’ flagship fund, Janus Henderson Global Unconstrained, bet the wrong way on European bonds – that German bond prices would drop compared to Italian paper. But after the Italian coalition fracas, the Gross fund slid 3%. (The fund since has partially recovered. And the Italians seem to have formed a new government.)

The 10-year Treasury gives comfort to investors because they view it as risk-free, thanks to Washington’s taxing authority over the world’s largest economy. When S&P lowered the US government’s credit rating in 2011, because of a federal budget impasse, US yields didn’t shoot up, noted Eddie Hebert, a managing director at investment manager PPM America. “That means investors still see America as a safe haven.”

Plus, the US economy is faring better than most others now, so its benchmark bond’s yield tends to be higher, thus making the obligation even more attractive. Stepped-up buying “has put further drags on the 10-year Treasury’s rise” on yield above 3%, said Matthew Merritt, global head of multi-asset strategy at Insight Investments.

Look at the 10-year government bond yields of America’s G-7 partners. With the exception of crisis-wracked Italy (yield: 3.11%), they all trail the Treasury note, with Canada’s yield the highest (2.35%) and Japan’s the lowest (0.5%), according to Bloomberg data.

The Upward Pressure
The case for powering past the 3% ceiling hinges on continued American economic growth and its usual handmaiden, quickening inflation.

Assuming that current economists’ projections are correct, and the US won’t slip into a recession for a while, a moderate ascent in inflation might be enough to finally push the 10-year yield above 3% and keep it there.

Economists polled by the Wall Street Journal expect inflation to hit a 2.5% annual rate in April this summer, up from 1.6% at mid-year 2017. It is anticipated to ease off a bit to 2.2% next June, but that’s still higher than the 1.32 annual CPI average for the five years ending in 2017. A sign of the times: Social Security recipients, who for years have endured miserly inflation adjustments to their payments, recently got a decent 2% raise, Loreen Gilbert, president of WealthWise Financial Services pointed out.

“The Fed is letting inflation run a little hotter now,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, one reason he expects the 10-year might hit 3.25% this year.

Another factor in the higher-yield scenario is an upcoming avalanche of new federal debt, the result of higher spending and the new tax cut. The Treasury Department just estimated that its borrowing needs this year will expand to almost $1 trillion, up from $519 billion last year, with similar high needs over the next two years. In addition, the University of Pennsylvania’s Wharton School figures that the tax reductions will require another $2 trillion in debt this decade.

“Who will buy that $3 trillion to $5 trillion in new debt, and at what rate?” asked Dave Haviland, a managing partner at Beaumont Capital Management. The upshot of more bonds available: lower prices and loftier yields. As a result, he thinks the 10-year could rise as high as 3.75%.

Should that happen, the hope is that the Fed won’t boost short rates beyond that point, producing an inverted yield curve. “The big concern,” Haviland said, “is a Fed policy mistake.”
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  #243  
Old 06-14-2018, 05:36 AM
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yes, it says pensions, but it's about yield curve inversion

https://www.marketwatch.com/story/ho...tor-2018-06-13

Quote:
Pension funds may be undercutting the predictive power of an important recession indicator
Treasury ‘stripping’ activity is at a record for May


Spoiler:
Pension funds are ramping up their purchases of zero-coupon Treasury bonds, potentially undermining the yield curve’s ability to act as a recession indicator.

Investment banks will separate a bond’s interest and principal payments, the latter of which is mostly sold as zero coupon debt to pension funds who need assets that can match their long-term liabilities. Mostly from the long-end of the bond market, around $6 billion of Treasurys saw their principal and interest payments separated in May, according to Credit Suisse, a record month that also marked the third straight month that such “stripping” activity topped $5 billion.

Increased buying of zero coupon bonds from stripping has capped the rise in long-dated yields and helped flatten the yield curve, adding to suspicions that its recession forecasting abilities may be weakened heading into the next economic slowdown. Such concerns come amid public comments among senior Federal Reserve officials who wonder if the curve should have a role in guiding how fast the central bank should raise rates. An inverted yield curve, when short-dated yields exceed their long-dated peers, has preceded every recession after World War II.

See: Cleveland Fed’s Mester says the Italian turmoil and a flattening yield curve haven’t changed her interest-rate view

“Several realities have diminished the predictive power of the yield curve and make the Fed’s worries about its slope puzzling,” Matthew Luzzetti, senior economist of Deutsche Bank, said in a June 7 note. Contributing to the yield curve’s weakening relationship with an economic slowdown, he cited pension fund buying as well as the Federal Reserve’s past bond-buying efforts and the central bank’s continued use of forward guidance, which have served to cap upside for long-term yields. Yields and bond prices move in opposite directions.

The gap between the yields of the 5-year note TMUBMUSD05Y, -0.36% and the 30-year bond TMUBMUSD30Y, -0.56% is at 28 basis points. The 5/30 spread is a key measure of the yield curve’s slope, near its flattest level in more than a decade, according to Tradeweb data.

“Strong stripping activity has generally contributed to the curve flattening,” said Jonathan Cohn, an interest-rate strategist at Credit Suisse, in a Monday note. He found this relationship has strengthened in the last three years.

Strong appetite for long-dated Treasurys among pension funds may explain why the 30-year bond yield has seen less selling pressure than its shorter-dated counterparts, keeping it relatively anchored. Even in periods when the long bond rallied this year, making them more expensive to investors, auctions for 30-year debt have attracted strong interest.

Currently trading at 3.12%, the long bond has climbed around 50 basis points since Sept. 8, a smaller jump than the benchmark 10-year note TMUBMUSD10Y, -0.37% , which rose as much as a 100 basis points in the same period.

BAML
Treasury STRIPs are on the rise
Economists tie the predictive power of yield-curve inversions to the tightening of financial conditions that they represent.

But if the curve flattening and inversion reflects pent-up appetite for long maturity bonds, eroding the term premium, instead of fears about a growth slowdown, economists’ recession models that employ the yield curve may prove less effective than before, said Luzzetti.

Read: An inverted yield curve is a recession indicator, but only in the U.S.

The term premium refers to the compensation investors demand for buying long-dated paper over their shorter-term peers if rates do not move as expected. Once an ever present feature of the bond market, the term premium has been negative since last March, according to the Fed.

Also check out: Yield curve’s return to flattest levels in decade raises question over its significance

Pension funds also need to top up on bonds for other reasons. Many of them still need to rebalance their gains in their equity portfolios last year toward bonds.

“Stock market outperformance has led to large flows into Treasury bonds from pension funds, as these funds seek to lock in equity gains and rebalance their portfolios. These fixed income inflows have contributed to term premium compression pressures,” said Luzzetti.

In addition, corporate treasurers have ramped up their bond buying to “take advantage of higher tax deductions,” said strategists at Société Générale. Pension plan contributions can be deducted at the old corporate tax rate of 35% before the September deadline, a move that would boost profit margins.

Fed researchers, however, have pushed back against the idea that this time is different. In a paper earlier this year, economists at the San Francisco Fed said suggestions that the historically low level of interest rates would make a recession less likely in the event of an inversion weren’t supported by their research.


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  #244  
Old 08-22-2018, 11:46 AM
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https://www.ai-cio.com/news/many-fed...ll-get-anyway/

Quote:
How Many Fed Interest Rate Increases Will We Get, Anyway?
The conventional projection is for six more, though some want it to stop at three.


Spoiler:
It’s the edge-of-chair question for credit markets: How many more interest rate increases will the Federal Reserve order? Three? Six?

That issue is heightened now because the Fed’s policymaking body will release its latest minutes on Wednesday. Fed watchers hope the minutes from its July 31-Aug. 1 meeting will give some insight into how many more hikes are coming.

Right now, according to bets on the CME and Fed officials, there will be six quarter-point raises for the benchmark federal funds rate: two more for this year, three more in 2019, and one in 2010. That would lift the benchmark to around 3.5%, well above the current range of 1.75% to 2%.

But a significant group of Fed officials and economists think that would be too much, and perhaps bring on a recession. The most prominent critic: President Donald Trump, who has inveighed against new Fed Chairman Jerome Powell’s continued push to raise rates, which the president fears will hobble the economy’s recently robust growth rate. The Fed has already had two increases this year, after a gradual program of boosts beginning in late 2015.

On Tuesday, Dallas Fed President Robert Kaplan wrote an essay calling for the central bank to hike short-term rates just three or four more times, and then re-assess. At that point, he contended, the Fed likely would reach the “neutral level,” where its actions neither help nor hurt the economy.

Then, Kaplan indicated, he “would be inclined to step back and assess the outlook for the economy and look at a range of other factors—including the levels and shape of the Treasury yield curve—before deciding what further actions, if any, might be appropriate.”

The flattening yield curve, with the two-year Treasury and the 10-year a mere 0.24 percentage point apart, is inciting fears that the curve will invert. Then, short-term bonds would yield more than the 10-year—long a portent of a coming recession.


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  #245  
Old 10-01-2018, 01:25 PM
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https://www.bloomberg.com/view/artic...udget-deficits

Quote:
Bond Vigilantes Won’t Corral Stampeding Budget Deficits
Debt markets have lost the power to rein in reckless economic policies.
Spoiler:
There’s a growing school of thought that federal budget deficits in the U.S. don’t matter. Just last week, Stony Brook University’s Stephanie Kelton and my Bloomberg Opinion colleague Noah Smith debated that very question: When — if ever — should we start worrying about the growing national debt?

Building upon that idea, Bloomberg News reported recently that the consensus among Washington politicians is that trillion-dollar deficits are considered “whatever” now that Republicans have moved away from the Tea Party movement and embraced the Trump administration’s fiscal freewheeling. Supporting this general ambivalence, the writers and others have said, is the fact that bond traders aren’t sending Treasury yields through the roof in anticipation of widespread inflation.

That way of thinking is outdated. It goes back to the notion of “bond vigilantes,” a term coined in the 1980s to describe how debt markets could could punish governments for economically irresponsible policies. That kind of power is long gone. The game has changed. If it’s still historically cheap for the U.S. to borrow money, therefore proving that deficits don’t matter, what about Germany, where 10-year bunds yield 0.47 percent, or Japan, where the 10-year yield is just 0.13 percent?

A Different Time
Historically low U.S. yields aren't a defense for ignoring budget deficits


Source: Bloomberg, U.S. Labor Department

The answer, of course, comes down to the post-financial crisis role of central banks. While the Federal Reserve is gradually reducing its balance sheet, the European Central Bank and the Bank of Japan are still very much juicing their economies. As I’ve written before, the idea of a “great unwind” of their extraordinary monetary stimulus is unlikely to come to fruition. By the time the main central banks are ready to tighten in unison, the world will probably need them to ease once again.

This is why the old way of thinking about yields and deficits no longer applies. Just because they’re low by historical standards doesn’t mean there’s no fear in the market about America’s national debt. In fact, it may seem paradoxical, but some investors argue that lower yields are a logical byproduct of years of rampant spending. Massive government borrowing pulls forward economic growth and causes interest payments to make up a growing share of the federal budget. If interest rates reached double digits, as they did in the 1980s, it would only exacerbate the situation.

One investor who remembers those days is Dan Fuss at Loomis Sayles & Co. Just a day after his 85th birthday, he told me about an “old memory I’ll never forget.” In 1981, the U.S. Treasury was offering debt with a 15.75 percent interest rate, and it was clear Wall Street was reluctant to buy it. The benchmark 10-year yield had soared from 9.5 percent in mid-1980 to almost 16 percent by the time of the sale. The feeling, Fuss said, was that rates could go even higher.

Of course, it turned out to be the peak in U.S. yields. Fuss says that Treasury bond was possibly the single-best investment he’s ever made at Loomis. The lesson, he says, is that even in the most trying times, investors will finance America. “The U.S. has the strongest currency in the world,” he said.

But here’s the rub. “At what point — and I don’t know how to measure this — do you lose confidence in the currency?” Fuss asked. The dollar is the reserve currency of the world, and that doesn’t seem to be changing soon. But he shares the same concerns as my Bloomberg Opinion colleague Robert Burgess about whether America’s pullback from the global stage will threaten King Dollar.


One of the key pillars of Modern Monetary Theory (championed by Kelton, among others) is that deficits are irrelevant when a sovereign nation can create as much money as needed to pay what it owes. This is an alluring premise, but it only works when you are a global superpower, or at least close to it. It’s why the U.S. and Japan can run up their debt without sweating, but Turkey and Argentina can’t without bouts of intense inflation. It’s why the prospect of a 2.4 percent budget deficit is roiling markets in Italy, with 10-year yields rising the most since May.

There will come a point, too, when markets sound the alarm on the U.S. national debt. The Treasury market is now $15.3 trillion in size, compared with $4.9 trillion a decade ago. According to data from the Institute of International Finance, U.S. federal debt as a whole makes up more than 100 percent of gross domestic product.

That day of reckoning is not coming soon. But if it ever does, I doubt yields will give anyone much of a heads-up. Too many factors are keeping them down, from an aging population demanding safe assets to slower productivity hampering economic growth. At least for now, the world has little choice but to keep America’s debt machine churning.


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