Investment Thread

[Jeffrey]

Heard Larry Summers talk about rate cuts yesterday on the radio...

Before the last four recessions, the Fed Funds rate was left substantially (like yesterday) higher than the 2 year Treasury.

Did Larry Summers mention that yesterday? I’d certainly expect a former Treasury Secretary to be very aware of financial history.

[OldPhiKap]

Consensus I have heard and seen so far seems to be that the bond market likely forced the move, but that it has little upside impact and may just spook the market. I guess we will see what Mr. Market will say over the next few days.

[Jeffrey]

Consensus I have heard and seen so far seems to be that the bond market likely forced the move, but that it has little upside impact and may just spook the market. I guess we will see what Mr. Market will say over the next few days.

The yield curve tells me, Mr. Market wanted a 75-100 bp cut. So, don't be mislead by his short-term reaction to a 50 bp cut. IMO, we need another 50 bp cut to please Mr. Market.

I'm a long-term value investor and personally love low rates. Professionally, I'm less pleased.

[OldPhiKap]

The yield curve tells me, Mr. Market wanted a 75-100 bp cut. So, don't be mislead by his short-term reaction to a 50 bp cut. IMO, we need another 50 bp cut to please Mr. Market.

I'm a long-term value investor and personally love low rates. Professionally, I'm less pleased.

The criticisms I read/heard, FWIW:

1. The cut takes the interest rate from about 1.75 to about 1.25 -- using up a lot of rope you may wish you had later.

2. If the issue is downturn in consumer spending due to coronavirus, this does not help. Lower rates do not get folks to the local restaurant or store.

3. Interest rates are already very low by historical standards; this is just more stimulus into a very flush market.

4. Doing it as an emergency cut cries out for panic, given that the last two times this was done was in the 2008 meltdown and the aftermath of 9/11.

5. This does not impact the major source of fluctuating debt for many -- credit cards.

6. To the extent folks still use savings accounts as a source of monetary wealth, this hurts your return. (Sophisticated investors may eschew this, but it's the reality for many Americans).

7. Trump is tweeting that it still isn't enough, and has mused in the past about the benefits of negative interest rates. This does not seem to be a majority view as best I can tell, to say it as nicely as I can. But point being -- even Trump is criticizing it. Calls for "More easing and cutting!" (his exclamation point).


I don't say any of that is right or wrong -- just what I heard and saw as initial reactions. I have not heard many yell hooray.

[Jeffrey]

The criticisms I read/heard, FWIW:

1. The cut takes the interest rate from about 1.75 to about 1.25 -- using up a lot of rope you may wish you had later.

Before the last four recessions, the Fed Funds rate was left substantially (like yesterday) higher than the 2 year Treasury. Even using your 1.25% estimate, isn't that still higher than the 2 year Treasury? Is that prudent?

[Jeffrey]

Reality is the fixed income market had already substantially cut rates. Do we really want overnight rates substantially higher than 10 year rates?

The two-year Treasury is at .83 percent.
The five-year Treasury is at .87 percent.
The ten-year Treasury is at 1.13 percent.

Where were these rates on 12/31/19?

The two-year Treasury was at 1.57 percent.
The five-year Treasury was at 1.69 percent.
The ten-year Treasury was at 1.92 percent.

The two-year Treasury is down 74 basis points.
The five-year Treasury is down 82 basis points.
The ten-year Treasury is down 79 basis points.

IMO, a 100 basis point FF rate cut looked prudent. I expect another 25-50 bp cut in the next 60 days.

[OldPhiKap]

Before the last four recessions, the Fed Funds rate was left substantially (like yesterday) higher than the 2 year Treasury. Even using your 1.25% estimate, isn't that still higher than the 2 year Treasury? Is that prudent?

I would appreciate your views on the concern and interrelationship of the two, because I have no idea. Is it a problem of arbitrage? Or is it a benefit to lower borrowing rates to lessen demand on the bonds, thus allowing the bond yield to rise? (Really just guessing here). Thanks!

[budwom]

The criticisms I read/heard, FWIW:

1. The cut takes the interest rate from about 1.75 to about 1.25 -- using up a lot of rope you may wish you had later.

2. If the issue is downturn in consumer spending due to coronavirus, this does not help. Lower rates do not get folks to the local restaurant or store.

3. Interest rates are already very low by historical standards; this is just more stimulus into a very flush market.

4. Doing it as an emergency cut cries out for panic, given that the last two times this was done was in the 2008 meltdown and the aftermath of 9/11.

5. This does not impact the major source of fluctuating debt for many -- credit cards.

6. To the extent folks still use savings accounts as a source of monetary wealth, this hurts your return. (Sophisticated investors may eschew this, but it's the reality for many Americans).

7. Trump is tweeting that it still isn't enough, and has mused in the past about the benefits of negative interest rates. This does not seem to be a majority view as best I can tell, to say it as nicely as I can. But point being -- even Trump is criticizing it. Calls for "More easing and cutting!" (his exclamation point).


I don't say any of that is right or wrong -- just what I heard and saw as initial reactions. I have not heard many yell hooray.

For me at least, that's a great list...definitely seems like a panic move, the economy isn't logey because of high rates or lack of money to spend (i.e. doesn't need boosting), it's because people are hunkered in place, apprehensive. You're not going to sell many tours to Italy right now now matter how low rates go...anyway, there we have it, ironically the Fed probably thinks they did the right thing, but as you say, it won't placate the president in the least.

[PackMan97]

Buy on the rumor (+1200). Sell on the news (-900).

0.500 doesn't quite buy you the bounce it used to.

[Jeffrey]

I would appreciate your views on the concern and interrelationship of the two, because I have no idea. Is it a problem of arbitrage? Or is it a benefit to lower borrowing rates to lessen demand on the bonds, thus allowing the bond yield to rise? (Really just guessing here). Thanks!

As a CEO of a financial institution, I'm paid to put money to work at the best risk/return space on the curve. Last night, I had a substantial amount of money in overnight accounts. I'm looking at no repricing risk (by placing funds in overnight accounts) and creating extreme liquidity (which makes my lame regulators happy). Last Monday, our brilliant regulators contacted me complaining about the very substantial amount of long-term bonds I bought in the 4th quarter. While I fortunately do not have to care about their opinions (our capital ratio is top 10 in the USA), and truly wish I had bought even more (current prices are much higher than I paid), I was not going to aggressively search for an alternative usage, for the substantial amount of money in overnight accounts, until the Fed Funds rate was cut. Now, I have true incentive to put the money to work elsewhere. If the Feds had cut 100 basis points, I would have had much more incentive. Make sense?

[Jeffrey]

Trump is tweeting that it still isn't enough, and has mused in the past about the benefits of negative interest rates. This does not seem to be a majority view as best I can tell, to say it as nicely as I can. But point being -- even Trump is criticizing it. Calls for "More easing and cutting!" (his exclamation point).

Must confess, Trump seems to really understand finance. IMO, lower rates, lower taxes, and increased government spending will create a strong economy.

IMO, Trump is almost always giving you guys plenty to bash him about... this is not your best target.

[Jeffrey]

Rates yesterday....

The two-year Treasury is at 0.90 percent.
The five-year Treasury is at 0.94 percent.
The ten-year Treasury is at 1.16 percent.

Rates now...

The two-year Treasury is at 0.67 percent.
The five-year Treasury is at 0.71 percent.
The ten-year Treasury is at 0.96 percent

Mr. Market wants another cut soon.

[PackMan97]

I was not going to aggressively search for an alternative usage, for the substantial amount of money in overnight accounts, until the Fed Funds rate was cut. Now, I have true incentive to put the money to work elsewhere. If the Feds had cut 100 basis points, I would have had much more incentive. Make sense?

And by putting money to work, you mean increased risk...?

[Jeffrey]

And by putting money to work, you mean increased risk...?

Yes, exactly, I'm going to take more risk to get a higher return (than the now reduced overnight rate). I'll take even more risk, if the Feds cut the rate again.

[OldPhiKap]

As a CEO of a financial institution, I'm paid to put money to work at the best risk/return space on the curve. Last night, I had a substantial amount of money in overnight accounts. I'm looking at no repricing risk (by placing funds in overnight accounts) and creating extreme liquidity (which makes my lame regulators happy). Last Monday, our brilliant regulators contacted me complaining about the very substantial amount of long-term bonds I bought in the 4th quarter. While I fortunately do not have to care about their opinions (our capital ratio is top 10 in the USA), and truly wish I had bought even more (current prices are much higher than I paid), I was not going to aggressively search for an alternative usage, for the substantial amount of money in overnight accounts, until the Fed Funds rate was cut. Now, I have true incentive to put the money to work elsewhere. If the Feds had cut 100 basis points, I would have had much more incentive. Make sense?

Thanks, makes sense as far as why the Feds rate should come down. Is the problem with the bond yield that it is just too low to bother with relatively, and by lowering the Feds rate the hope is that the bond yield rises to give you better investment options for you to apply your liquidity?

Must confess, Trump seems to really understand finance. IMO, lower rates, lower taxes, and increased government spending will create a strong economy.

IMO, Trump is almost always giving you guys plenty to bash him about... this is not your best target.

I wasn't bashing, just passing along the criticisms heard. In particular, one guest on CNBC interpreted the President as wanting a weaker dollar in order to stimulate exports, when (according to the guest) we needed a stronger dollar to increase the buying power of consumers to keep spending going. That was the basis of my putting it on the list, not a personally-held view. (Yes I know that CNBC is sorta "trading for dummies" a lot of the time -- my choices are that or Bloomberg and I was on CNBC during a Bloomberg commercial).

[Jeffrey]

Thanks, makes sense as far as why the Feds rate should come down. Is the problem with the bond yield that it is just too low to bother with relatively, and by lowering the Feds rate the hope is that the bond yield rises to give you better investment options for you to apply your liquidity?

Please rephrase your question. I want to give you a good response.

[OldPhiKap]

Please rephrase your question. I want to give you a good response.

Sure. What is the correlation between the Feds rate and the yield on a two year treasury? I can understand why all investors and consumers want lower interest rates, but why does the low bond yield essentially force that result?

[Kdogg]

10 and 30 year Treasuries hit historic lows today as people seek safe harbor. If this holds up we might see negative rates on new issues. Let’s refinance all the US debt! All Germany debt is negative as is most French but surprised to see short term negative rates in Italy...Italy! Do these traders not know history? That’s fear.

[budwom]

The substantial Geezer Vote may not be thrilled with negative rates.

[Jeffrey]

I can understand why all investors and consumers want lower interest rates, but why does the low bond yield essentially force that result?

I'm paid to put money to work at the best risk/return space on the curve, but do not have to buy bonds. Here's a simple example. Usually, I run a duration (life of the instrument) matched book (asset and liabilities of the same duration), to minimize repricing risk. So, I take 4 year duration capital and invest it into a 4 year duration instrument to yield a desired net spread. Let's say the current cost of my 4 year capital is 1% and my desired net spread is 100 basis points. If I currently invest that capital in a 4 year Treasury, I'm going to gross 70 basis points and earn a net spread of negative 30 basis points (my Board of Directors will not be happy). However, if instead I invest in 60 month car loans (with a 48 month duration), at a 3.9% rate, then I can yield my desired net spread of 100 basis points, if I keep my origination and charge-off costs below 1.9%. Lower bond yields also decrease my cost of capital and enable me to reduce consumer interest rates, while still earning my desired net spread. Make sense?