| MARKET ROUNDUP | |
| Dow | -2.51 to 17,764.04 |
| S&P 500 | +0.87 to 2,080.15 |
| Nasdaq | -7.76 to 5,013.87 |
| 10-YR Yield | +0.036 to 2.417% |
| Gold | +$2.40 to $1,176 |
| Crude Oil | +$1.79 to $59.93 |
Interest rates are taking flight … at a time when the risk of investor losses is at its highest ever.
The yield on the 10-year Treasury note hit 2.45% earlier today, its highest since October. The yield on the 30-year Treasury bond rose again, to 3.18%. That means it has gained almost a full percentage point from its January low.
Bonds, bond funds and ETFs are bleeding as a result. Long-term funds have lost more than 15% of their value in just a few months, while municipal bonds are suffering their worst quarterly losses since Detroit tumbled toward bankruptcy back in early 2013.
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| Investors are throwing the dice when it comes to interest rates. |
But as bad as those declines sound, they could get much worse. Here’s why: As you know, central banks the world over have been buying trillions of dollars in long-term bonds. They’ve also been pegging short-term rates at 0% (or even in negative territory).
IMG Investors are throwing the dice when it comes to interest rates.
That has encouraged investors to take on more “duration risk” than at any time in history, as this Bloomberg story noted this week.
Duration is a measure of potential losses from interest-rate moves. If your bond fund has a duration of 10, it means you stand to lose roughly 10% of your money for every 1 percentage point move higher in long-term rates.
Given the increased volatility in interest rates, and the huge amount of risk that bond fund managers the world over have taken on, it should be no surprise that we’re seeing more and more “Bloody Wednesday”-style moves. That’s exactly what I’ve been predicting, and I urge you to take steps to prepare yourself.
(Editor’s note: You can find Mike’s protective strategies and details on specific investments you can make by clicking here.)
In the meantime, keep an eye on the 2.5-2.6% level on the benchmark 10-year note. That’s the next major level of resistance on the charts. If we take it out, we could see longer-term yields rally back to their late-2013 highs near 3% – when we were swept up in first, Fed-fueled “taper tantrum.”
| “It should be no surprise that we’re seeing more and more ‘Bloody Wednesday’-style moves.” |
So what do you think? Is this the start of a major move higher for rates? Will the risk that reckless Wall Street fund managers have taken on come back to bite them, and in a very bad way? Or is this just a flash in the pan move that won’t last?
Share your thoughts at the Money and Markets website when you get a minute.
| Our Readers Speak |
Meanwhile, I hope you enjoyed my colleague Mike Burnick’s take on the Federal Reserve and interest rates yesterday. My wife and I were in Chicago for a long weekend with family, but it’s nice to be back in the saddle again now.
Reader Frebon responded to Mike’s column with this analysis on the Fed and what it might do next: “The Fed is only data dependent and the data is faulty. They do not possess any common sense, however.
“It is their low interest rate policy which is stifling the economy by taking money out of the middle class — who will actually spend it and create demand — and putting it in the hands of banks and corporations, who are only looking to their bottom lines and are either fortifying their capital ratios, buying back stock or investing overseas.”
Reader Chuck B. also took issue with potentially faulty data, saying: “The government figures make it look as if employment is improving – and maybe it is. But according to other figures, at least a third of the working age population is unemployed. That doesn’t include those who are underemployed, or working several part-time jobs to make ends meet somehow, but who count as employed according to ‘official’ figures.”
Meanwhile, Reader Jake noted a key trend we’ve seen over and over again in interest rate cycles – the Fed follows the markets, not the other way around. His view:
“If the longer-term, free market rates rise, the Fed will follow suit. Rates on those as well as foreign bonds are moving up, so they are talking that story. I really don’t think the Feds actually control rates in any large way. Few have wanted to borrow money, so it has been on sale.”
Finally, Reader Glenn pointed to the ongoing divergence between stock market performance and economic performance recently. His take: “You equate the health of the economy with the health of the stock market. They are not only not the same thing, but for a great many Americans, they have not much at all to do with each other, by their experience. Picky I know. But I think you know better.”
Thanks for all your insights. I believe the sum total of the data out there indicates the Fed should have already raised rates. But they keep hesitating out of fear about the side effects of doing so. I don’t believe that game can go on much longer, however. That’s because the markets are already taking the lead and driving rates higher – as Reader Jake noted.
Agree? Disagree? Want to weigh in on other topics of the day? Then don’t hesitate to hit up the website here.
| Other Developments of the Day |
The country is eagerly awaiting a Supreme Court decision on the legality of federal insurance subsidies in select U.S. states. It should come sometime later this month, and may result in more than six million people losing health insurance coverage. In the meantime, President Obama is going on the offensive – delivering another speech that highlights the benefits of the Obamacare program.
The garage sale at General Electric (GE) is continuing, with the diversified conglomerate agreeing to sell a private-equity lending business to the Canada Pension Plan Investment Board for around $12 billion. The unit provides loans used to finance takeovers and business operations.
Elsewhere in the financial industry, global bank HSBC (HSBC) is exiting several businesses and emerging market operations as part of a major restructuring. The British bank will eliminate 50,000 jobs, and re-invest some of the savings in areas it wants to emphasize, such as Asia.
Apple (AAPL) unveiled several new entertainment- and software-focused updates, apps, and services at its latest Worldwide Developer Conference yesterday. They will enable things like picture-in-picture viewing/multitasking on iPads and reward customers who use its Apple Pay system, among other things.
Share your comments over at the website when you have some time.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 17 comments }
With GE selling off so much of its old financial assets, it has lots of money in its coffers that may be used to buy other industrial assets, in accordance with its announced plans. If it waits to do this until the markets correct, and prices are down, GE could be worth a good look.
ge would be bankrupt since 2008 if not for the taxpayers. crushing debt load. jeff is useless.
Banks see no reason to raise rates. The spread between their cost of money, essentially nothing, and what they can still charge for car loans and mortgages is at least 3% which is good return for no effort. They would be no better off if they were paying me 4% on my money market fund and charging 7% on mortgages.
Of course, I would be much better off, as would those benefiting from my added spending, but that does enter the equation.
The Fed really only has control, more or less, over short-term interest rates up to and including 10 year notes. They changed the Benchmark from 30 year Bonds to 10 year Notes since they did not have control of Bond interest rates. Through the power of the printing press they have depressed rates for so long that now the market is correcting back to the ‘norm’; about 6%. As rates continue to rise, the economy will further deteriorate, small businesses will close and more jobs will be lost. In 1966 I bought a new 3 bdrm. brick home for $18,500 at 6.25%; it is now valued $175,000 on a 4.75% 30 year loan, but few can afford to buy it. This is ridiculous. 49 years of inflation coupled with artificially low interest rates is a combination for disaster for everyone. Hopefully we will see the demise of the Fed, who is responsible for most of this mess.
ron paul for pres
ron paul for pres
If you really want another career politician as your pres., he seems like the best one of the bunch, but he is a politician, after all. Don’t know how successful he was as a doctor. Ben Carson was a very fine neurosurgeon, but I don’t like how very socially conservative he seems, and don’t know about his constitutional stance.
Things could become very ‘interest’ing if the market moves and leaves the Fed standing on the proverbial street corner. Watch what will happen to real estate if the 2.5% ceiling is broken. Selling prices will decline to the extent that the increased interest takes more of the monthly payment that buyers are presently able to afford. I have been told by knowledgeable participants that if the 10-year rate goes above 3% the present market selling prices will revert to 2010-2011 levels. Effective demand and wealth have not grown due in large part to the present administration’s regulatory actions and the Fed’s support of corporations. Thus, the housing market is at the limits of affordability.
correction: does NOT enter the equation
The question: Is that based in reality or fear? Current “emotion” says rates are going up soon. While the case is increasing, I still do not believe that the facts justify the economy is heating up sufficiently to cause an actual rate increase. Wages are still not increasing…under employment is still high.
Rates should go up when wages are increasing beyond 2% per year…then we have a heated economy. Remember, wage increases raise prices both in cost and demand. No wage increase…no inflation. Increased money supply (“printing money”) by governments are irrelevant when their is inadequate demand.
GDP DECLINED in the first quarter. Doesn’t sound like a heated economy to me!
This is still a policy weakened economy and in my judgement will be until Fall 2016.
Perhaps consider the scenario that the Fed cannot Afford interest rates to rise, they have been kept artificially low for the benefit of the Bankers and Corporates with a resulting stock boom. The Fed knows full well that the mortgage paying population cannot afford to pay rates beyond pretty much where they are now now – and if they are forced to then there will be another GFC.
Remember, Inflation ( upward asset price revaluation ) does not create wealth, it actually erodes “wealth”. Only productivity creates wealth, but this is hampered globally because we no longer run under the Capitalistic model but now within a system of “Creditism” with an over supply of devalued “money” that has no where to go to produce genuine ( and new ) productivity.
The powers that be, only wish to maintain the status quo ( to extract profits ) they cannot afford to let the Monetary system to fall over.
But a reset does look likely :-)
Some of the major financial management firms are calling the sudden rise of long term bond yields, a “technical” move. It is the result of speculators attempting to unwind positions in long term securities, all at the same time, causing a liquidity problem.
It still remains to be seen how retail bond investor will behave as they see the NAV of their bond funds begin to decline. At a minimum, anyone invested in bonds should be in an actively managed fund, preferably a CEF.
Just some local history – for the whole of 1987 beginning in February and including post crash I paid 25.5 % interest on a mortgage (in NZ) officially inflation was declared at 19%.
Even at these rates the investment still paid for itself during the 1987 crash and I emerged a year later with a large capital value appreciation – the market reset the assets true worth in relation to a devalued currency and inflated monetary supply.
This situation couldn’t happen in 2015
Sorry guys I’m away down in Farnborough for at least this month and maybe the next two months so once again Jackie and I have to miss the meets.Have to win the lrtteoy soon so I can give up this work lark Have fun and don’t eat all of the pies
HSBC is an amazing company. They have been hit by billions in fines for bad business practices so they pack up their bags and sack 50,000 innocent people and are reinvesting money in Asia. Well I live in Thailand and I can well understand why they are expanding their operation in the Asia. The motto “If your not cheating your not trying” will surely be expanded here. They seem to like countries where the rules fluctuate day by day. Just another sign of everything that is going wrong in the world today. Pity.
The yield on the 10-year Treasury note hit 2.45% earlier today, its highest since October. ”
It is noteworthy that the bond market did not panic in October when interest rates were last at the current level. This time may be different. The bond market looks to the future. Apparently, it is now expecting interest rates to rise in that future. Apparently, it did not expect this in October. The Fed can manipulate interest rates for a short time, but they cannot manipulate interest rates forever.
Bill & All.. The Federal Reserve WILL raise rates starting in October 2015. Triple Eve of what people call Halloween.. October 28th 2015.it begins… What a time for things to start getting scary Happy Higher Interests Rates Halloween October 28th 2015. Like I have been saying since January 2015 – October will be the month!!! Does the Bond market collapse in September =to force Fed to move.? Do you want to know? Get Ready Get Ready . October will be a month to remember.. Does China become a member of the IMF in the SDR”S . Also watch happens to oil ? Also Israel WILL go alone in 2016 against Iran. ? Yes they will wow less then 11 months… Record drops in the stock market in October.. ..In a very few short years the standard of living for most and I mean most Americans will plummet. Who will be President in 2017? Woman or a man? Dem.& Rep or other. I will give only one . Their will not be woman president in 2017..Will Israel get support from the new President of the United States of America in 2017.? What will happen to ISIS? WOW … Have a great everyone…More it come. God is not in control like many say but his foolishness is wiser then any serpent or man or anything else for that matter..