Beware the bond market’s duration bomb

Beware the bond market’s duration bomb

As bond yields have tumbled because of the Federal Reserve’s lower interest rates for longer monetary stance, investors have compensated by buying longer duration bonds. The logic is pretty simply. A one-year Treasury now yields 0.11%. A two-year Treasury pays 0.45%. A five-year Treasury yields 1.18%. The benchmark 10-year Treasury was paying 1.61% at the close today, October 26. Want more yield? You can buy the 30-year Treasury for a yield of 2.04%. The problem is that the longer the duration of a bond–the more time until maturity–the bigger the downward move in bond prices if/when the Federal Reserve decides to raise interest rates or if/when the financial markets decide to anticipate a Fed move by selling bonds ahead of any move by the U.S. central bank.

Beware the bond market’s duration bomb

Treasury options market will be “active” tomorrow–will this add to post Jackson Hole volatility?

More than 2 million options on the September 10-year Treasury expire by the end of trading tomorrow, August 27. That’s 63% of all options open interest in Treasuries. It “looks” like the positioning of those Treasury options is relatively balanced. Bloomberg reports that data from JPMorgan Chase show that the bank’s clients have pulled back on short bets on a steeper yield curve after tomorrow’s speech (10 a.m. New York time) by Fed chair Jerome Powell. But I wouldn’t bet against some extra volatility tomorrow.

Stocks decide inflation is in retreat and move higher

Stocks decide inflation is in retreat and move higher

The Consumer Price Index climbed 0.5% in July. That was in line with Wall Street expectations. And down from the 0.9% gain in the inflation index reported for June. That was enough to send stock prices higher as investors and traders decided the data supports the Federal Reserve’s view that the recent spike in inflation will be temporary. Year over year the New Consumer Price Index is up 5.4%, a 30-year high.

So when does the Federal Reserve become the Treasury market?

So when does the Federal Reserve become the Treasury market?

Back in 2018 the Federal Reserve started to run down its valance sheet out of concern that its asset pile had grown so large that the central bank was in danger of becoming the market for things like Treasuries and mortgage-backed assets. (For some of the dangers in that state see the Bank of Japan, which does “own” the market for government debt.) Over the next two years the Fed ran its assets down to $3.75 trillion from $4.4 trillion. If you haven’t been paying attention, you might have missed the steady increase in the Fed’s holdings to a whopping $8.2 trillion in Treasury bonds and mortgage-backed assets.

Special Report: Fixed income investing is facing a crisis–COMPLETE CONSOLIDATED VERSION–3 tactics and 7 picks so you can fix your income investing crisis–Part 1, The Tactical Framework, Part 2, The 3 buckets and 7 picks

Special Report: Fixed income investing is facing a crisis–3 tactics and 7 picks so you an fix your income investing crisis–Bucket #3 with 7th pick APD

Today I’m going to give you some picks and some rules for finding more candidates for the middle bucket, the 5-year bucket. In terms of the mechanics of a three-bucket income investment system, this middle bucket is critical since it the mechanism for turning the price appreciation of the long-term bucket into the cash income of the short term bucket. And it has to accomplish this task without taking on inordinate amounts of risk since a five-year holding period doesn’t allow a lot of time to recover losses from mistake.

Beware the bond market’s duration bomb

Markets increasingly think Fed’s end of bond buying will be no big deal

I wouldn’t call it the consensus yet, but financial market thinking seems headed toward a belief that the end of the Fed’s $120 billion a month in purchases of Treasuries and mortgage backed assets won’t be a big deal. Certainly not enough to upset the bond market or produce another temper tantrum. The belief hinges on forecast of demand and supply that sees them roughly in balance even after the Fed stops its buying. An end to Fed purchases would be a significant hit to demand. But it looks like the U.S. Treasury will be cutting back on bond auctions as about the same time. And that would leave demand and supply roughly where they are now.

Special Report: Fixed income investing is facing a crisis–3 tactics and 7 picks so you can fix your income investing crisis–Part 2, The first (of three) buckets

Special Report: Fixed income investing is facing a crisis–3 tactics and 7 picks so you can fix your income investing crisis–Part 2, The first (of three) buckets

Today, I’m going to begin to give you specific picks so you can start to fill out the three buckets I recommended in Part 1 of this Special Report. Filling the long-term bucket is probably the most fun–who doesn’t like imagining the wealth that will roll in from finding the next Nvidia (NVDA) or from investing in the current Nvidia. The short-term bucket is the most challenging since it requires you to confront the current paucity of assets throwing off yields of even 2% head on.But let’s start there since the other buckets hang off the short-term bucket.