Best of the Week
Most Popular
1.Canada Real Estate Bubble - Harry_Dent
2.UK House Prices ‘On Brink’ Of Massive 40% Collapse - GoldCore
3.Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - Nadeem_Walayat
4.Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - Marc_Horn
5.5 Maps That Explain The Modern Middle East - GEORGE FRIEDMAN
6.Gold Back With A Vengeance As Bitcoin Bubble Bursts - OilPrice_Com
7.Gold Summer Doldrums - Zeal_LLC
8.Crude Oil Trade & Nasdaq QQQ Update - Plunger
9.Gold And Silver – Why No Rally? Lies, Lies, And More Lies - Michael_Noonan
10.UK Election 2017 Disaster, Fake BrExit Chaos, Forecasting Lessons for Next Time - Nadeem_Walayat
Last 7 days
Students, It’s Time to Prepare Your Finances for the Years Ahead - 25th Jul 17
Stock Market and Gold Stocks Trend Forecast Update - 25th Jul 17
Saving Illinois: Getting More Bang for Its Bucks - 24th Jul 17
3 Stocks Sectors That Will Win in The Fed’s Great Balance-Sheet Unwind - 24th Jul 17
Activist Investors Are Taking Over Wall Street, Procter and Gamble Might Never Remain the Same - 24th Jul 17
Stock Market Still on Track - 24th Jul 17
Last Chance For US Dollar To Rally - 24th Jul 17
UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - 22nd Jul 17
Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts - 22nd Jul 17
Warning: The Fed Is Preparing to Crash the Financial System Again - 21st Jul 17
Gold / Silver Shorts Extreme - 21st Jul 17
GBP/USD Bearish Factors - 21st Jul 17
Gold Hedges Against Currency Devaluation and Cost Of Fuel, Food, Beer and Housing - 21st Jul 17
Is It Worth Investing in Palladium? - 21st Jul 17
UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - 21st Jul 17
The Fed May Show Trump No Love - 20th Jul 17
The 3 Best Asset Classes To Brace Your Portfolio For The Next Financial Crisis - 20th Jul 17
Gold Stocks and Bonds - Preparing for THE Bottom - 20th Jul 17
Millennials Can Punt On Bitcoin, Own Safe Haven Gold For Long Term - 20th Jul 17
Trump Has Found A Loophole To Rewrite Trade Agreements Without Anyone’s Permission - 20th Jul 17
Basic Materials and Commodities Analysis and Trend Forecasts - 20th Jul 17
Bitcoin PullBack Is Over (For Now): Cryptocurrencies Gain Nearly A 50% In Last 48 Hours - 19th Jul 17
AAPL's 6% June slide - When Prices Are Falling, TWO Numbers Matter Most - 19th Jul 17
Discover Why A Major American Revolution Is Brewing - 19th Jul 17
iGaming – Stock Prices - 19th Jul 17
The Socionomic Theory of Finance By Robert Prechter - Book Review - 18th Jul 17
Ethereum Versus Bitcoin – Which Cryptocurrency Will Win The War? - 18th Jul 17
Accepting a Society of Government Tyranny - 18th Jul 17
Gold Cheaper Than Buying Greek Villas in 2012 - 18th Jul 17
Why & How to Hedge the Growing Risks of Holding Stocks - 18th Jul 17
Relocation: Everything You Need to do for a Smooth Transition Abroad - 17th Jul 17
A Former Lehman Brothers Trader: It’s Time To Buy Brick And Mortar Retailers - 17th Jul 17
Bank Of England Warns “Bigger Systemic Risk” Now Than 2008 - 17th Jul 17
Bitcoin Price “Deja Vu” Corrective Sequence - 17th Jul 17
Charting New Low in Speculation in Gold and Silver Markets - 17th Jul 17
Bitcoin Crash - Is This The End of Cryptocurrencies? - 17th Jul 17
The Fed's Inflation Nightmare Scenario - 17th Jul 17
Billionaire Investors Backing A Marijuana Boom In 2017 - 17th Jul 17
Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - 17th Jul 17
Gold and Silver Biggest Opportunity Since Late 2015, Last Chance at These Prices - 17th Jul 17
Stock Market More to Go - 17th Jul 17
Emerging Markets & Basic Materials Stocks Breaking Out Together - 16th Jul 17
Stock Market SPX Uptrending Again After Microscopic Correction - 15th Jul 17

Market Oracle FREE Newsletter

Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts

What’s the Fed Factor in US Treasury Bond Yields?

Interest-Rates / US Bonds May 11, 2017 - 05:04 PM GMT

By: Harry_Dent

Interest-Rates I hate taxes.

I don’t begrudge paying for a functioning government, it’s the dysfunctional favoritism that ticks me off.

This amorphous blob in Washington sucks dollars out of my wallet and then tells me not to worry about how it’s spent, even as I watch the government hand my dollars out like candy.

I’m still beside myself about General Motors.


The common version of events tells us that the company went bankrupt. Right.

Tell that to the investors that owned GM bonds backed by physical equipment. They were told to go to the back of the line. Instead, union pension funds (junior creditors, mind you) were given first dibs on the assets, and ended up with 100% of their benefits.

That doesn’t really sound like a bankruptcy, does it?

And then GM was allowed to punt what became known as “old GM,” saddling that sad sack with all the debts and burdens, but hanging on to its operating losses.

This meant GM wouldn’t pay income taxes for years as it raked in cash with no debt.

And don’t get me started on the home builders, who were allowed to extend their lookback when matching up losses in the late 2000s, against earlier profits, again to drive their tax burdens below zero.

Did I mention I hate taxes? But I pay them.

The IRS can confiscate assets like no other entity, so I never get close to the questionable line. In fact, I estimate my taxes and pay quarterly.

I’m so conservative that I hold a year’s worth of tax payments aside, to make sure that I can write the checks as they come due.

But keeping the funds in just cash makes no sense, so I create a short-term bond ladder. The returns are tiny, but they exist, and I’m always looking for another way to boost my balance sheet.

To find suitable investments, I turned to my brokerage firm’s website, searching A-rated bonds with maturities two months, five months, and eight months out. As an ex-bond trader, I’m very familiar with how yield curves work, even when they are as short as two to eight months.

I immediately reached for yield in the A-rated pile, discarding anything financial, looking for companies that make real stuff and operate mostly in the U.S. As I perused the offerings, I was struck by what I didn’t find.

Yield.

Now, when you look at returns on bonds that mature in eight months, there won’t be much yield anyway. But these bonds were paying .06% and .159%. And these are annualized numbers!

I immediately flipped back to the main yield/maturity matrix page on the firm’s website, and I scanned return ranges by quality and issuing class, and found something surprising.

What was an anomaly years ago is now commonplace. U.S. Treasury bonds carry higher yields – and in some cases, much higher yields – than lowly A-rated paper.

Diageo, PLC, the alcohol company, paid 0.056%, while John Deere paper returned .15%. U.S. Treasury bonds of the same maturity paid 0.92%… six times what I’d earn on the John Deere bonds and 15 times what I’d get on the Diageo paper.

And it’s much better than I’d get if I tried to buy German or Japanese government bonds. Those pay, or rather require that I pay, -0.88% and -0.22% respectively, and that’s for 2-year bonds!

Clearly, when it comes to short-term fixed income, the U.S. qualifies as a high-yield offering, even though there’s no chance of the U.S. defaulting. If the blame for the high borrowing cost is not a function of repayment risk, then it must be something else.

And we know what that other factor would be – the Federal Reserve.

With low growth and low productivity, the U.S. economy isn’t breaking any speed records. Lending is softening, not expanding. And yet the Fed is pushing rates higher, against the tide.

The central bank makes this happen by offering reverse repurchase agreements to money market funds and other institutional short-term borrowers at the rates it wants to achieve. But the Fed only works in government issued collateral, so these bonds end up paying more than lower rated bonds of the same maturity.

It’s all very strange.

While I might be able to capture a bit more yield because of this, I end up losing as a taxpayer. The Fed’s distortion of the short-term market pushes up the borrowing cost of the government when it issues T-bills. And there are other, bigger losers – banks.

The Fed might not be following the lead of the moribund economy, but long-term bond buyers know the score.

(Incidentally, my colleague Lance, who runs the Treasury Profits Accelerator trading service, often recommends short-term trades based on market overreactions to Fed speeches and announcements, and rising and falling bond yields.)

After hitting a high of more than 2.6% earlier this year, 10-year U.S. Treasury bond yields recently touched 2.2%. As the Fed pushes up short-term rates and investors pull down long-term rates, the difference between the two shrinks, indicating a flat yield curve and modest economic growth.

Banks pay depositors based on the short-term rate set by the Fed, but they lend money long –term based on prevailing rates. The difference between the two is called the net interest margin (NIM), and as it shrinks, banks earn less on their fundamental reason for being, which is taking deposits and lending.

If NIM remains low, then bank prospects grow dimmer, taking some of the punch out of the financial sector in the months to come, adding to the headwinds for the equity indexes this year.

We’ve long maintained that long-term interest rates will stay low for years, allowing for some volatility based on central bank intervention (ending QE and eventually cutting its balance sheet) and geopolitical events.

As the Fed raises short-term rates to give itself some breathing room ahead of the next recession, banks will pay the price.

But at least I’ll earn a bit more money while waiting to pay my taxes.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2017 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife