Displaying items by tag: fed

(New York)

In an article that contrasts strongly to some others we are running today, here is a different view on bonds coming out of the Wall Street Journal—that the bull market is far from over. The argument is based on two interconnected factors. The first is that rates and yields do look likely to rise in the short term, but at the same time, there are many signs the business cycle is poised to end, which will bring on a recession. When that happens, yields will once again plunge, keeping the bond market surging.

FINSUM: If a recession does come then rates and yields will likely drop again. Unless of course inflation sticks around and we get caught in a stagflationary period.

(Washington)

Whether one likes it or not, Treasury yields hitting 3%, which they look bound to do, will be a major event. The big question is what to do once it happens. Is it the signal of a sharp move higher in yields, or will it be the climax to a short-lived selloff? The reality is that if Treasuries move just a little above three, there could be a strong wave of selling. However, strategies betting against volatility have been paired back in recent weeks, so the selling might not be as furious as one might fear.

FINSUM: Nobody has any idea what will happen if Treasuries move above 3%. As far as bonds, we expect that there will be more and more organic buyers above 3%, which should keep things in check. On the stock side, we do not see why a move higher would be too bad, as the spread to equity yields will still be wide.

(Washington)

Make no mistake about it, the Fed minutes from last month’s meeting today are a big risk. Economic data is a big driver of the market right now, and nothing could be more important than the Fed’s attitude on rates. If the minutes show a very hawkish Fed, then expect some volatility as investors interpret the odds for more and faster rate hikes. If the notes are dovish, expect gains. The minutes may include the Fed’s views on how the tax cut will affect the economy, which is another x-factor.

FINSUM: The market seems have grown slightly less worried about higher rates over the last couple of weeks, which we were readily expecting. But this could still be a risky minutes release.

(New York)

Goldman Sachs put out a big warning to the market yesterday. The bank’s fixed income division says that it thinks yields on ten-year Treasuries are going to rise to 3.5% within two quarters as the Fed continues to hikes rates and the market sells off. Goldman called its prediction “not very brave”, indicating it thinks yields might be higher, especially since it feels the Fed will hike four times this year. Goldman’s forecast for rates is much higher than most analysts, so if it comes to pass, it could have big ramifications for equity investors.

FINSUM: If yields rose to 3.5% or above that quickly, we expect the equity markets would perform very poorly, and it may be the kind of scenario where we have a recession.

(New York)

One of the biggest names on Wall Street is warning investors that a recession is coming. Ray Dalio, head of the world’s biggest hedge fund, says that we are likely in for a recession as the Fed has to navigate a tricky tightening cycle. Dalio says the economy is in a hard-to-navigate period of tightening rates that will be hard for the Fed to get right. Rates are likely to rise quickly, which could spark a recession. The view is a reversal for Dalio, who had been until very recently saying that it was foolish to be wary of the stock market.

FINSUM: Dalio’s calls from Davos just a few weeks ago look foolish now, but he does make a good point that this will be a tricky period for the Fed to navigate well.