Displaying items by tag: bonds

(New York)

We know, we know, a mortgage meltdown sounds like a claim coming out of left field. However, it comes from a potentially big issue that no one is paying attention to—the fact that the Fed is winding down its massive $1.6tn+ mortgage bond portfolio. As the Fed has begun to unwind its MBS portfolio, there are growing worries over the economy and real estate market. This could lead to a mortgage shock. Spreads between MBS and Treasuries have already risen as investors have grown nervous about oversupply.

FINSUM: So this is more of a technical issue than a fundamental one, but given the confluence of negative sentiment and oversupply, there is certainly some significant risk on the horizon for MBS.

(New York)

If you could time travel back to December, it would be hard to find anyone in the world that would have thought that six months later, ten-year Treasury yields would be back under 2%. The turnaround has been so stark and so dramatic, that it is hard to fathom. The yield is now at its lowest level since 2016, with investors fearful of the economy and anticipating several Fed rate cuts.

FINSUM: The big question is what this means. Consider that the yield curve has been inverted for over 90 days. This seems like a very clear recession signal, yet economic data continues to hold up.

(Washington)

There was a lot of anxiety yesterday about what the Fed might do. The big banks were taking the opposite side of markets, saying that the pace of rate cuts that investors expected were unrealistic. Then Fed chief Powell spoke and it became clear that markets were right, the Fed is completely dovish and has fallen in line with investor expectations. Powell signaled that rate cuts were on the immediate horizon, which has led markets to up their odds-making of a rate cut in July to 100%.

FINSUM: Powell was about as dovish as a central banker ever gets short of the middle of a crisis. For us this is quite an unusual situation—an economy doing well with both of the Fed’s dual targets being met, yet there is an undeniable sentiment towards cutting rates.

(New York)

Whether investors like it or not, a recession is coming. One of the key indicators is for a yield curve inversion to last 90 days or more. If it does so, a recession is highly likely in the next 12-18 months. Well, the first point of inversion began in March and we just crossed the 90-day threshold, which means that the strongest indicator of recession has just been triggered. Here are some tips to prepare: clear out garbage holdings from your portfolio (e.g. the stock tip from your brother in law six months ago), set aside cash and come up with a plan to buy stocks when certain thresholds are hit (e.g. a 25% decline in key indexes), pay down debt (it might not be this easy to do so again for awhile).

FINSUM: For all the talk we have heard over the last year about “this time is different”, the reality is that the strongest recession indicator known has just been triggered.

(New York)

The muni bond market is in a difficult place for investors. Demand is far outstripping supply, which means prices are high and yields low, leaving investors few opportunities to find value. However, few does not mean none, so here are some places to find good value municipal bonds. Airport muni bonds can be a good choice, as they tend to fair well in recessions and have very defensible funding sources (e.g. state and local governments). Toll-road bonds are another good choice, as they have very strong credit characteristics (only two have defaulted since 1970). Toll roads in San Francisco, New York, Oklahoma, and Maine are particularly good bets as there are few options for drivers to avoid them.

FINSUM: These seem like well-thought out and defensible choices.