On Wednesday, I wrote about the positive and negative of rising interest rates for bond investors. I also promised a follow-up to share my opinion on where interest rates go from here so let’s dive into that.
Note: In both today’s and the recent commentary, I’m addressing treasury bonds, specifically, not to be confused with corporate bonds, which I hold relatively very little of across client portfolios as I’m purposely avoiding credit and default risk at this point in the market cycle.
In short, I believe by the time this market cycle is complete over the next couple years, interest rates on 0-10 year treasury bonds could fall back towards zero again. This would imply a great investment opportunity in an asset class that is widely hated at the moment! But that’s how it normally works doesn’t it?
Obviously, if inflation is sustained for a prolonged period then rates will continue higher, but I don’t think that’s the likely outcome. Therefore, this is really a forecast about inflation / deflation over the next couple years. Continue reading “Follow Up: Where Will Interest Rates (Inflation) Go?”
The most common discussion with clients recently has been about interest rates (and bonds) as interest rates have been rising swiftly as of late.
It’s a popular topic because interest rates impact our lives in various ways; rising interest rates causes bond prices to fall, rising interest rates means things purchased with borrowed money cost more (houses / mortgages, autos / auto loans, credit cards, etc…), future cash flows from investments / projects become less valuable, etc… 30-year mortgage rates have doubled to over 5% from 2.5%
On the other hand, rising rates also motivate us to save more as savings vehicles yield more and motivate us to take on less debt / pay down debt faster. When’s the last time we’ve earned any notable interest in our checking and savings accounts? Many young people probably don’t even realize that banks used to pay interest on those checking and savings balances. Continue reading “On Interest Rates: The Federal Reserve is in a Difficult Position”
This has been a strange period in that both traditional bonds AND stocks are down around 7%-8% simultaneously. Historically, if stocks were down like this bonds would at least be holding up, if not appreciating, and vice versa.
A couple months ago I wrote a commentary about why we own treasuries in portfolios referencing the fact that since 1928, treasuries and stocks have only been down simultaneously in the same year three times! Historically, stocks and treasuries have been great complimentary, non-correlated assets. In fact, they have about a negative 0.40% correlation.
At this point, if nothing were to change for the rest of the year, we could have our fourth year in almost a century where both bonds and stocks are down simultaneously. Continue reading “Quarterly Market Update: All That Glitters is Gold…”
There is an important debate currently raging between experts within the financial industry. Since it involves a question I’ve been receiving increasingly as of late I am going to address here.
The debate is whether we get significant inflation / falling U.S. Dollar or deflation / rising USD. It should be noted that there are very smart, successful investors, advisors, hedge fund managers and economists on both sides of the debate.
The recent year-over-year Consumer Price Inflation (CPI) prints have been quite high at 4.16%, 4.99%, 5.39%, and 5.37%. However, the bigger question we’re exploring here is if high inflation will be sustained for the foreseeable future or if the inflation is truly “transitory” as some policymakers are suggesting. Continue reading “Inflation or Deflation?”
A question I’ve received frequently the last couple months from many different people is about the potential for inflation given the unprecedented response to the Novel Coronavirus Pandemic. It is an important question because it impacts the best investment approach going forward as well as other personal finance decisions.
I understand the rationale behind the question. After all, trillions of dollars have been pledged between the Federal Reserve and the U.S. Treasury in the last few months in what essentially amounts to a “helicopter drop” of money on the economy. So, it is understandable that people are beginning to have concerns about the potential for inflation.
Ultimately, I believe we will get inflation mainly because the Federal Reserve will stop at almost nothing to make it happen, HOWEVER, we must allow for the possibility of getting deflation first. Continue reading “Deflation or Inflation?”