Bonds – Page 4 – ReportWire

Gold should be dead, but somehow it’s still adding value

[ad_1]

Why isn’t gold dead yet?

It hasn’t served a vital economic function since the government stopped treating it as money back in 1971. Actually, you could argue it stopped being necessary long before that.

Yes, some people prefer it in jewelry. It is used in some technological equipment, and sometimes, still, in dentistry. But so what? According to authoritative data from the World Gold Council, even all those uses only account for about half of the world’s supply each year. Logically, this should mean that there is a gigantic glut of gold and that its price would be in free fall.

But it isn’t. Gold is beating U.S. stocks and bonds this month. And this isn’t even a rarity. I’ve run some numbers and have found a couple of things that could be very important to retirees, and for all of us suckers saving for retirement.

Even though, according to traditional financial theory, they really make no sense at all.

Don’t miss: Gold headed for best week since March after U.S. inflation reports

Also see: Why gold will beat the stock market in the coming weeks

The first thing is that over the past century including some gold in your portfolio alongside stocks and bonds has genuinely added value. It has produced higher average returns, less volatility and fewer of those disastrous “lost decades” where your portfolio ended up whistling Dixie.

The second thing is that this peculiarity has been showing no signs of letting up in recent years or decades — even though, if anything, gold makes even less sense today than it used to.

Let me explain.

As usual, I’ve tapped the excellent database maintained by the NYU Stern School of Business, which tracks asset values going back to 1928.

Over that period, a conventional so-called balanced portfolio invested 60% in the S&P 500
SPY,
-0.06%
index of large-company stocks and 40% in U.S. 10-year Treasury bonds
TMUBMUSD10Y,
3.832%
has generated an average return of 4.9% a year in “real” terms, meaning above inflation.

A portfolio that’s 60% invested in the S&P 500, 30% in the bonds and 10% in gold
GC00,
-0.26%
earned a slightly higher average, 5.1% a year in real terms. But the volatility was lower: The portfolio that included the gold had a lower standard deviation of returns, and a much higher “median” return, meaning the middlemost return if you ranked all the years from best to worst. The portfolio including gold beat the traditional one by five full percentage points in total over the typical 10-year period, and failed to keep up with inflation for 10 years on only five occasions — half as often as the portfolio consisting exclusively of stocks and bonds.

Nor is this just about olden times. The portfolio including 10% gold has beaten the traditional 60/40 by an average of 0.4 percentage point a year since President Richard Nixon finally killed the gold standard in 1971. And it has beaten the traditional portfolio by the same amount, an average of four-tenths of a percentage point, so far this millennium. (The 60/40 portfolio has done better if you start measuring only in 1980, as that ignores the golden 1970s but includes the long bear market for gold of the 1980s and 1990s.)

And gold has added value in five of the last seven years (while in the other two it was effectively a tie).

It’s not so much that gold is a great long-term investment on its own. It’s that gold has seemed to shine when others, specifically stocks and bonds, have failed. And it still does. It held up during the crash of 1929-32. But it also held up during the crash in 2002. And in 2008. And 2020.

A financial expert told me this was “hindsight bias.” But so is most financial analysis.

When your financial adviser tells you what you might reasonably expect from large stocks, small stocks, international stocks, real estate and so forth in the decades ahead, he or she is basing that on history. (In some cases this has been downright hilarious, as when advisers said you should still expect “average” historical returns of 5% a year from Treasurys, even when they had only a 2% yield.)

I’m danged if I know why. But so far this year, once again, you’ve been better off in a portfolio of 60% stocks, 30% bonds and 10% gold than in just 60% stocks and 40% bonds. Make of it what you will.

[ad_2]

Source link

July 14, 2023

U.S. stocks rise as bulls get ‘wish’ on inflation report, yet soft landings for Fed are ‘pretty improbable’

[ad_1]

Markets seem to be embracing the notion of a soft landing for the U.S. economy despite inflation remaining above the Federal Reserve’s 2% target.

“Soft landings are not impossible, but they’re pretty improbable,” said Bob Elliott, co-founder, chief executive officer and chief investment officer at Unlimited Funds, in a phone interview. “They’re particularly challenging in an environment where the labor market is tight,” he said, and yet “many investors are sort of enamored with this idea that we could get a soft landing.”

The U.S. stock market was rising Wednesday after fresh data showed inflation rose in June slightly less than expected. Meanwhile, the unemployment rate remains low in the U.S., with wage growth helping to fuel consumer spending in an economy that grew at a revised 2% annualized pace in the first quarter.

“There’s a race going on between the Fed slowing the economy down, and then on the other side, inflation becoming entrenched,” said Elliott. In that race, the Fed has been “one or two steps behind,” he said, ahead of Wednesday’s inflation reading.

The consumer-price index showed U.S. inflation rose 0.2% in June for a year-over-year rate of 3%, according to a report Wednesday from the Bureau of Labor Statistics. Core CPI, which excludes energy and food prices, increased 0.2% last month for a year-over-year rate of 4.8%. The Bureau of Labor Statistics said core inflation’s rise in June marked the smallest monthly increase since August 2021.

“The Fed will see the June CPI report as progress, but they are still very likely to raise the target rate a quarter percent at their decision in July,” Bill Adams, chief economist for Comerica Bank, said in emailed comments Wednesday. “The Fed would rather overtighten and slow the economy more than necessary than under-tighten and risk inflation accelerating when the economy regains momentum.”

Many investors have been expecting the Fed to hike its benchmark interest rate by a quarter percentage point at its policy meeting later this month, which would bring it to a targeted range of 5.25% to 5.5%. Federal-funds futures on Wednesday pointed to a 92.4% probability of such a rate hike and a slightly more than 80% chance of the Fed then pausing at its next meeting in September, according to CME FedWatch Tool, at last check.

After the expected increase in July, traders in the fed-funds-futures market were on Wednesday largely expecting the Fed to hold rates steady for the rest of the year.

“The bulls get their wish – CPI print came in better than expectations,” said Rhys Williams, chief strategist at Spouting Rock Asset Management, in emailed comments Wednesday. “We think the danger now is that the Federal Reserve does one too many rate increases and the soft landing turns into something harder.”

In Elliott’s view, both the stock and bond markets lately appeared to be embracing the idea of a soft landing for the economy.

The yield on the two-year Treasury note, which recently has been trading below the Fed’s benchmark rate, tumbled after the CPI report was released Wednesday. Two-year yields
TMUBMUSD02Y,
4.758%
were down about 16 basis points around midday Wednesday at 4.73%, according to FactSet data.

“As the Fed has moved interest rates to very restrictive levels thus far, and probably will execute another hike or possibly two from here, we think that patience should be a real virtue in their overall disposition toward ongoing monetary policy,” said Rick Rieder, BlackRock’s CIO of global fixed income and head of the firm’s global allocation investment team, in emailed comments Wednesday. “Today’s CPI report for June displayed notable moderation, which is good news for policy makers, markets and households overall.”

U.S. stocks were up Wednesday afternoon, with the S&P 500
SPX,
+0.83%
gaining 0.7% while the Dow Jones Industrial Average
DJIA,
+0.39%
rose 0.4% and the Nasdaq Composite
COMP,
+1.15%
advanced 0.9%, according to FactSet data, at last check. The stock-market’s fear gauge, the Cboe Volatility index
VIX,
-7.28%,
was down more than 7% at 13.8 around midday Wednesday.

Read: S&P 500 is most likely going to correct back to 4,100, Mizuho warns market bulls

[ad_2]

Source link

July 12, 2023

What the Inverted Yield Curve Really Means. It May Not Be Recession.

[ad_1]

This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com.

https://www.barrons.com/articles/inverted-yield-curve-recession-rates-fed-bonds-be519f7c

July 4, 2023 6:46 am ET

Order Reprints
Print Article

The bond market inversion reached its steepest since 1981 this week. When investors charge the government more to borrow for two years than for 10 years, it’s often seen as a sign that a recession is coming.

[ad_2]

Source link

July 4, 2023

Recession canceled? U.S. stock market ‘pretty frothy’ after S&P 500’s strongest first half since 2019.

[ad_1]

The S&P 500 index just wrapped up its strongest first half of a year since 2019, as a U.S. recession feared near by many investors seems perpetually further away than anticipated, leaving the stock market rally’s momentum for the rest of 2023 in question.

It’s “difficult to gauge” when the “liquidity unleashed” by the U.S. government during the pandemic will run out, said José Torres, senior economist at Interactive Brokers, in a phone interview, referring to fiscal and monetary stimulus in 2020-2021. While the Federal Reserve has been raising interest rates since 2022 to battle high inflation, the Fed’s intervention after regional-bank failures in March provided more liquidity to the financial system, he said.

That “created this environment for risk assets to run higher,” said Torres. And then, the artificial-intelligence craze has more recently driven “momentum” in U.S. stocks, he said. “I think the market goes lower from here.”

The S&P 500
SPX,
+1.23%
in mid-March was trading near its starting level in 2023, as regional-bank woes weighed on stocks before the Fed’s intervention that month. The central bank’s bank term funding program, announced March 12, helped shore up confidence in the banking system, taking off “a lot of pressure on financial conditions,” according to Torres.

The S&P 500 rose 15.9% in the first six months of 2023 for its strongest first-half of a year since 2019, according to Dow Jones Market Data. Each of the index’s 11 sectors climbed in June, marking the first time since November that all of them were up in the same month.

The U.S. economy has been resilient despite the Fed’s rapid interest rate hikes in 2022 to cool demand and bring down still high inflation. Investors appear to be shrugging off recession worries after some surprisingly strong economic data in recent days.

“Ladies and Gentleman, the recession has been cancelled!” wrote Bernard Baumohl, chief global economist at the Economic Outlook Group, in a note emailed June 29.

“Let’s not forget that despite the economy’s impressive performance the first three months, prices have continued to ease as well,” Baumohl said in the note. “Virtually every inflation metric has been falling,” he said, so “unless inflation shows signs of reversing course and accelerates, the Fed should maintain its current pause.”

The Fed has slowed its interest-rate hikes this year, pausing them at its June policy meeting while signaling that further rate increases may still be coming. Federal-funds futures on Friday showed traders largely expecting the Fed to lift its benchmark rate by a quarter point in July to a targeted range of 5.25% to 5.5%, according to the CME FedWatch Tool, at last check.

Investors have cheered the Fed’s pause, with many expecting it’s near the end of its rate-hiking cycle, which had led to brutal losses for stocks and bonds last year.

Meanwhile, economic data released in the past week showed a revised estimate for U.S. growth in the first quarter was higher than anticipated; new orders for manufactured durable goods were stronger than expected in May; sales of newly built homes that same month beat economists’ forecasts; consumer confidence jumped in June to a 17-month high based on a Conference Board survey; and that initial jobless claims in the week ending June 24 fell.

Investors also welcomed more evidence of inflation easing. U.S. inflation measured by the personal-consumption-expenditures price index softened to 3.8% in May on a 12-month basis, the slowest increase since April 2021, based on a government report Friday.

But Torres said he worries the U.S. economy may be growing too fast for the Fed’s fight with inflation, potentially leading the central bank to become more hawkish by further tightening monetary policy.

‘Shocked’

“There’s a huge discrepancy” between two-year Treasury yields
TMUBMUSD02Y,
4.908%
and where the Fed has indicated its benchmark rate may wind up at the end of its hiking cycle, he said. That’s after the recent rise in two-year yields from the wake of their fall during the regional-banking stress.

The Fed’s summary of economic projections, released in June, showed its policy rate could wind up as high as 5.6% by the end of this year, compared to a current targeted range of 5% to 5.25%.

Meanwhile, the yield on the two-year Treasury note rose 81.7 basis points in the second quarter to 4.877% on Friday, the highest level since March 9 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.

“I’ve been shocked the market has already been able to digest this yield move to the upside,” said Torres. “There’s still more room to the upside on yields,” he said, adding that two-year Treasury rates often are viewed as a gauge of how hawkish the Fed may be with its policy rate.

The U.S. stock market rose on Friday, closing out June with weekly, monthly and quarterly gains.

The S&P 500 and Nasdaq Composite
COMP,
+1.45%
each finished the month at its highest closing level since April 2022, with both indexes notching their longest monthly win streaks since 2021, according to Dow Jones Market Data. The technology-heavy Nasdaq soared 31.7% during the first six months of 2023, clinching its best first half since 1983.

Sentiment in the stock market has gotten “pretty frothy,” making equities vulnerable to a decline, said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a phone interview. “On the surface the market has been incredibly resilient, but of course the concentration has been extreme.”

She pointed to a “small handful” of megacap stocks, including names like Apple Inc.
AAPL,
+2.31%
Microsoft Corp.
MSFT,
+1.64%
and Nvidia Corp.
NVDA,
+3.63%,
powering the performance of the S&P 500 and Nasdaq.

Read: Apple clinches $3 trillion valuation, becoming first U.S. company to close at that mark

Such stocks “really kicked into high gear” at the start of the banking trouble in March, as investors, in a defensive move, sought companies that are “highly liquid” and generate cash, she said.

Stocks in that megacap group, sometimes referred to as Big Tech although they span sectors including communication services and consumer discretionary as well as information technology, have also benefited from AI exposure, said Sonders.

Weakness, strength on the roll

Sonders said she sees the U.S. as having experienced “rolling” recessions in different segments – such as housing or manufacturing – as opposed to the entire economy being swept up in a full-blown downturn. “The recession versus no recession debate” is missing the current nuances of this cycle, in her view.

“We’ve seen weakness and strength rolling through the economy as opposed to everything either booming at the same time, or falling apart at the same time,” she said. So while cracks may turn up in the services sector, the U.S. could still benefit from other areas, such as the recent lift seen in the housing market, which already has gone through a recession, according to Sonders.

Read: Homebuilder ETF outperforms S&P 500, industry’s stocks still ‘cheap’ in 2023 market rally

In the stock market, megacap names have gotten a lot of attention for their surge this year, yet other pockets, such as homebuilders and the S&P 500’s industrials sector, have recently done well, she said. Industrial stocks
SP500EW.20,
+0.92%
recently stood out to Sonders for their “decent breadth.”

But to her thinking, “this is not the kind of environment to make a monolithic sector call or two,” rather Sonders favors screening stocks for characteristics such as “high quality” when looking for investment opportunities.

Fluctuating financial conditions have made it harder to discern when the U.S. could fall into a recession, according to Torres. But rates rising further poses the risk of returning to the kind of environment that created stress for regional banks, he said. And with “commercial real estate lurking in the background” as a concern, he said it’s tough to see the stock market climbing from the S&P 500’s already “rich” levels.

“The higher the Fed pushes rates, the more pressure that’s gonna put on bank balance sheets,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, in a phone interview. “It just becomes a question of whether or not you’re going to see a run on a particular bank.”

This coming week, the Fed will release minutes from its June policy meeting. Investors will see them on Wednesday, the day after the July 4 holiday in the U.S.

While the S&P 500 has rallied in 2023, shares of the SPDR S&P Regional Banking ETF
KRE,
-1.14%
sank 30.5% in the first half of the year while the Invesco KBW Bank ETF
KBWB,
+0.24%
is down 20.5% over the same period, according to FactSet data.

“There is a lot of dispersion within the market,” said Ripley. “There are pockets that are doing better than others.”

[ad_2]

Source link

July 2, 2023

Here’s the next yield play for fixed income as rates peak, according to BlackRock

[ad_1]

[ad_2]

Source link

June 30, 2023

A U.S. recession is coming this year, HSBC warns — with Europe to follow in 2024

[ad_1]

Hong Kong observation wheel, and the Hong Kong and Shanghai Bank, HSBC building, Victoria harbor, Hong Kong, China.

Ucg | Universal Images Group | Getty Images

The U.S. will enter a downturn in the fourth quarter, followed by a “year of contraction and a European recession in 2024,” according to HSBC Asset Management.

In its mid-year outlook, the British banking giant’s asset manager said recession warnings are “flashing red” for many economies, while fiscal and monetary policies are out of sync with stock and bond markets.

Global Chief Strategist Joseph Little said while some parts of the economy have remained resilient thus far, the balance of risks “points to high recession risk now,” with Europe lagging the U.S. but the macro trajectory generally “aligned.”

“We are already in a mild profit recession, and corporate defaults have started to creep up too,” Little said in the report seen by CNBC.

“The silver lining is that we expect high inflation to moderate relatively quickly. That will create an opportunity for policymakers to cut rates.”

Despite the hawkish tone adopted by central bankers and the apparent stickiness of inflation, particularly at the core level, HSBC Asset Management expects the U.S. Federal Reserve to cut interest rates before the end of 2023, with the European Central Bank and the Bank of England following suit next year.

The Fed paused its monetary tightening cycle at its June meeting, leaving its Fed funds rate target range at between 5% and 5.25%, but signaled that two further hikes can be expected this year. Market pricing narrowly anticipates the Fed funds rates to be a quarter percentage point higher in December of this year, according to CME Group’s FedWatch tool.

HSBC’s Little acknowledged that central bankers will not be able to cut rates if inflation remains significantly above target — as it is in many major economies — and said it is therefore important that the recession “doesn’t come too early” and cause disinflation.

“The coming recession scenario will be more like the early 1990s recession, with our central scenario being a 1-2% drawdown in GDP,” Little added.

HSBC expects the recession in Western economies to result in a “difficult, choppy outlook for markets” for two reasons.

“First, we have the rapid tightening of financial conditions that’s caused a downturn in the credit cycle. Second, markets do not appear to be pricing a particularly pessimistic view of the world,” Little said.

Higher interest rates are taking their toll on business activity, economist says

“We think the incoming news flow over the next six months could be tough to digest for a market that’s pricing a ‘soft landing’.”

Little suggested that this recession will not be sufficient to “purge” all inflation pressures from the system, and therefore developed economies face a regime of “somewhat higher inflation and interest rates over time.”

“As a result, we take a cautious overall view on risk and cyclicality in portfolios. Interest rate exposure is appealing — particularly the Treasury curve — the front end and mid part of the curve,” Little said, adding that the firm sees “some value” in European bonds too.

“In credit, we are selective and focus on higher quality credits in investment grade over speculative investment grade credits. We are cautious on developed market stocks.”

Backing China and India

As China emerges from several years of stringent Covid-19 lockdown measures, HSBC believes that high levels of domestic household savings should continue to support domestic demand, while problems in the property sector are bottoming out and government fiscal efforts should create jobs.

Little also suggested that comparatively low inflation — consumer prices rose by a two-year monthly low of 0.1% in May as the economy struggles to get back firing on all cylinders — means further monetary policy easing is possible and GDP growth “should easily exceed” the government’s modest 5% target this year.

HSBC remains overweight on Chinese stocks for this reason, and Little said the “diversification of Chinese equities shouldn’t be underestimated.”

China will continue to be a strong driving force for the global economy, premier says

“For example, value is outperforming growth in China and Asia. That’s the opposite of developed stock markets,” he added.

Along with China, Little noted that India is the “main macro growth story in 2023” as the economy has recovered strongly from the pandemic on the back of resurgent consumer spending and a robust services sector.

“In India, recent upward growth surprises and downward surprises on inflation are creating something of a ‘Goldilocks’ economic mix,” Little said.

“Improved corporate and bank balance sheets have also been boosted by government subsidies. All the while, the structural, long run investment story for India remains intact.”

[ad_2]

Source link

June 27, 2023

‘Bite of these higher rates is gaining traction almost every day,’ KBW CEO Thomas Michaud warns

[ad_1]

A major financial services CEO warns the economy hasn’t fully absorbed higher interest rates yet.

Thomas Michaud, who runs Stifel company KBW, notes there’s a delayed reaction in the marketplace from the last hike — calling a 25 basis point move at 5% a very different situation than off a half percent.

related investing news

As regional bank stock rally regains steam, investors should watch out for these spoilers

“This is getting to be the real deal at the moment because of the level of rates,” he told CNBC’s “Fast Money” on Wednesday. “The bite of these higher rates is gaining traction almost every day.”

Michaud delivered the call hours after the Federal Reserve decided to leave interest rates unchanged. It comes after ten rate hikes in a row.

The Fed signaled on Wednesday two more hikes are ahead this year. Michaud expects one to happen in July. However, he questions whether policymakers will raise rates a second time.

“Trying to deliver a new message with these dots is not what I’m willing to hang my hat on from what I see happening in the economy,” he said. “The economy is slowing. So, I think we’re near the end of this rate increase cycle.”

He lists interest rate sensitive areas of the economy already in a recession: Office space in urban areas, residential mortgage originations and investment banking revenues. He sees the problems contributing to more pain in regional banks.

“Banks were already tightening in the fourth quarter of last year. It didn’t just start in March. Loan growth had been slowing,” added Michaud. “There are elements of like the global financial crisis that are in bank stocks right now.”

According to Michaud, the regional bank rally is a short-term bounce. The SPDR S&P Regional Banking ETF is up almost 18% over the past month.

“The overall industry rally for all participants probably doesn’t happen until we get some more stability in what we think the earnings are going to be,” said Michaud. “Earnings estimates haven’t settled. They haven’t stopped going down.”

He sees a shift from adjusting to the new interest rate environment to credit quality in the second half of this year.

“Before the first quarter we cut bank estimates by 11%. After the quarter, we cut them by 4%.” Michaud said. “My instincts are we are going to cut them again.”

Disclaimer

[ad_2]

Source link

June 14, 2023

JPMorgan bond chief Bob Michele sees worrying echoes of 2008 in market calm

[ad_1]

Bob Michele, Managing Director, is the Chief Investment Officer and Head of the Global Fixed Income, Currency & Commodities (GFICC) group at JPMorgan.

CNBC

To at least one market veteran, the stock market’s resurgence after a string of bank failures and rapid interest rate hikes means only one thing: Watch out.

The current period reminds Bob Michele, chief investment officer for JPMorgan Chase‘s massive asset management arm, of a deceptive lull during the 2008 financial crisis, he said in an interview at the bank’s New York headquarters.

“This does remind me an awful lot of that March-to-June period in 2008,” said Michele, rattling off the parallels.

Then, as now, investors were concerned about the stability of U.S. banks. In both cases, Michele’s employer calmed frayed nerves by swooping in to acquire a troubled competitor. Last month, JPMorgan bought failed regional player First Republic; in March 2008, JPMorgan took over the investment bank Bear Stearns.

“The markets viewed it as, there was a crisis, there was a policy response and the crisis is solved,” he said. “Then you had a steady three-month rally in equity markets.”

The end to a nearly 15-year period of cheap money and low interest rates around the world has vexed investors and market observers alike. Top Wall Street executives, including Michele’s boss Jamie Dimon, have raised alarms about the economy for more than a year. Higher rates, the reversal of the Federal Reserve’s bond-buying programs and overseas strife made for a potentially dangerous combination, Dimon and others have said.

But the American economy has remained surprisingly resilient, as May payroll figures surged more than expected and rising stocks caused some to call the start of a fresh bull market. The crosscurrents have divided the investing world into roughly two camps: Those who see a soft landing for the world’s biggest economy and those who envision something far worse.

Calm before the storm

For Michele, who began his career four decades ago, the signs are clear: The next few months are merely a calm before the storm. Michele oversees more than $700 billion in assets for JPMorgan and is also global head of fixed income for the bank’s asset management arm.

In previous rate-hiking cycles going back to 1980, recessions start an average of 13 months after the Fed’s final rate increase, he said. The central bank’s most recent move happened in May.

In that ambiguous period just after the Fed has finished raising rates, “you’re not in a recession; it looks like a soft landing” because the economy is still growing, Michele said.

“But it would be a miracle if this ended without recession,” he added.

The economy will probably tip into recession by the end of the year, Michele said. While the downturn’s start could get pushed back, thanks to the lingering effects of Covid stimulus funds, he said the destination is clear.

“I’m highly confident that we’re going to be in recession a year from now,” he said.

Rate shock

Other market watchers do not share Michele’s view.

BlackRock bond chief Rick Rieder said last month that the economy is in “much better shape” than the consensus view and could avoid a deep recession. Goldman Sachs economist Jan Hatzius recently dialed down the probability of a recession within a year to just 25%. Even among those who see recession ahead, few think it will be as severe as the 2008 downturn.

To start his argument that a recession is coming, Michele points out that the Fed’s moves since March 2022 are its most aggressive series of rate increases in four decades. The cycle coincides with the central bank’s steps to rein in market liquidity through a process known as quantitative tightening. By allowing its bonds to mature without reinvesting the proceeds, the Fed hopes to shrink its balance sheet by up to $95 billion a month.

“We’re seeing things that you only see in recession or where you wind up in recession,” he said, starting with the roughly 500-basis point “rate shock” in the past year.

Other signs pointing to an economic slowdown include tightening credit, according to loan officer surveys; rising unemployment filings, shortening vendor delivery times, the inverted yield curve and falling commodities values, Michele said.

Pain trade

The pain is likely to be greatest, he said, in three areas of the economy: regional banks, commercial real estate and junk-rated corporate borrowers. Michele said he believes a reckoning is likely for each.

Regional banks still face pressure because of investment losses tied to higher interest rates and are reliant on government programs to help meet deposit outflows, he noted.

“I don’t think it’s been fully solved yet; I think it’s been stabilized by government support,” he said.

Downtown office space in many cities is “almost a wasteland” of unoccupied buildings, he said. Property owners faced with refinancing debt at far higher interest rates may simply walk away from their loans, as some have already done. Those defaults will hit regional bank portfolios and real estate investment trusts, he said.

A woman wearing her facemask walks past advertising for office and retail space available in downtown Los Angeles, California on May 4, 2020.

Frederic J. Brown | AFP | Getty Images

“There are a lot of things that resonate with 2008,” including overvalued real estate, he said. “Yet until it happened, it was largely dismissed.”

Last, he said below investment grade-rated companies that have enjoyed relatively cheap borrowing costs now face a far different funding environment; those that need to refinance floating-rate loans may hit a wall.

“There are a lot of companies sitting on very low-cost funding; when they go to refinance, it will double, triple or they won’t be able to and they’ll have to go through some sort of restructuring or default,” he said.

Ribbing Rieder

Given his worldview, Michele said he is conservative with his investments, which include investment grade corporate credit and securitized mortgages.

“Everything we own in our portfolios, we’re stressing for a couple quarters of -3% to -5% real GDP,” he said.

That contrasts JPMorgan with other market participants, including his counterpart Rieder of BlackRock, the world’s biggest asset manager.

“Some of the difference with some of our competitors is they feel more comfortable with credit, so they are willing to add lower-rate credits believing that they’ll be fine in a soft landing,” he said.

Despite gently ribbing his competitor, Michele said he and Rieder were “very friendly” and have known each other for three decades, dating to when Michele was at BlackRock and Rieder was at Lehman Brothers. Rieder recently teased Michele about a JPMorgan dictate that executives had to work from offices five days a week, Michele said.

Now, the economy’s path could write the latest chapter in their low-key rivalry, leaving one of the bond titans to look like the more astute investor.

[ad_2]

Source link

June 9, 2023

The Debt Ceiling Could Be a Mess. How to Play It.

[ad_1]

The debt-ceiling standoff between the GOP House and the Biden administration will likely cast a long shadow over markets. President Joe Biden met with House Speaker Kevin McCarthy and other congressional leaders this past week, but their talks ended without a resolution, and a Friday meeting was postponed as staffs met.

[ad_2]

Source link

May 12, 2023

What the really rich are doing with their money right now: Goldman Sachs

[ad_1]

When it comes to investing, some people don’t think in terms of thousands of dollars, tens of thousands, or even millions.

They think in hundreds of millions, or even billions. They have so much money they actually set up a private company, known as a “family office,” to manage all the loot.

And now Goldman Sachs, one of the bankers to the…

[ad_2]

Source link

May 9, 2023

Demand from homebuyers drive gains in purchase applications as 30-year fixed rate rises

[ad_1]

CNBC's Diana Olick reports on mortgage demand's recent rebound.

[ad_2]

Source link

April 26, 2023

Treasury yields little changed as focus remains on economic outlook, earnings

[ad_1]

John Zich | Bloomberg | Getty Images

U.S. Treasury yields were little changed on Tuesday, as investors continued to assess the outlook for the U.S. economy and digested the latest round of corporate earnings.

As of around 2:20 a.m. ET, the yield on the benchmark 10-year Treasury note was fractionally higher at 3.5946% while the yield on the 30-year Treasury bond also nudged marginally upwards to 3.8080%. Yields move inversely to prices.

Corporate earnings season dominates this week’s agenda, with giants Johnson & Johnson, Bank of America and Goldman Sachs all set to report before the opening bell on Wall Street on Tuesday.

On the data front, traders will have an eye on the March housing starts and building permits figures due at 8:30 a.m. ET. Housing starts for the month are expected to have fallen by 3.4% to 1.40 million units, according to Dow Jones consensus estimates, while building permits are projected to drop by 4.9% to 1.45 million units.

Markets are closely following economic data for a read on where the Federal Reserve might take interest rates at its next meeting in early May. More than 84% of traders are calling a 25 basis point hike at the next policy meeting, according to CME Group’s FedWatch tool.

An auction will be held Tuesday for $34 billion of 52-week Treasury bills.

[ad_2]

Source link

April 17, 2023

This one-of-a-kind suite of ETFs may help investors during economic slumps

[ad_1]

Investors may have a new way to generate income during economic declines.

Innovator launched a one-of-a-kind suite of barrier ETFs this month that provides protection by purchasing U.S. Treasurys and selling equity options.

“Advisors are realizing that bonds aren’t the safe haven that many thought they would be,” the firm’s CIO, Graham Day, told CNBC’s “ETF Edge” this week. “If you can pair [a barrier ETF] with the fixed income, it offers a tremendous amount of diversification benefits.”

Innovator, an outcome-based ETF issuer, launched these products last week: Premium Income 10 Barrier ETF, Premium Income 20 Barrier ETF, Premium Income 30 Barrier ETF and Premium Income 40 Barrier ETF.

Day said these ETFs remove credit risk while providing daily liquidity.

Protecting against losses up to 10%, 20%, 30% and 40%, the funds provide income distribution rates at around 9%, 8%, 6% and 5%, respectively, according to the company’s website.

This means they’ll produce less income with the more protection they provide. If the fund’s underlying asset experiences losses beyond its set performance level, Day contends investors will still receive quarterly distribution payments — which are based on the premiums of the sold options.

Per Innovator data on defined outcome ETF industry growth, barrier and buffer ETFs have increased from three in August 2018 to 158 in March 2023, with assets under management rising from $100,000 to about $21 billion.

Not just for the pros

Newcomers in the defined outcome ETF space should not be deterred by the detailed protection the funds offer, said Todd Sohn of Strategas Securities.

“Don’t get too scared of the word ‘option,’” the firm’s managing director said. “If you’re a novice investor, understand that they’re not doing anything too crazy, right? If that was the case, I don’t think the products would be gathering assets too much.”

He finds Innovator’s website does a “great job” of breaking everything down.

“I’d be curious as ETFs continue to grow and the options markets on other funds deepens if they’ll add more suites out there,” Sohn added.

In a statement to CNBC, Sohn wrote he’s not a client of Innovator and doesn’t use these ETFs right now. But he indicates he could see using them in the future.

[ad_2]

Source link

April 15, 2023

Banks in ‘more precarious situation’ creating risks for global growth, IMF chief economist warns

[ad_1]

Interest rate rises have increased banks’ vulnerabilities — and their response presents a significant risk to global growth, the International Monetary Fund’s chief economist warned Tuesday.

“We are concerned about what we have seen in the banking sector, particularly in the U.S. but maybe also in other countries, might do to growth in 2023,” Pierre-Olivier Gourinchas told CNBC’s Joumanna Bercetche in Washington, D.C.

related investing news

Wells Fargo says investors should expect a 10% stock market correction soon

Central bank hikes have increased funding costs for banks, while lenders have also seen some losses in assets like long-term bonds.

“Banks are in a more precarious situation. They have healthy cushions, but it’s certainly going to lead them to be a little bit more prudent and maybe cut down lending somewhat,” Gourinchas said.

In one scenario, the IMF sees banks tightening lending further than at present, bringing its forecast of 2.8% global growth in 2023 down to 2.5%.

Gourinchas said its models had also forecast a more adverse scenario where financial stability is not contained.

Central Bank of Kenya governor: We felt onward shocks from banking sector turmoil

“That would lead to massive capital flows from the rest of the world trying to go back to safety, going to U.S. Treasurys, dollar appreciation, increasing risk premia, loss of confidence,” he said. In this scenario, the IMF sees the world economy growing at about 1% for this year. But the risks of this are comparatively low, Gourinchas noted, at about 15%.

The IMF on Tuesday released its latest global growth report, which contained its weakest medium-term growth expectations for more than 30 years.

Financial stability has been in the spotlight in recent months, amid the collapse of several U.S. banks, the snap sale of Credit Suisse in Europe, and turmoil in the U.K. bond market that nearly toppled pension funds last fall.

Gourinchas told CNBC that the debate around central bank rate hikes had shifted from growth versus inflation to financial stability versus inflation.

He said central banks and financial authorities have shown they have the tools to address pockets of instability, for example U.S. regulators guaranteeing deposits for Silicon Valley Bank customers and Bank of England gilt purchases. “Monetary policy should stay focused on bringing inflation down, that’s our recommendation at this point,” Gourinchas concluded.

[ad_2]

Source link

April 11, 2023

10-year Treasury yield is little changed as traders await key inflation data this week

[ad_1]

The 10-year U.S. Treasury yield was little changed Monday as investors awaited key inflation data this week.

The yield on the benchmark 10-year Treasury note held steady at 3.387%, while the yield on the 30-year Treasury bond dipped nearly 2 basis points to 3.584%. Meanwhile, the 2-year note yield was little changed at 3.976%. Prices move inversely to yields.

Last week, the Labor Department released nonfarm payroll data for March, showing that the U.S. economy added 236,000 jobs over the period. The number was in line with expectations, but down from 326,000 new hires in February.

“March’s jobs growth was the smallest monthly increase since December 2020, but was still a good increase. Hiring is slowing, with headwinds concentrated in the tech industry, real estate, finance, and retail,” wrote Bill Adams, chief economist at Comerica Bank.

“The March jobs report was good news, but take it with a grain of salt. Other labor market indicators have deteriorated in the last few months. … Revisions to this jobs report are more likely to be negative than positive.”

In focus for investors this week is the inflation outlook, with consumer price index data due out on Wednesday. That same day, the Federal Open Market Committee will release minutes from its latest monetary policy meeting.

Market players are weighing the prospect of tightening credit conditions and a potential U.S. recession in the wake of the near collapse of Swiss investment banking giant Credit Suisse, along with the failures of several mid-tier U.S. lenders.

[ad_2]

Source link

April 10, 2023

Major trading platform CEO sees signs of a bond ETF revival

[ad_1]

Demand for bond ETFs appears to be rising.

According to MarketAxess CEO Chris Concannon, there are signs Treasury ETFs are on the cusp of substantial inflows.

“We’re about to see what I’d call [a] bond renaissance,” the electronic-trading platform CEO told CNBC’s “ETF Edge” this week. “The Fed is still taking action, so I would expect bond yields overall to remain relatively high and attractive.”

In late March, the Federal Reserve raised rates by a quarter point — its ninth hike since March 2022. Next Wednesday, Wall Street will get the Fed minutes from the last policy meeting and more clarity on what may come next.

VettaFi vice chairman Tom Lydon sees a similar pattern.

“They’re starting to move back not just into Treasurys, but into corporates and high yields with the idea that we may be able to lock in longer duration and longer payment for those higher rates, [and] with the idea that we’re not going to see higher rates a year from now,” he said.

VettaFi’s latest data finds international and U.S. fixed income exchange-traded funds saw about $45 billion in inflows since the beginning of the year. Meanwhile, it found corporate bond ETFs saw $6 billion in outflows in the first quarter

Lydon speculates the renewed interest is caused by investors losing faith in traditional 60/40 investment portfolios.

“We’ve seen a lot of advisors take a little bit off the table, both in the equity side and the fixed income side,” he said. “So, safety is key until we start to see confidence that the Fed really has some handle on inflation and [there’s] stability in the marketplace.”

[ad_2]

Source link

April 7, 2023