Tag: treasury securities

Why Fed rate hikes take so long to affect the economy, and why that effect may last a decade or more

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The U.S. economy continues to grow despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023.

The Fed’s leaders expect their interest rate decisions to eventually slow that growth.

The increase in borrowing costs that stems from Fed decisions does not affect all consumers immediately. It typically affects people who need to take new loans — first-time homebuyers, for example. Other dynamics, such as the use of contracts in business, can slow the ripple of Fed decisions through an economy.

“It might not all hit at once, but the longer rates stay elevated, the more you’re going to feel those effects,” said Sarah House, managing director and senior economist at Wells Fargo.

“Consumers did have additional savings that we wouldn’t have expected if they had continued to save at the same pre-Covid rate. And so that’s giving some more insulation in terms of their need to borrow,” said House. “That’s an example of why this cycle might be different in terms of when those lags hit, versus compared to prior cycles.”

A 1% interest rate increase can reduce gross domestic product by 5% for 12 years after an unexpected hike, according to a research paper from the Federal Reserve Bank of San Francisco.

“It’s bad in the short term because we worry about unemployment, we worry about recessions,” said Douglas Holtz-Eakin, president of the American Action Forum, referring to the paper’s implications for central bank policymakers. “It’s bad in the long term because that’s where increases in your wages come from; we want to be more productive.”

Some economists say that financial markets may be responding to Federal Reserve policy more quickly, if not instantaneously. “Policy tightening occurs with the announcement of policy tightening, not when the rate change actually happens,” said Federal Reserve Governor Christopher Waller in remarks July 13 at an event in New York.

“We’ve seen this cycle where the stock market moved more quickly in some cases, more slowly in other cases,” said Roger Ferguson, former vice chair of the Federal Reserve. “So, you know, this question of variability comes into play, as in how long it’s going to take. We think it’s a long time, but sometimes it can be faster.”

Watch the video above to see why the Fed’s interest rate hikes take time to affect the economy.

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December 12, 2023
Interest rates are high. These are the best places to park your cash | CNN Business

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Editor’s Note: This is an update of an article that originally ran on September 20, 2023.

New York
CNN
—

The Federal Reserve on Wednesday chose not to raise its key interest rate, the same decision it took following its September meeting, leaving its benchmark lending rate at its highest level in 22 years.

Given that the Fed influences — directly or indirectly — interest rates on financial accounts and products throughout the US economy, savers and people with surplus cash still have many opportunities to get a far better return on their money than they’ve had in years — and even more importantly, a return that outpaces the latest readings on inflation.

Here are low-risk options to get the best yield on funds you plan to use within two years, and also on cash you expect to need within the next two to five years.

The average annual percentage yield on bank savings accounts was just 0.59%, according to an October 31 survey from Bankrate. That average is kept low by a nearly zero APY at the biggest brick-and-mortar banks like JPMorgan Chase and Bank of America, which were each offering rates of just 0.01%.

But many online, FDIC-insured banks are offering well north of 5% on their high-yield savings accounts.

Those accounts are a great place to deposit money that you will likely deploy within the next two years — to cover anything from a planned vacation or big purchase to an emergency expense or an unexpected change of circumstance like a job loss.

While bank deposit account yields can change overnight, they have remained high for months and are likely to continue to do so. “In the last few months, the Fed has signaled that it intends to keep rates higher for longer. … Some banks have responded to this new ‘higher for longer’ expectation by offering promotional rate guarantees on their savings or money market accounts. In the guarantee, a competitive rate is guaranteed to last for several months on the savings or money market account,” said Ken Tumin, founder of DepositAccounts.com.

An online savings account is what certified financial planner Lazetta Rainey Braxton, co-CEO at 2050 Wealth Partners, calls your “cushion” account. She likes the word “cushion” because it describes the flexibility and options such an account gives you to handle both what you want to do in the near term and what you might need to do.

Another way high-yield accounts can be useful, Braxton said, is to house money you’ll need to pay off a purchase for which you’ve secured a 0% financing deal for a limited period of time. In that case, you won’t owe interest on your purchase so long as you pay it off in full before the end of the promotion period, which can be anywhere from six to 24 months. In the meantime, the money can grow by 4% to 5% a year in your high-yield account.

For your regular household bills, Braxton recommends keeping just enough cash to cover a month or two in a regular checking account for fastest access. “Not too much, because [those accounts] won’t yield much,” she said.

You can always link your high-yield account to your checking account to transfer funds when needed — just know it may take up to 24 hours for the transferred money to show up in your checking account, Braxton noted.

Money market accounts and funds

If you don’t want to set up an online savings account at another bank, your own bank may offer you a money market deposit account that pays a higher yield than your regular checking or savings accounts.

Money market accounts may have higher minimum deposit requirements than a regular savings account, but they are more liquid than a fixed-term certificate of deposit or Treasury bill, meaning they give you access to your money more quickly while still potentially giving you some of the highest yields available, said Doug Ornstein, senior manager for integrated solutions at TIAA Wealth Management.

But don’t confuse money market accounts with money market mutual funds, which invest in short-term, low- risk debt instruments. As of Oct 31, they had an average 7-day yield of 5.19%, according to the Crane Money Fund Index, which tracks the top 100 taxable money market funds.

Unlike money market deposit accounts, money market mutual funds are not insured by the FDIC. But if you invest in a money market fund through a brokerage, your overall account is likely to be insured through the Securities Investor Protection Corp (SIPC), which offers protection in the event your brokerage ever goes under.

Another high-return, low-risk investment that is great for money you likely won’t need to tap for a few months or even a couple of years are certificates of deposit.

You can get the best returns on CDs through a brokerage such as Schwab, E*Trade or Fidelity. That’s because you can comparison shop for CDs from any number of FDIC-insured banks and will not have to set up individual accounts with each institution.

To get the greatest benefit from a CD, you have to leave the money invested for a fixed period. You can always access your principal sooner if you need to, but if you do you will forfeit at least some interest.

As of November 1, CDs listed on Schwab.com with durations of three months, six months, nine months, one year and 18 months were all yielding at least 5.5% .

Say you invest $10,000 in a six-month CD with a 5.5% APY. At the end of that period, you’ll get your principal back plus nearly $274 in interest when the CD matures, according to Bankrate’s CD calculator. If you put it in a one-year CD you’d earn $555 in interest, while an 18-month term will generate $844.

If you don’t go through a brokerage you may get a reasonable deal from your primary bank. Tumin said. For example, he noted, Citi came out with an 11-month CD Special with a rate of up to 5.65% APY. But he cautions that with any big bank CD you should take your money out at the end of the term, otherwise your bank may automatically renew it and lock you in to a much lower-yielding CD.

Another option for money you can leave untouched anywhere from several months to a few years are short-term Treasury bills, which are backed by the full faith and credit of the United States.

Three- and six-month bills had yields of 5.46% and 5.54% respectively on November 1, while nine-month and one-year bills were offering 5.46% and 5.43%, according to rates posted on Schwab.com for a $25,000 investment.

If you’re someone who manages your portfolio like a hawk, you may feel comfortable buying T-bills on your own from TreasuryDirect.gov. But if you don’t, it might be easier just to buy new issues through your brokerage account or invest in a short-term bond index fund or ETF, said Andy Smith, executive director of financial planning at Edelman Financial Engines.

And if you’re looking at money that will be needed in three to five years, you might consider a diversified fund of highly rated government and corporate bonds, Ornstein said. Yields on four-year, AAA rated corporate bonds, for instance, were yielding 4.97% this week, and three-year AAA-rated municipal bonds (which are issued by local governments) had rates of 4.59%, according to Schwab.com.

When deciding on the best accounts and investments for your specific goals and peace of mind, it may pay to consult a fee-only fiduciary adviser — meaning someone who doesn’t get paid a commission to sell you a particular investment.

What you’ll always want to do is build in flexibility for yourself so you can easily access cash, regardless of your timeline for key goals. “What happens if something changes and you need that down payment a lot sooner — or your parents need medical care fast?” Smith said.

That means balancing your desire for great yield with a need and desire for ease of access without penalty. Translation: Don’t chase yield for yield’s sake.

Think of it this way, Ornstein said: Unless you have huge sums to invest or are an institutional investor, the difference between getting a 5.1% yield versus 5% is negligible, and in fact it could even cost you more if there are penalties for taking your money out early. “Most of the time convenience is really important. Give up the 0.1%,” he advised.

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November 1, 2023
Calls to move away from the U.S. dollar are growing — but the greenback is still king

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Calls to move away from relying on the U.S. dollar for trade are growing.

More and more countries — from Brazil to Southeast Asian nations — are calling for trade to be carried out in other currencies besides the U.S. dollar.

The U.S. dollar has been king in global trade for decades — not just because the U.S. is the world’s largest economy, but also because oil, a key commodity needed by all economies big and small, is priced in the greenback. Most commodities are also priced and traded in U.S. dollars.

But since the Federal Reserve embarked on a journey of aggressive rate hikes to fight domestic inflation, many central banks around the world have raised interest rates to stem capital outflows and a sharp depreciation of their own currencies.

“By diversifying their holdings reserves into a more multi-currency sort of portfolio, perhaps they can reduce that pressure on their external sectors,” said Cedric Chehab from Fitch Solutions.

To be clear, the U.S. dollar remains dominant in global forex reserves even though its share in central banks’ foreign exchange reserves has dropped from more than 70% in 1999, IMF data shows.

The U.S. dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter last year, according to data from the IMF’s Currency Composition of Foreign Exchange Reserves (COFER). Comparatively, the euro is a distant second, accounting for about 20.5% of global forex reserves while the Chinese yuan accounted for just 2.7% in the same period.

China is one of the most active players in this push given its dominant position in global trade right now, and as the world’s second largest economy.

Based on CNBC’s calculation of IMF’s data on 2022 direction of trade, mainland China was the largest trading partner to 61 countries when combining both imports and exports. In comparison, the U.S. was the largest trading partner to 30 countries.

“As China’s economic might continues to rise, that means that it’ll exert more influence in global financial institutions and trade etc,” Chehab told CNBC last week.

China — long among the top 2 foreign holders of U.S. Treasurys — has been steadily reducing its holdings of U.S. Treasury securities.

Mainland China held nearly $849 billion of U.S. Treasurys as of February this year, the latest data from the U.S. Treasury department showed. That’s at a 12-year low, according to historic data.

Changing dynamics

Economic benefits

Analysts say changing global economic dynamics are driving the co-called de-dollarization trend which can benefit local economies in a number of ways.

Trading in local currencies “allow exporters and importers to balance risks, have more options to invest, to have more certainty about the revenues and sales,” former Brazilian ambassador to China, Marcos Caramuru, told CNBC last week.

Another benefit for countries moving away from using the dollar as the middle man in bilateral trade, is to “help them move up the value chain,” said Mark Tinker from ToscaFund Hong Kong told CNBC “Street Signs Asia” early April.

“It isn’t about selling cheap stuff to Walmart, keeping down the prices for American consumers in order to earn dollars to buy its energy. This is now about actually a completely bilateral trade bloc,” Tinker said.

Meanwhile, growth of non-U.S. economic blocs also encourage these economies to push for wider use of their currencies. The IMF estimates that Asia could contribute more than 70% to global growth this year.

“U.S. growth might slow, but U.S. growth isn’t what it’s all about anymore. There is a whole non-U.S. block that’s growing,” said Tinker. “I think there is going to be a re-internationalization of flows.”

Geopolitical concerns

Geopolitical risks have also accelerated the trend to move away from U.S. dollar.

“Political risk is really helping introduce a lot of uncertainty and variability around how much of a safe haven that U.S. dollar really is,” said Galvin Chia from NatWest Markets told “Street Signs Asia” earlier.

Tinker said what accelerated the calls for de-dollarization was the U.S. decision to freeze Russia’s foreign currency reserves after Moscow invaded Ukraine in February 2022.

The yuan has reportedly replaced the U.S. dollar as the most traded currency in Russia, according to Bloomberg.

So far, the U.S. and its western allies have frozen more than $300 billion of Russia’s foreign currency reserves and slapped multiple rounds of sanctions on Moscow and the country’s oligarchs. This forced Russia to switch trade to other currencies and increase gold in its reserves.

“Now you find that if you disagree with U.S. foreign policy, you risk having those confiscated or frozen. You’ve got to have alternative place to put those assets,” Tinker said. In the Middle East, major oil exporter Saudi Arabia has reportedly signaled it’s open to trade in other currencies other than the greenback.

Although analysts don’t anticipate a complete break away from dollar-denominated oil trade over the short-term, “I think what they’re saying more is, well, there’s another player in town, and we want to look at how we trade with them on a bilateral basis using yuan,” said Chehab.

Dollar is still king

Despite the slow erosion of its hegemony, analysts say the U.S. dollar is not expected be dethroned in the near future — simply because there aren’t any alternatives right now.

“Euro is somewhat an imperfect fiscal and monetary union, the Japanese yen, which is another reserve currency, has all sorts of structural challenges in terms of the high debt loads,” Chehab told CNBC.

The Chinese yuan also falls short, Chehab said.

“If you look at the yuan reserves as a share of total reserves, it’s only about 2.5% of total reserves, and China still has current account restrictions,” Chehab said. “That means that it’s going to take a long time for any other currency, any single currency to really usurp the dollar from that perspective.”

Data from IMF shows that as of the fourth quarter of 2022, more than 58% of global reserves are held in U.S. dollar — that’s more than double the share of the euro, the second most-held currency in the world.

The international reserve system “is still a U.S.-reserve dominated system,” said NatWest’s Chia.

“So long as that commands the majority, so long as you don’t have another currency system or economy that’s willing to step up to that international reach, convertibility and free floating and the responsibility of a reserve currency, it’s hard to say dollar will be displaced over the next 3 to 5 years. unless someone steps up.”

— CNBC’s Joanna Tan and Monica Pitrelli contributed to this report.

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April 23, 2023
The bond market is crumbling. That’s bad for Wall Street and Main Street | CNN Business

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A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

New York
CNN Business
—

The global bond market is having a historically awful year.

The yield on the 10-year US Treasury bond, a proxy for borrowing costs, briefly moved above 4% on Wednesday for the first time in 12 years. That’s a bad omen for Wall Street and Main Street.

What’s happening: This hasn’t been a pretty year for US stocks. All three major indexes are in a bear market, down more than 20% from recent highs, and analysts predict more pain ahead. When things are this bad, investors seek safety in Treasury bonds, which have low returns but are also considered low-risk (As loans to the US government, Treasury notes are seen as a safe bet since there is little risk they won’t be paid back).

But in 2022’s topsy-turvy economy, even that safe haven has become somewhat treacherous.

Bond returns, or yields, rise as their prices fall. Under normal market conditions, a rising yield should mean that there’s less demand for bonds because investors would rather put their money into higher-risk (and higher-reward) stocks.

Instead markets are plummeting, and investors are flocking out of risky stocks, but yields are going up. What gives?

Blame the Fed. Persistent inflation has led the Federal Reserve to fight back by aggressively hiking interest rates, and as a result the yields on US Treasury bonds have soared.

Economic turmoil in the United Kingdom and European Union has also caused the value of both the British pound and the euro to fall dramatically when compared to the US dollar. Dollar strength typically coincides with higher bond rates as well.

So while we’d normally see a rising 10-year yield as a signal that US investors have a rosy economic outlook, that isn’t the case this time. Gloomy investors are predicting more interest rate hikes and a higher chance of recession.

What it means: Portfolios are aching. Vanguard’s $514.5 billion Total Bond Market Index, the largest US bond fund, is down more than 15% so far this year. That puts it on track for its worst year since it was created in 1986. The iShares 20+ Year Treasury bond fund

(TLT) (TLT) is down nearly 30% for the year.

Stock investors are also nervously eyeing Treasuries. High yields make it more expensive for companies to borrow money, and that extra cost could lower earnings expectations. Companies with significant debt levels may not be able to afford higher financing costs at all.

Main Street doesn’t get a break, either. An elevated 10-year Treasury return means more expensive loans on cars, credit cards and even student debt. It also means higher mortgage rates: The spike has already helped push the average rate for a 30-year mortgage above 6% for the first time since 2008.

Going deeper: Still, investors are more nervous about the immediate future than the longer term. That’s spurred an inverted yield curve – when interest rates on short-term bonds move higher than those on long-term bonds. The inverted yield curve is a particularly ominous warning sign that has correctly predicted almost every recession over the past 60 years.

The curve first inverted in April, and then again this summer. The two-year treasury yield has soared in the last week, and now hovers above 4.3%, deepening that gap.

On Monday, a team at BNP Paribas predicted that the inverted gap between the two-year and 10-year Treasury yields could grow to its largest level since the early 1980s. Those years were marked by sticky inflation, interest rates near 20% and a very deep recession.

What’s next: The bond market may face fresh volatility on Friday with the release of the Federal Reserve’s favored inflation measure, the Personal Consumption Expenditure Price Index for August. If the report comes in above expectations, expect bond yields to move even higher.

The Bank of England held an emergency intervention to maintain economic stability in the UK on Wednesday. The central bank said it would buy long-dated UK government bonds “on whatever scale is necessary” to prevent a market crash.

Investors around the globe have been dumping the British pound and UK bonds since the government on Friday unveiled a huge package of tax cuts, spending and increased borrowing aimed at getting the economy moving and protecting households and businesses from sky-high energy bills this winter, reports my colleague Mark Thompson.

Markets fear the plan will drive up already persistent inflation, forcing the Bank of England to push interest rates as high as 6% next spring, from 2.25% at present. Mortgage markets have been in turmoil all week as lenders have struggled to price their loans. Hundreds of products have been withdrawn.

“This repricing [of UK assets] has become more significant in the past day — and it is particularly affecting long-dated UK government debt,” the central bank said in its statement.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”

Many final salary, or defined-benefit, pension funds were particularly exposed to the dramatic sell-off in longer dated UK government bonds.

“They would have been wiped out,” said Kerrin Rosenberg, UK chief executive of Cardano Investment.

The central bank said it would buy long-dated UK government bonds until October 14.

Steep drops in bond prices may be signaling doom and gloom for the economy, but some analysts say short-term bonds are still looking more attractive than equities right now.

“Record low yields have kept fixed income in the shadow of equities for decades,” said analysts at BNY Mellon Wealth Management in a research note. “But the aggressive shift in Fed policy is beginning to change this.”

Central banks around the globe have responded to elevated inflation by hiking interest rates– and bond yields have increased alongside them. The two-year US Treasury bond is currently yielding nearly 4%. That’s still a relatively low return, but better than the S&P 500’s dividend yield of around 1.7%.

“For the first time in several years, bonds are attractive investment options. In addition to providing diversification versus equities…you now get paid for owning them,” wrote Barry Ritholtz of Ritholtz Wealth Management on Wednesday.

Consider the alternative: the S&P is down more than 20% year to date.

The US Bureau of Economic Analysis releases its third estimate for Q2 GDP and US weekly jobless claims.

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October 5, 2022
Inside the Treasury Department team monitoring early economic warning signs as default threat looms | CNN Politics

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CNN
—

Nearly five months before the US was projected to hit the debt ceiling, a small team inside the Treasury Department began alerting top officials to early effects already being felt in the US financial system.

The cost of insuring US debt, as measured by the price of credit-default swaps, was rising – a sign that investors were beginning to view US bonds and other securities as increasingly risky.

That early warning – and subsequent ones over the last month as the swaps pricing has surged – came out of the Treasury Department’s Markets Room and its eponymous team of nine financial analysts who are responsible for monitoring and analyzing global financial markets to inform the policy work of top Treasury Department and White House officials.

As the US rapidly approaches a potential default date in early June, top US officials are increasingly relying on the Markets Room to monitor for signs of disruption in the financial markets.

“In the same way that a doctor wants to understand the vital signs of a patient as they’re thinking about how to treat them, at Treasury keeping abreast of understanding the various ways in which the economy is healthy or unhealthy. And part of that is understanding the market,” Deputy Treasury Secretary Wally Adeyemo told CNN in an interview.

“So, we’re spending a lot of time with them better understanding what the costs are today, in order to make sure that we’re in a position to share that information with Congress, in order to prevent us from getting into a position where for the first time in our history, we’re unable to pay all of our obligations on time.”

That work begins each day before dawn, when staffers take turns waking up around 3:30 a.m. ET to compile data about overnight market developments and begin making calls to contacts working in European and Asian markets.

At around 7 a.m. ET, those data and insights land in the inboxes of top policymakers at the White House and Treasury Department.

At 9 a.m. ET, before the US markets open, Treasury Secretary Janet Yellen and her senior leadership team huddle virtually with the Markets Room and other key Treasury Department aides for a briefing on the state of the financial markets and issues to watch for that day.

“Almost every American is influenced by what’s happening around the globe and global markets either through your 401(k), or your attempt to borrow money for your small business or for your home. So, this team of individuals, every morning, provides us a briefing and an update on what’s happening around the world,” Adeyemo said.

In recent weeks, that daily briefing has heavily focused on reverberations of the debt limit standoff, from updates on auctions of Treasury bills to market reactions and commentary from market analysts and economists.

Much of the rest of the day is spent monitoring developments in the financial markets and fielding inquiries from top policymakers at Treasury and the White House for analysis on those developments.

And at the end of the day, the Markets Room also helps policymakers digest the biggest developments in the financial markets with another widely read one-page memo delivered after the US markets close and before the Asian markets open.

Beyond the Treasury Department, a White House spokesperson said the unit’s twice-daily memos are “a valuable asset” for officials at the National Economic Council and Council of Economic Advisers.

“Those offices also rely on the Markets Room’s real-time updates – either in memos or meetings – when more regular monitoring is warranted,” the spokesperson said.

Officials say the Markets Room is focused on monitoring the global economy’s recovery from the pandemic-induced recession, lingering inflation and the trajectory of the global economy.

Albert Lee, the Markets Room director, described the unit as an early warning system on the global financial system for top US policymakers.

In the early days of the coronavirus pandemic, the team was among the first to sound alarm bells inside the federal government about early shocks in pockets of the financial system and predicting rate cuts from the Federal Reserve.

The team also played a critical role during the banking crisis earlier this year, tracking the sharp selloff of stock and outflows of deposit at Silicon Valley Bank that ultimately triggered the bank’s collapse.

As the Treasury Department acted to address the second-largest bank failure in US history and prevent any spillover effects in the banking sector, top Treasury Department officials leaned on the Markets Room team to track the feedback of their policy actions.

“It was critically important for us to understand how markets were interpreting the actions that we took that made clear to the American people that your deposits were safe,” Adeyemo said. “We were monitoring signs of distress in the banking sector.”

With one week until the government can potentially no longer pay its bills, the US stock market is only just beginning to show signs of concern about a potential default and Treasury officials say the team is focused on tracking further reactions from the stock market as well as the Treasury securities market.

The stock market’s reaction has, up until now, been relatively muted – especially as compared to the 17% drop the S&P 500 suffered amid the 2011 debt ceiling crisis. But Treasury officials say volatility in the securities market is already affecting the federal government, raising the cost to borrow.

Yields on short-term Treasury securities have surged and recent auctions for securities are leaving a heftier price tag for the federal government, which Adeyemo said recently incurred $80 million in additional costs for a recent auction of Treasury bills.

“So, the cost of borrowing has already gotten more expensive when it comes to us borrowing in the short term for the US government,” Adeyemo said. “So as the debt limit manufactured crisis goes on, and costs go up for the government, it also means that costs will go up for the American people as well.”

Adeyemo declined to disclose what contingencies are being prepared should the US default. But when the US faced a similar standoff on the debt in 2011, Federal Reserve officials and Treasury Department officials quietly prepared a plan to prioritize payments on US debt and delay paying other government bills and obligations, like Social Security and payments to veterans, according to transcripts of a central bank meeting released in 2017.

“The most important thing for the American people, for our country, for our credibility, not only with our creditors, but with the American people is to pay all of our bills on time. That’s what our system is built to do,” Adeyemo said. “I’ve spent a good part of a decade working here at the Treasury Department. What I can tell you is that there’s no plan that would allow us to meet all of our commitments other than Congress, raising the debt limit.”

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April 12, 2021