Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
@JD_co, if the Fed stays the course as they planned, the terminal rate will be 5.25 - 5.50% ! And that is just one scenario. The other scenario is recession hits in 2023, unemployment rises, price falls and labor cost eases, the Fed may pause and cut rate to help the economy. At that point, bonds will likely to do well. This happened during the GFC and tech bubble.
The other question on individual agency and corporate bonds is beyond my competence. However, I would stay away from callable long term bonds. They can easily call back these bonds when the rate drops. I only buy bonds with call protection.
@Old_Joe’s and @yogibb’s posts above are really great advices.
Sven: "Pimco bond funds have a considerable outflow, billions !"
Yes, and I was one of the sellers; got rid of my last shares of a Pimco bond fund on January 25. That move didn't mean I'd never buy into one again, under different circumstances. Lately my FI focus has been on a T-bill ladder and a couple of inverse etf's.
Lots of guesswork on this thread, based on when market conditions will become supportive of bond oefs or equities in 2023. My guess is that this market will flounder around for most, if not all, of 2023, with the Feds waiting for some sign that inflation has stabilized. That may take a long time, as increased interest rates are not quickly changing inflationary conditions. Much of our infkation was because of supply problems from China, who has been struggling with Covid control--who knows when that might settle down and create large scale exports to the US, without Covid interruptions. Another major contributor is Oil supplies, largely resulting from Russian Oil issues and the Ukraine war--I don't see that ending anytime soon. Then you can get into what each country has done economically that has created "worldwide" inflation. Maybe Biden approved spending bills is contributing to this, but many of those bills will take a long period of implementation to create spending related issues. Maybe Trump taking out huge amounts of income, with his tax relief act for wealthy individuals and corporations, has something to do with the ballooning deficit problems during his term. Who knows what any, or all, of this will be under control, and inflation stabilizes. Will we enter into a recession?--most think we will, at least a mild recession, but all of that is pure speculation.
I personally think all of this will more slowly playout, and we will see the market start having some increased volatility, as we jump on every blimp as if that is a surefiire sign we have everything under control. We are in the midst of changing a large number of years of low to zero interest rates, years and years of government stimulation, and I just don't think this is a short term correction period, that will change all of that.
@dtconroe: +1. Just to be clear, I don't have a timeframe in mind; just making the point that while bond funds are still getting beaten up, and nobody knows what's going to happen when, there's no reason to completely dismiss them forever. Last post on the thread here so it can get back to the CDs and Treasuries focus.
Yes, the threads do sometimes wander around a bit, but I think that's usually healthy, as there are typically connecting elements of the conversations, such as in this case, various reactions to and handling of inflation cycles. No problema.
I share your dismay with bond funds, as they have produced a miserable return and lost principal. A year or two ago, no one seemed to believe the old adage that the return of a bond or a bond fund is essentially it's yield. With yields of 1% in 2019 etc, it is obvious many people are going to be hurt.
Buying short term bonds now ensures you get your money back, although you have an opportunity cost and do not equal inflation if rates rise substantially.
A "barbell" approach makes the most sense to me, aiming to buy longer term bonds for the expected drop in rates in 5 years or less.
If hyperinflation arrives, only cash will prosper, making several years living expenses essential to keep in cash.
One of the smartest people I have run across writing about interest rates and bonds is Harvey Bassman, with a monthly report. He invented PFIX, which is up 86% this year as bet on rising rates, and for bond fund protection.
He just doubled down on agency bonds for a variety of reasons all explained in this comprehensive discussion. The math is a bit intimidating but worth working at
The article is tough going for me, @sma3, especially with the key nomenclature appearing in Russian!! Putin may have fingers in more pies than we thought.
Bassman is suggesting that with bond volatility MOVE high, the short-term MBS tranches (structured securities) are good deals now due to their high spreads (over Treasuries).
He also likes mREITs, highly leveraged pools of mortgage securities.
Remember that the bond market anticipates some future Fed moves - may be 3-4 25-bps equivalent hikes. So, the bond market may bottom in 2022/Q4 or 2023/Q1.But this guessing has been terrible so far. Last year, when the Fed started hikes, many thought that all the Fed may do would be 3-4 25-bps equivalent hikes total, but now we are past 15th with at least 4-5 more hikes to come. So, those who have stuck with bond funds, or were early, have had severe and historic bond losses. This will change at some point.
For me, a question that will become very relevant in 2023, is a prediction of where CD rates will settle at. If we do not experience a major, or prolonged recession, I am guessing they will settle somewhat higher, than where they are at the end of 2022--maybe around 5% to 6% for shorter term rates. After that, the question will arise as to the attractiveness of CDs on a longer term investing option, than various categories of bonds and equities. At least for a significant percentage of retired investors, CDs may take away a large amount of money, that use to go into various categories of bond and equities, because CDs were too low to produce meaningul income. When all the dust starts settling, I suspect we will have a much different set of market conditions than what we have had over the last 15 to 20 years, with low to zero interest rates, and tons of government spending. Of course, if we go into a major recession, it seems likely that the government will have to lower interest rates, and it is hard to guess where that might settle.
Rates and the inflation rate probably depend on 1) the unemployment rate ( which probably will not drop as much as expected in a recession, with 3 million long Covid people unable to work), 2) Economic activity if there is a serious more than two quarter recession/depression and 3) Price of Energy and raw materials , artificially inflated by war and politics
I fear 1) and 3) are really unknowns and could make inflation stay far higher than it otherwise might with weakening economic activity, similar to the late 1970s early 1980s
There are so many moving parts. Interest payments on federal debt have increased 25% in less than a year. Does the Gov borrow more money just to pay the interest if rates stay high? Cut benefits including SS to the non-college educated ( even if they vote Trump) ?
What happens when the GOP refuses to increase debt ceiling? Will foreigners stop buying treasuries to fund all this stuff, even if USA is the "cleanest of a lot of dirty shirts" ( if judeged by GDP/debt ratios) ?
In the past, the world knew we were good for the money, as taxes could ( and can be raised, especially since they "sunset" anyway in what ? 2025). If the tea party/Trumpers are in control will they go along, or will we have the mother of all fights with people like Rick Scott apparently willing to "defund" the entire US Government.
What would that do to interest rates on Treasuries, regardless of the inflation rate?
A rational mind would not propose "Sunsetting" the entire US Government or making Medicare and Social security "discretionary".
BenWP, Sorry about the spelling/spellchecker issue-- made an edit and correction to my post. Unfortunately, I am not witty enough to have done that purposely.
At Fido, the new issue CDs available just went from 187 to 111. The issuers are pulling them from the platform. The CD % rates are dropping off at the longer end, after barely budging this past week after the latest hike.
A CPI report issued today shows inflation is "only" 7.7% YOY, and the market flips. We have suddenly moderated, apparently?????
Today's CPI and core CPI numbers suggested inflation may have peaked and likely to fall further. Imagine if the numbers came out on the opposite side?
This implies next rate hike will be smaller, 50 bps in December and taper down to 25-25-25 for next few FOMC meetings in 2023, until it reaches some terminal rate, ~5%. I will be patient and buy what is available. It is likely there will be more opportunities in coming months.
@JD_co- thanks much for that info- I followed and did likewise: • UBS Bank USA UT, Cusip 90348J7C8, 4.9%, 11/18/24 • UBS Bank USA UT, Cusip 90348J7D6, 4.95%, 11/17/25
Mortgage rates dropped too. Call me skeptical but I'm not sure today's CPI necessarily constitutes a trend, though it would be nice if it did. I'd be delighted with a few more 5% up days: a couple years' worth of CD returns just like that!
JD_co and Old_Joe, you two are too fast. Most of the 2-3 year non-callable CDs you mentioned are all gone by the time I got to my brokerage. Will wait for next week.
Many things happened. The dollar weakened today against major currencies so many unhedged foreign funds are up too. The unemployment numbers are up indicating the softening of labor market and cost. Earnings among tech companies are weakening too. Watch for consumer spending in this holiday season.
@Sven, there was some heavy and fast CD buying this AM. It may just be a knee-jerk reaction to today's CPI.
I'm thinking Banks may cap their CD rates closer to 5% if the target Fed Funds Rate is seen maxing out at 4.50%. - 4.75%. Hope I am wrong about this, and CD rates crawl higher from here. But 6% CDs now seem like a stretch.
The terminal rate is projected to be 5.00-5.25% if the Fed maintains their path of rate hike. That is the worse scenario if the inflation fails to response to the rate hikes. Now there is an indication that it is slowing, and a more moderate pace could be sufficient. Getting yield close to the terminal rate is actually very good, especially when these are longer duration CDs. Tomorrow the bond market is closed, but we may see new brokered CDs.
By the way, yields of money market funds have moved up to 3%.
Thanks to @yogibb, I have updated the Fed’s terminal rate above.
@Sven et al At Fidelity: The standard core MMKT's of SPAXX and FDRXX (common temporary parking spots from sales, and then awaiting the next purchase) are paying a 3.24% yield. FZDXX is a premium MMKT that must be purchased, is paying a 3.69% yield. FZDXX = $10,000 minimum for IRA accounts and $100,000 for taxable accounts.
Current CD rates at Schwab today are as follows: 3month (4.06%), 6month (4.55%), 9momth (4.6%), 1yr (4.8%), 18mo (4.8%), 2yr (4.85%), 3yr (4.9%), 4yr (4.85%), 5yr (4.0%)
Money Market rates at Schwab today are as follows:SWVXX (3.7%), SNAXX (3.85%)
My thoughts are that CDs are in sort of a pause and evaluate period, with only about .8% difference betwee 3 month and 2 yr. Money Market rates are continuing relatively high, only slightly below 3 month CDs. It will be interesting to see if the Feds raise rates again in December, as inflation measures have started a slight decline. Banks are clearly evaluating the risks/rewards of what they are willing to offer with new issue CDs, but for a retiree, short term CDs from 4.55% to 4.8%, are well worth considering, but if you are into more of a trading mentality, it seems that holding cash in Money Markets may be your preferred option.
Comments
The other question on individual agency and corporate bonds is beyond my competence. However, I would stay away from callable long term bonds. They can easily call back these bonds when the rate drops. I only buy bonds with call protection.
@Old_Joe’s and @yogibb’s posts above are really great advices.
Yes, and I was one of the sellers; got rid of my last shares of a Pimco bond fund on January 25. That move didn't mean I'd never buy into one again, under different circumstances. Lately my FI focus has been on a T-bill ladder and a couple of inverse etf's.
I personally think all of this will more slowly playout, and we will see the market start having some increased volatility, as we jump on every blimp as if that is a surefiire sign we have everything under control. We are in the midst of changing a large number of years of low to zero interest rates, years and years of government stimulation, and I just don't think this is a short term correction period, that will change all of that.
I share your dismay with bond funds, as they have produced a miserable return and lost principal. A year or two ago, no one seemed to believe the old adage that the return of a bond or a bond fund is essentially it's yield. With yields of 1% in 2019 etc, it is obvious many people are going to be hurt.
Buying short term bonds now ensures you get your money back, although you have an opportunity cost and do not equal inflation if rates rise substantially.
A "barbell" approach makes the most sense to me, aiming to buy longer term bonds for the expected drop in rates in 5 years or less.
If hyperinflation arrives, only cash will prosper, making several years living expenses essential to keep in cash.
One of the smartest people I have run across writing about interest rates and bonds is Harvey Bassman, with a monthly report. He invented PFIX, which is up 86% this year as bet on rising rates, and for bond fund protection.
He just doubled down on agency bonds for a variety of reasons all explained in this comprehensive discussion. The math is a bit intimidating but worth working at
https://www.convexitymaven.com/wp-content/uploads/2022/11/Convexity-Maven-Deep-Dive-MBS.pdf
He also likes mREITs, highly leveraged pools of mortgage securities.
Remember that the bond market anticipates some future Fed moves - may be 3-4 25-bps equivalent hikes. So, the bond market may bottom in 2022/Q4 or 2023/Q1.But this guessing has been terrible so far. Last year, when the Fed started hikes, many thought that all the Fed may do would be 3-4 25-bps equivalent hikes total, but now we are past 15th with at least 4-5 more hikes to come. So, those who have stuck with bond funds, or were early, have had severe and historic bond losses. This will change at some point.
Does anyone see rates going double digits ?
I fear 1) and 3) are really unknowns and could make inflation stay far higher than it otherwise might with weakening economic activity, similar to the late 1970s early 1980s
There are so many moving parts. Interest payments on federal debt have increased 25% in less than a year. Does the Gov borrow more money just to pay the interest if rates stay high? Cut benefits including SS to the non-college educated ( even if they vote Trump) ?
What happens when the GOP refuses to increase debt ceiling? Will foreigners stop buying treasuries to fund all this stuff, even if USA is the "cleanest of a lot of dirty shirts" ( if judeged by GDP/debt ratios) ?
In the past, the world knew we were good for the money, as taxes could ( and can be raised, especially since they "sunset" anyway in what ? 2025). If the tea party/Trumpers are in control will they go along, or will we have the mother of all fights with people like Rick Scott apparently willing to "defund" the entire US Government.
What would that do to interest rates on Treasuries, regardless of the inflation rate?
A rational mind would not propose "Sunsetting" the entire US Government or making Medicare and Social security "discretionary".
https://www.forbes.com/quotes/3725/
“When all the dust starts selling, I suspect we will have a far different set of market conditions…”
That indeed will be an intriguing market! That could push me to stop cleaning house in hopes of there being a market for dust.
A CPI report issued today shows inflation is "only" 7.7% YOY, and the market flips. We have suddenly moderated, apparently?????
https://mutualfundobserver.com/discuss/discussion/60263/october-inflation-report-price-pressures-show-signs-of-cooling#latest
Thanks for the heads up news on CD rates that react quickly. Are you looking for something (non-callable) beyond 2-5 years?
You have any other ideas/suggestions?
Today's activity is spooking me out.
This implies next rate hike will be smaller, 50 bps in December and taper down to 25-25-25 for next few FOMC meetings in 2023, until it reaches some terminal rate, ~5%. I will be patient and buy what is available. It is likely there will be more opportunities in coming months.
• UBS Bank USA UT, Cusip 90348J7C8, 4.9%, 11/18/24
• UBS Bank USA UT, Cusip 90348J7D6, 4.95%, 11/17/25
OJ
Many things happened. The dollar weakened today against major currencies so many unhedged foreign funds are up too. The unemployment numbers are up indicating the softening of labor market and cost. Earnings among tech companies are weakening too. Watch for consumer spending in this holiday season.
I'm thinking Banks may cap their CD rates closer to 5% if the target Fed Funds Rate is seen maxing out at 4.50%. - 4.75%. Hope I am wrong about this, and CD rates crawl higher from here. But 6% CDs now seem like a stretch.
Gonna have to wait and see. Today was weird.
By the way, yields of money market funds have moved up to 3%.
Thanks to @yogibb, I have updated the Fed’s terminal rate above.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
52-wk T-Bill (EOD) 4.59% (also the peak of the yield-curve).
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_bill_rates&field_tdr_date_value_month=202211
At Fidelity: The standard core MMKT's of SPAXX and FDRXX (common temporary parking spots from sales, and then awaiting the next purchase) are paying a 3.24% yield.
FZDXX is a premium MMKT that must be purchased, is paying a 3.69% yield. FZDXX = $10,000 minimum for IRA accounts and $100,000 for taxable accounts.
Money Market rates at Schwab today are as follows:SWVXX (3.7%), SNAXX (3.85%)
My thoughts are that CDs are in sort of a pause and evaluate period, with only about .8% difference betwee 3 month and 2 yr. Money Market rates are continuing relatively high, only slightly below 3 month CDs. It will be interesting to see if the Feds raise rates again in December, as inflation measures have started a slight decline. Banks are clearly evaluating the risks/rewards of what they are willing to offer with new issue CDs, but for a retiree, short term CDs from 4.55% to 4.8%, are well worth considering, but if you are into more of a trading mentality, it seems that holding cash in Money Markets may be your preferred option.
I skimmed through the other bonds
Almost all either corporate CDs etc being offered at Schwab are callable.
Maybe the "smart money" assumes that interest rates are going down in 2 to 4 years.
Maybe better off in longer term treasuries even though yield worse. Have to do the math to make sure.