Given the upward trajectory in fiscal deficit spending in the developed nations as well as in Asia, it’s difficult for me to contemplate a scenario where bond yields fall back to their prior range from last decade. Not only will financing be more difficult for us to come by, but it will come at a higher cost. This, of course, is the textbook definition of crowding out, where only the biggest and strongest firms as well as the governments can effectively manage borrowing at these costlier levels.
As I have been suggesting for the past couple years, lock in financing as we can and not to wait for bond yields to fall nor short-term interest rates to drop in any meaningful way. Anyone who has waited for borrowing costs to come down has paid a tremendous opportunity cost as asset prices and asset cash flows have continued to spiral higher. The Federal Reserve and other central banks know very well that price inflation is higher than the official readings and can gauge on the street how poorly the average person is faring.
I notice that the five-year forward contract for the FED funds rate is currently around 3.6%. This rate is certainly much higher than it was just prior to covid and I don’t know how the Federal Reserve will be able to lower the Fed funds rate down to that level or below anytime soon. Even if the Federal Reserve is able to slice the FED funds rate 150 basis points, this would only translate into about a 3.5 to 4% 10-year yield. If this is the case, treasury bond investors may be in for a disappointment as capital appreciation potential lags.
Thus, this blog’s recommendation of parking cash and fixed income investments in short-term Treasuries has been paying off so far. We have been earning well over 5% for the past year with no worries regarding loss of principal. Berkshire Hathaway has also taken this route and has earned a lot of income with no pain.
How Long Will High Rates Last? Bond Markets Say Maybe Forever
(Bloomberg) — Just as optimism is growing among investors that a rally in US Treasuries is about to take off, one key indicator in the bond market is flashing a worrying sign for anyone thinking about piling in.
First, the good news. With 2024’s midway point in sight, Treasuries are on the cusp of erasing their losses for the year as signs finally emerge that inflation and the labor market are both truly cooling. Traders are now betting that may be enough for the Federal Reserve to start cutting interest rates as soon as September.
But potentially limiting the central bank’s ability to cut and thus setting up a headwind for bonds is the growing view in markets that the economy’s so-called neutral rate — a theoretical level of borrowing costs that neither stimulates nor slows growth — is much higher than policymakers are currently projecting.
“The significance is that when the economy inevitably decelerates, there will be fewer rate cuts and interest rates over the next ten years or so could be higher than they were over the last ten years,” said Troy Ludtka, senior US economist at SMBC Nikko Securities America, Inc.
Forward contracts referencing the five-year interest rate in the next five years — a proxy for the market’s view of where US rates might end up — have stalled at 3.6%. While that’s down from last year’s peak of 4.5%, it’s still more than one full percentage higher than the average over the past decade and above the Fed’s own estimate of 2.75%.
This matters because it means the market is pricing in a much more elevated floor for yields. The practical implication is that there are potential limits to how far bonds can run. This should be a concern for investors gearing up for the kind of epic bond rally that rescued them late last year.
For now, the mood among investors is growing more and more upbeat. A Bloomberg gauge of Treasury returns was down just 0.3% in 2024 as of Friday after having lost as much as 3.4% for the year at its low point. Benchmark yields are down about half a percentage point from their year-to-date peak in April.
Traders in recent sessions have been loading up on contrarian bets that stand to benefit from greater odds the Fed will cut interest rates as soon as July, and demand for futures contracts that a rally in the bond market is booming.
But if the market is right that the neutral rate – which cannot be observed in real time because it’s subject to too many forces – has permanently climbed, then the Fed’s current benchmark rate of more than 5% may be not as restrictive as perceived. Indeed, a Bloomberg gauge suggests financial conditions are relatively easy.
“We’ve only seen fairly gradual slowing of the economic growth, and that would suggest the neutral rate is meaningfully higher,” said Bob Elliott, CEO and chief investment officer at Unlimited Funds Inc. With the current economic conditions and limited risk premiums priced into long-maturity bonds, “cash looks more compelling than bonds do,” he added.
The true level of the neutral rate, or R-Star as it is also known, has become the subject of hot debate. Reasons for a possible upward shift, which would mark a reversal from a decades-long downward drift, include expectations for large and protracted government budget deficits and increased investment for battling climate change.
Further gains in bonds may require a more pronounced slowdown in inflation and growth to prompt interest rate cuts more quickly and deeply than the Fed currently envisions. A higher neutral rate would make this scenario less likely.
Economists expect data next week will show that the Fed’s preferred gauge of underlying inflation slowed to an annualized rate 2.6% last month from 2.8%. While that’s the lowest reading since March 2021, it remains above the Fed’s goal for 2% inflation. And the unemployment rate has been at or below 4% for more than two years, the best performance since 1960s.
“While we do see pockets of both households and business suffering from higher rates, overall as a system, we clearly have handled it very well,” said Phoebe White, head of US inflation strategy at JPMorgan Chase & Co.
The performance of financial markets also suggests the Fed’s policy may not be restrictive enough. The S&P 500 has hit records almost on a daily basis, even as shorter maturity inflation-adjusted rates, cited by Fed Chair Jerome Powell as an input for gauging the impact of Fed policy, have surged nearly 6 percentage points since 2022.
“You do have a market that’s been incredibly resilient in the face of higher real yields,” said Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co.
What Bloomberg Strategists Say …
“In the space of just a couple of dot plots, the Federal Reserve has raised its estimate of the nominal neutral rate from 2.50% to 2.80% — which shows how central banks around the world are still trying to get their arms around the scale of the economic expansion and the inflation seen in this cycle. Which is why the current market pricing that expects almost two full rate cuts from the Fed this year looks overstated.”
— Ven Ram, cross-asset strategist
With exception of a few Fed officials such as Governor Christopher Waller, most policymakers are moving to the camp of higher neutral rates. But their estimates varied in a wide range between 2.4% to 3.75%, underscoring the uncertainties in making the forecasts.
Powell in his discussions with reporters on June 12, following the wrap of the central banks two-day policy meeting, seemed to downplay its importance in the Fed’s decision making, saying “we can’t really know” whether neutral rates have increased or not.
For some in the market, it’s not an unknown. It’s a new higher reality. And it’s a potential roadblock for a rally.
I’m always learning something new from your blog.
Who is Jared Isaacman?
At what point do Pfizer investors realize they made the wrong choice? 🤣🤣🤣
Recent research on Eli Lilly revealed this:
Zepbound, from drugmaker Eli Lilly, belongs to a new class of medications, called GLP-1 agonists, that have skyrocketed in popularity in the U.S. in recent years. Novo Nordisk’s Ozempic and Wegovy and Lilly’s Mounjaro are the same type of drugs
An unprecendent number of people are taking these weight-loss drugs, heavily marketed on TV. I believe this is a huge reason for this company’s surge in stock.
Totally separate situation from the “safe and effective” vaccine scandal of Pfizer.
Maybe you already saw this recent CDC official recommendation that we all get vaxed with Covid and Flu shots this fall – anyone who is 6 months old or older!! Incredible. It’s like the Pfizer (mentioned) lawsuit isn’t happening, the vaccines truly are “safe and effective,” and nobody has died or gotten sick or debilitated from the bioweapons at all. What a bunch of psychopaths!! I wonder what percentage of the population will now line up for the COVID shots this fall. And I also understand that the new flu shots will be using the same mRNA technology as the COVID shots.
https://www.scrippsnews.com/health/cdc-recommends-updated-covid-19-flu-shots-this-fall
These elites are not psychopaths in the true sense. They actually believe that what they’re doing is proper and fitting.
These are the same synagogue people who demand advertisers show at least 70% of those in the advertisements to be schvartzes. If a publicly traded corporation does not show enough schvartzes in its advertisements, its cost of capital will spiral much higher.
Moreover, many private firms whose management aspires to become large, will always show a good 70% of their advertisement characters as black. I would have to say that about 10 to 15% are white Caucasian European.
These synagogue members who prop up people like Chuckie Schumer and Michael Obama, are the same synagogue people who hate Christian white European people and today’s Christians are on board with it. Today’s Caucasian Christians, whom I call the Pauline Christian Laodiceans, hate their country and hate their race.
In their polluted and diluted minds, that makes their job of salvation easy and they can be internationalist Buddhists. Keep in mind that this last generation of poisoned Christians were indoctrinated in the public schools and also received dozens of injections as children. They were raised on anti-nazi movies like Schindler’s list, which were nothing but propaganda placements. I often think of Bertrand Russell in this regard.
I’ve gotten thousands of emails over the past decade from the deceived Christian souls who tell me how evil the United States is and always was. It’s mighty convenient for them to think this way as they can sit back and relax, tapping on their keyboards, not having to worry about standing up for their fellow Caucasian countryman.
I now see these Laodicean pastors who talk about demons and fallen angels, rather than the synagogue Jews, who are directing all of this. They send their daughters off to marry other kinds. They will have no mercy at the judgment.
There’s no pushback anymore, so just mend your fences take care of those around you.
As for those who will line up and take the injections, Pfizer’s stock is indicating to me that there will be a lot less people than previously. They will always be the libtards that will take these injections, even if they see those in the front of the line who already received them dropping dead. They deserve to be killed anyway. Their participation is killing us. Even if Pfizer never pays out a dime in damages, which I doubt it ever will, a much greater percentage of the population will be reluctant or will refuse to take any Pfizer made injection.
The synagogue elites got away with it once and I doubt they’ll get away with it again with any large success.
That said, they may not get away with the bird flu hype and associated mRNA bird flu vaccine. However, people today are a lot dumber and may fall for the same tricks.
People are retarded and people who know better, act willfully retarded to get along.
On a separate note I was in a CVS in Hartford and they have the Tide detergent and deodorant locked up. Pretty sad .
Hartford, CT? That makes sense. What a sad place Hartford turned out to be. When I was a young lad I used to go through with my family up to VT. The city was much nicer before all the others moved in. The decay was gradual and this has been since the early 70s.
When people like I am are dead and buried, the world will be a much nicer place and the various colored pigs can roll around in the mud with joy.
Maybe a better term to use for “them,” than psychopaths, might have been “diabolical narcissists.”
You sound a lot like this Canadian man called “Alex on Life,” who goes into the psychology of the dangerous “normie” and the “jooz” running it all, and their symbiotic relationship. He contends that the normies work for the SOS/jew leaders who control everything and have completely defeated the entire world.
Most of his videos were scrubbed, in addition to these older videos on Odysee, search bitchute for Alex on Life, and you will find some recent videos using the code word “alien.”
https://odysee.com/@AlexOnLife:7/76-Let-Them-Have-Their-Vaccine-480:6
https://odysee.com/@AlexOnLife:7/77-Support-The-Vax-3.86GB:b
He contends that most “do not know the jew”… Also, as you indicated, it is acceptable to them to do what they are doing. They are expected to lie to the goyim, who have nobody – their teachers, pastors, parents, media, etc – to tell them any of this harsh reality.
This is what happens when a company’s board hires the only woke black woman of an S&P 500 firm to be its CEO. WBA is quickly becoming the new Rite Aid. WBAs capital structure is permanently destroyed, thanks to the Marxist thinking CEO….
Walgreens Slashes Outlook on Tough Retail Environment
(Bloomberg) — Walgreens Boots Alliance Inc. slashed its fiscal 2024 guidance due to a worse-than-expected retail environment and announced it would close more stores as part of a strategic review.
Walgreens lowered its forecast range for full-year adjusted earnings to $2.80 to $2.95 per share after narrowing its guidance to $3.20 to $3.35 last quarter. Adjusted earnings for the fiscal third quarter were 63 cents a share, worse than the 68 cents Wall Street analysts anticipated. Revenue in the period was $36.4 billion, compared to an average estimate of $35.8 billion.
In an update of its ongoing strategic review, it said that it will close some underperforming US stores and make organizational changes to better align its pharmacy and health-care units. The company is contending with a challenging retail environment as consumers spend less on nonessential items and seek more affordable options.
It also announced a $431 million writedown of its international Boots chain. The company had revived discussions last year about a potential exit from Boots. However, it has shelved plans for a possible initial public offering of Boots and is now exploring other options, Bloomberg reported earlier this month, citing people with knowledge of the matter. The Boots business saw quarterly sales of $5.7 billion, an increase of 2.8% from the year-ago period.
Its US retail pharmacy unit posted revenue of $28.5 billion, an increase of 2.3% from the year-ago quarter.
Like its rival CVS Health Corp, Walgreens has been moving away from its retail roots and pushing deeper into more lucrative health care including primary care. The efforts have hit Walgreens’ profits, however, leaving investors dissatisfied and putting pressure on executives to execute a turnaround.
The shares lost half their value during the short tenure of Chief Executive Officer Roz Brewer. Under current CEO Tim Wentworth, who was appointed in 2023, the company has lauched a review of the business aimed at increasing cash flow and investing more money in its pharmacy and health-care businesses. Late last year, the drugstore announced a $1 billion cost-cutting program, closing unprofitable locations and putting the brakes on non-essential projects.
The US health-care unit, which includes primary-care provider VillageMD, posted revenue of $2.1 billion, an increase of 7.6% compared to the year-ago quarter. Walgreens has invested $5.2 billion in VillageMD, allowing it to open hundreds of doctors’ offices in its drugstores. It has since announced plans to close 160 of the clinics, and last quarter announced a $5.8 billion writedown related to the business.
This explains why Walgreens online ordering through the app does not work as promised. I tried ordering their nonprescription items and it gets stuck or there are error messages. I have never seen a more sloppy set up.
Own SFRs, not commercial RE…
Empty Offices Risk Wiping Out $250 Billion in Commercial Property Value
(Bloomberg) — Nearly one-quarter of all US office space will be vacant by 2026 as working from home persists, slicing commercial-property values by as much as $250 billion, according to a report from Moody’s.
Office-vacancy rates are expected to rise to 24% from 19.8% in the first quarter of this year in the US, reducing revenue for office landlords by between $8 billion and $10 billion when combined with the impact of lower rents and lease turnovers, the authors of the report said. That, in turn, could translate into “property value destruction” in the range of a quarter-trillion dollars, Todd Metcalfe, Moody’s associate director of commercial real estate (CRE) forecasting, and Tom LaSalvia, Moody’s head of CRE economics, said in a separate analysis that’s not contained in the report.
The figures illustrate the gloomy prospects faced by property owners and lenders as employers continue to jettison square footage or shift from multi-year leases to shorter-term and more flexible co-working arrangements. A full 85% of North American organizations polled by brokerage Jones Lang LaSalle Inc. have implemented hybrid work, and occupancy across offices in major US cities is stuck at about 50% of pre-pandemic levels. Wavering demand and increased borrowing costs have slammed office valuations, especially among older buildings.
“The argument for maintaining or even increasing remote work practices remains compelling for many businesses,” the Moody’s authors said. “If productivity remains stable and costs can be reduced by forgoing physical office spaces, the rationale for mandating in-office attendance diminishes.”
Moody’s analysis focused on white-collar sectors that have highest work-from-home rates and also account for the lion’s share of office property in the US, such as the finance, information, real estate and administrative sectors. It controlled for those who worked from home before the pandemic, and accounted for the ongoing decline in office space allotted per worker, which began after the 2008 financial crisis and has accelerated since then.
Using multiple sets of government and academic data including the Survey of Working Arrangements and Attitudes, Moody’s determined that office workers today need about 14% less office space than they did before the pandemic. The figure corresponds to research from the McKinsey Global Institute, which concluded that there will be 13% less demand for office space in a typical city globally by 2030. McKinsey also found that office-property values will decline by anywhere between $800 billion and $1.3 trillion over that time period.
Eventually, the Moody’s authors said, vacancy rates will plateau as enough offices are torn down or converted to other uses like warehouses or residential property.
“Right-sizing will continue over the next decade as the market shakes out less efficient space for flexible floorplans that support our relatively new working habits,” the report said.
Some rosy housing data from Tuesday morning….
FHFA House Price Index (YoY) (Apr)
Act: 6.3% Cons: 6.3% Prev: 6.7%
FHFA House Price Index (MoM) (Apr)
Act: 0.2% Cons: 0.3% Prev: 0.1%
FHFA House Price Index (Apr)
Act: 424.3 Prev: 423.3
S&P/CS HPI Composite – 20 s.a. (MoM) (Apr)
Act: 0.4% Cons: 0.3% Prev: 0.3%
S&P/CS HPI Composite – 20 n.s.a. (MoM) (Apr)
Act: 1.4% Cons: 1.3% Prev: 1.6%
S&P/CS HPI Composite – 20 n.s.a. (YoY) (Apr)
Act: 7.2% Cons: 7.0% Prev: 7.5%
Stone,
What do you think of this article originating on Bloomberg that some big fish trader placed a bet that the Fed will be forced to lower the Fed Funds by 300 basis points this fall? I also saw it on the Bloomberg site. Does that mean a stock market crash as well?
https://www.zerohedge.com/markets/market-spooked-big-bet-fed-will-cut-300bps-q1-2025
I read the original Bloomberg article. I did not read the ZH version. I notice the Bloomberg writer stated this trade was not necessarily a speculation play per se, but part of another overall strategy and a hedge play.
I would not read much of anything into these articles. Why? For every buyer of a future option there is someone else who is writing the option and selling it. The article said that hedge funds are wildly short while asset managers are long.
If bond yields and short-term interest rates fall, the markets will be well supported. Either way it doesn’t mean anything regarding a crash.
Perhaps the globalists are planning some and are loading up on futures call options like they loaded up on put options just prior to 9/11.
Actually, I read the original Bloomberg article. I didn’t read the ZH.
I found the original article link not behind a paywall
https://www.infinhub.com/news/across-the-web/yahoo-financebond-traders-boldly-bet-on-basis-points-of-fed-cuts-by-march-21434?cid=2
Canada inflation quickens to 2.9%, reducing odds of July cut
https://www.bnnbloomberg.ca/canada-inflation-quickens-to-2-9-reducing-odds-of-july-cut-1.2089153
If the Fed lowers interest rates then that will decimate any credibility in the USD. Investors will see the high debt levels and the extra dollars to be printed to pay all this debt.
The dollar will hold up as it’s already too strong in the international markets. High overnight domestic rates are having an adverse impact around the world. The real winners will be the asset owners. The Fed will conjure up another scheme to soak up the debt. This overnight rates bonanza was a real boost to the wealth consolidation process. Very original and ingenious.
From Bloomberg this morning…
High rates, forever?
How long will high rates be with us? Bond markets say maybe forever. Just as optimism is growing that a rally in US Treasuries is about to take off, one key indicator in the bond market is flashing a worrying sign for anyone thinking about piling in. The economy’s so-called neutral rate — a theoretical level when borrowing costs neither stimulate nor slow growth — looks to be much higher than policymakers are currently projecting. Later this week, the Federal Reserve’s key inflation gauges may also offer clues how likely policymakers are to go on disappointing bond bulls betting on two US rate cuts this year.
For those of us who borrow to build up an SFR rental portfolio, the real cost of our loans is actually lower than it was 5 years ago. Prior to covid and just thereafter, I was lucky to snag a 30-YEAR FIXED DSCR loan at 6%. I now have to borrow at around 7.5 to 7.875%. However, inflation is higher now as well as rent growth, and any cash I borrow can be parked overnight in a money market fund for at least 5%.
From 2010 to 2019, my rent growth was about 1.5% a year. For many of my tenants I wouldn’t raise rent for at least three to four years. Rent growth post covid is now about 5%. That’s a huge difference and can really compound over the past five years.
Historically speaking, these borrowing rates are not all that high, given the market and economic backdrops. I don’t know how the Federal Reserve can lower the overnight rates in any profound way, especially since the UST has borrowed so heavenly on the short end of the yield curve. The only way that long-term Treasuries can experience any profound capital gains is to continue keeping the yield curve inverted.
The so-called neutral rate is much higher than what even the FED is contemplating. I suspect it’s at least 4% and that’s probably where the FED will have to stop indefinitely. There’s just too much interest income come supporting the asset markets. If this interest income dries up, the FED will definitely have to step in and reignite QE to add to its balance sheet.
But at some point, either the FED will have to step in in a profound way or the UST will shift its borrowings out to the longer end. I don’t know how long the yield curve inversion can last. 5 years? Forever?