Category

Bonds

Zach Abraham Featured on TheStreet

By | Bonds, In The Headlines, News

Interest rates, bond prices and inflation are related. Here’s how.

By | Bonds

The Federal Reserve

“Part of the mission given to the Federal Reserve by Congress is to keep [consumer] prices stable–that is, to keep prices from rising or falling too quickly. The Federal Reserve sees a rate of inflation of 2 percent per year–as measured by a particular price index, called the price index for personal consumption expenditures–as the right amount of inflation.

“The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.”  ~The Federal Reserve of Cleveland

Interest Rate Risk

In general, low interest rates can be good for mortgage and other consumer loans because you will pay less to borrow money. However, low interest rates are not so good when you’re looking at the low interest credited on savings accounts and CDs.

But the main reason interest rate risk is considered a risk has to do with bond prices.

About Bonds

Bonds are basically fixed-rate loans with set maturity dates. Buying or selling them before maturity, when current interest rates might be higher or lower than the bond’s face value interest rate, is what affects their price.

In general, when interest rates go up, bond values go down. As bond prices increase, bond yields fall. Interest rate risk is common to all bonds, even U.S. Treasury bonds.

“The most important difference between the face value of a bond and its price is that the face value is fixed, while the price varies. The face value remains the same until the bond reaches maturity. On the other hand, bond prices can change dramatically.” ~Investopedia

Why You Should Care

Pre-retirees and retirees with money invested in the stock market often have the majority of their investments held in bonds after they reach age 50+ because in general, bonds are often considered “safer” than stocks.

A common principle used by some stockbrokers and bankers called “the Rule of 100” uses age to determine how much of their client portfolios are held in bonds versus stocks. The rule works like this: When you are 60, 60% of your portfolio will be in bonds versus 40% in stocks, when you’re 70, 70% will be in bonds versus 30% in stocks, etc. going up from there.

This shift to more bonds and less stocks as you get older happens automatically in many 401(k) “target date” funds as well.

Bonds Versus Bond Funds

Because the term “bonds” is often used interchangeably with “bond funds,” it’s important to know that some Wall Street experts consider bond funds to be correlated with stock market risk, and therefore not “safer.”

“A bond fund is simply a mutual fund that invests solely in bonds… An investor who invests in a bond fund is putting his money into a pool managed by a portfolio manager. Most bond funds are comprised of a certain type of bond, such as corporate or government bonds, and are further defined by time period to maturity, such as short-term, intermediate-term, and long-term. Some bond funds comprise of only one type…Still, other bond funds have a mix of the different types of bonds in order to create multi-asset class options.

“The types of bond funds available include: US government bond funds, municipal bond funds, corporate bond funds, mortgage-backed securities (MBS) funds, high-yield bond funds, emerging market bond funds, and global bond funds…Typically, a bond fund manager buys and sells according to market conditions and rarely holds bonds until maturity.

“In other words, bond funds are traded on the market, and the market prices on bonds change daily, just like any other publicly-traded security.” ~Investopedia

 

What’s Happening Now: The Headlines

 

  • Inflation Fears

“Inflation is near a decade low and well below the 2% level the Federal Reserve targets as ideal. The usual conditions for rising inflation—tight job markets and public expectations of rising prices—are glaringly absent. Yet anxiety about inflation is at a fever pitch, among economists and in markets, where long-term interest rates have been grinding higher since President Biden unveiled plans for huge new fiscal stimulus.” ~Wall Street Journal

  • Rock Bottom Interest Rates

“The Federal Reserve’s emergency rate cut back in March [2020], which dropped the benchmark interest rate to zero, is likely here to stay…the Fed publicly stated that even if inflation starts to pick up again amid the economic recovery from the coronavirus pandemic, it doesn’t expect to raise interest rates any time soon as the labor market rebounds. Wall Street economists predict that these rock-bottom rates may be around for the next several years. In fact, after the 2008 Global Financial Crisis, the Fed kept benchmark rates low for seven years. While this means that borrowing becomes cheaper for those who can get approved for loans, it’s not such good news for savers.” ~CNBC

  • Bond Yields Higher

“The 10-year U.S. Treasury yield climbed back above the 1.5% level on Thursday [3/4/21] after Fed Chair Jerome Powell said there was potential for a temporary jump in inflation and that he had noticed the recent rise in yields. The yield on the benchmark 10-year Treasury note rose to 1.541% shortly in afternoon trading. The yield on the 30-year Treasury bond pushed higher to 2.304%. Yields move inversely to prices.” ~CNBC

“If you hear that bond prices have dropped, then you know that there is not a lot of demand for the bonds. Yields must increase to compensate for lower demand.” ~The Balance

  • Long-Term Bonds Face Nearly Zero Upside

“Buffett is bearish on bonds. Why does [Warren] Buffet think that “bonds are not the place to be these days”? Yields on Treasurys are near historical lows, and investors locking in these low returns by investing in long-term bonds face nearly zero upside with significant downside if rates rise.” ~Think Advisor

 

To Recap: Interest Rate Risk / Bond Risk / Inflation Risk

  • Bond Risk: In general, when interest rates go up, bond values go down. Interest rate risk is common to all bonds, even U.S. Treasury bonds. A bond’s maturity and coupon rate generally affect how much its price will change as a result of changes in market interest rates.
  • Inflation Risk: Inflation risk is the risk that rising costs will undermine purchasing power over time. The Fed will raise interest rates if inflation rises.

 

Inflation risk, bond risk, and interest rate risk can be managed through strategies like portfolio diversification, insured solutions that offer inflation adjustments, and by proper financial and retirement planning.

It’s more important than ever to make sure you are protected from multiple risks as you get closer to or are already in retirement. If you have any questions about your situation, please don’t hesitate to call us. You can reach Bulwark Capital Management at 253.509.0395. 

 

 

Sources:

https://www.clevelandfed.org/en/our-research/center-for-inflation-research/inflation-101/why-does-the-fed-care-get-started.aspx#

https://www.investopedia.com/terms/b/bond-yield.asp

https://www.investopedia.com/ask/answers/013015/how-does-face-value-differ-price-bond.asp

https://www.cnbc.com/select/what-happens-when-interest-rates-go-down/

https://www.cnbc.com/2021/03/04/us-bonds-treasury-yields-lower-ahead-of-fed-chair-powells-speech.html

https://www.thinkadvisor.com/2021/03/03/is-buffett-right-to-be-bearish-on-bonds/

https://www.investopedia.com/terms/b/bondfund.asp

https://www.wsj.com/articles/is-inflation-a-risk-not-now-but-some-see-danger-ahead-11614614962

 

 

Should Interest Rates Remain Low?

By | Bonds, Interest Rate Risk

Federal Reserve Board Chair Jerome Powell and other Fed officials recently asserted there was “no need to change to rates any time soon.” The minutes of the recent Federal Open Market Committee meeting on November 18 offered some details. Two Fed presidents — albeit hawks — stated their position that rates should remain at the current 1 . 50% to 1 . 75% range.

Federal Reserve Bank of Boston President Eric Rosengren, who dissented on the three recent rate cuts, reiterated his concern about low rates in a Bloomberg interview and ruled out negative rates, even if a recession occurs.

Federal Reserve Bank of Cleveland President Loretta Mester said in a talk the panel can take a wait-and-see approach before deciding its next move.

In testimony before Congress, Powell stated “the current stance of policy is likely to remain appropriate as long as the data supports,” he said. “Powell also indicated that a push to raise rates would likely require ‘serious’ inflation,” which is not expected.

The Bondbuyer.com asked Zach Abraham, in addition to other leading financial experts, what he thought of the Federal Reserve’s recent remarks.

“The Fed is watching the markets,” noted Zach Abraham, Principal/Chief Investment Officer at Bulwark Capital Management. “91% of household wealth is in financial assets and 8% is in real assets. When you consider the fact that the wealthiest and largest generation in our nation’s history is retiring en masse and now relying on said financial assets to replace income, the market is the economy,” he said.

While market pullback late last year was attributed “to decreased consumer spending in the fourth quarter, in reality, consumer spending dipped 8% BECAUSE the market dropped 20% in 2 months.”

Read the entire article here: https://www.bondbuyer.com/news/fomc-where-it-needs-to-be-for-a-treacherous-political-year

ABOUT THE PUBLICATION

The bondbuyer.com is designed for municipal finance professionals, bond issuers, government officials, investors and other decision makers in the municipal bond industry; the website receives nearly 59,000 unique visitors per month. It provides breaking news, analysis and data regarding all areas of municipal finance. The site features news on the national as well as regional levels, and it contains market statistics, graphs, charts, photos and weekly indices.

Did the Fed and the White House Come to a Meeting of the Minds?

By | Bonds, Investments, Stock Market

On November 18, President Donald Trump invited Federal Reserve Board Chair Jerome Powell to meet at the White House with him and Treasury Secretary Steve Mnuchin. Afterwards Trump tweeted, “Just finished a very good & cordial meeting at the White House with Jay Powell of the Federal Reserve. Everything was discussed including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others, etc.”

While the Fed released a statement saying that the meeting covered “the economy, growth, employment and inflation,” the Fed said Powell’s remarks “were consistent” with those he made at last week’s congressional hearings. “[Powell] did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming information that bears on the outlook for the economy.” Powell told the president that monetary policy decisions will be “based solely on careful, objective and non-political analysis,” the statement said.

Zach Abraham, principal/CIO at Bulwark Capital Management, told reporters at the Bondbuyer.com that, “This is simply a case of Trump throwing everything at the Fed but the kitchen sink. If we really want to keep China in check, the Fed and the White House must be on the same page. Beijing and the PBOC have strategically exploited Fed Independence and the inherent lag between monetary policy and economic reality on the ground.

“I’d assume Trump is merely trying to close this gap and make nice with Powell as he’s realized the need to be on the same page. I just don’t think the White House has realized that lower U.S. rates and a lower dollar are precisely what Beijing wants,” said Abraham.

Read the entire article here: https://www.bondbuyer.com/news/whats-behind-trump-powell-meeting

ABOUT THE PUBLICATION

The bondbuyer.com is designed for municipal finance professionals, bond issuers, government officials, investors and other decision makers in the municipal bond industry; the website receives nearly 59,000 unique visitors per month. It provides breaking news, analysis and data regarding all areas of municipal finance. The site features news on the national as well as regional levels, and it contains market statistics, graphs, charts, photos and weekly indices.

How Will Lower Interest Rates Affect the Bond Market?

By | Bonds, Investments, Stock Market

On October 31, along with other financial industry experts,  Zach Abraham, Principal and Chief Investment Officer for Bulwark Capital Management was asked to weigh in regarding the Federal Reserve’s recent lowering of interest rates.

At that time, Federal Reserve Board Chair Jerome Powell had just made it clear the Fed expected to keep rates at a range of 1.50% to 1.75% unless events resulted in a “material reassessment” of the Fed’s outlook.

“While the rate cut certainly means that yields on treasuries are headed lower, it may not be so for the rest of the bond market,” said Zach Abraham, principal/CIO at Bulwark Capital Management.

“At some point in this cycle we will see spreads blow out. It’s inevitable, as it occurs in every cycle. Flight to safety puts a bid under treasuries while corporates are shunned as weakening economic fundamentals raise risks, or at least perceived risks, of corporate defaults.”

He called Powell’s claim that the Fed is on pause “a bit humorous.” The Fed trimmed the rate target by 75 basis points in the past three meetings and “launched a $100 billion standing repo facility (just quantitative easing by another name). It’s time we all face the facts. The Fed has a tiger by the tail and has no clue how to let go,” Abraham said. “Investors, as well as the market, are beginning to figure this out. Barring some exogenous/inflationary shock, we’re headed back to the zero bound.”

Read the entire article here: https://www.bondbuyer.com/news/how-feds-pause-will-impact-bond-market

ABOUT THE PUBLICATION

The bondbuyer.com is designed for municipal finance professionals, bond issuers, government officials, investors and other decision makers in the municipal bond industry; the website receives nearly 59,000 unique visitors per month. It provides breaking news, analysis and data regarding all areas of municipal finance. The site features news on the national as well as regional levels, and it contains market statistics, graphs, charts, photos and weekly indices.