15 Jan 2016

Insight: Fed’s Backing Down

Comments from central bankers have been dovish in recent days – they seem to be backing down from earlier statements that suggested that the fed funds rate could increase by one percent or more this year. St. Louis Federal Reserve President James Bullard noted that ‘with renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome.’ He further said that… Read More

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5 Nov 2015

Interest Rates May Head Higher

Yellen’s comments yesterday definitely had an impact on the markets view of what could happen to interest rates in December.  The chart below shows what markets think are the odds of a rate hike at the December meeting since the beginning of the year. You can see that at the beginning of the year, markets thought that the odds of a hike were not particularly high, ranging from 20 to… Read More

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5 Jun 2015

Interest Rates Rising

Long-term interest rates have moved up swiftly in recent weeks.  On April 20th, the 10-year German government bond had a yield of 0.06 percent. Around that time, I couldn’t stop writing about negative interest rates (see here and here) because the 10-year Swiss government bond yielded -0.13 percent along with the government bonds of a half-dozen other European countries at shorter maturities.  I read at one point that one-third of all outstanding… Read More

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15 Jan 2015

How High Should Interest Rates Go?

As recently as Christmas Eve, the market believed that there was a 92.4 percent chance that the Federal Reserve would raise interest rates in 2015. The probability is based on prices for Federal Funds futures price contracts at the Chicago Board of Trade (CBOT). In the first few weeks of this year, I started hearing market chatter that the Fed may have to push off raising interest rates until 2015… Read More

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12 Jan 2015

Finally, A Regulation You Can Opt-Out Of

In the December 2012 issue of ALM Insights, I wrote an article titled Basel III’s AFS Provision. At the time of the article, the provision detailing the effects of Accumulated Other Comprehensive Income (AOCI) on regulatory capital had been delayed due to a “wide range of views”, and the final outcome was still very much up in the air. Few in the banking industry thought that forcing banks of all… Read More

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9 Jan 2015

Inflation Expectations in 2015

In my judgment, the biggest stories of 2014 were falling interest rates and oil prices. I’ve written that most people expected interest rates to rise and no one expected a major drop in oil prices. The combination of those two things, plus the unexpected rise in the U.S. dollar (a big story, but not as big as the first two) means that inflation expectations have fallen dramatically in the U.S…. Read More

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21 Oct 2014

Lower for Longer

One of the interesting implications of the recent selloff in stocks and rally in bonds is that investors have quickly shifted gears regarding when they think that the Federal Reserve will begin to raise interest rates. Right now, the market expects the Fed to announce that they will end their bond-buying program, known as quantitative easing, at their meeting on October 29th. There has been some scuttlebutt that the Fed… Read More

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22 Sep 2014

What if You Called The Bond Market Perfectly?

It’s an interesting question. The ability to call the tops and bottoms with perfect accuracy is considered the “holy grail” of bond market investing. We spend a great deal of effort talking to clients about the risk of trying to make speculative calls – the risk of being wrong of course. Just as an exercise I thought it would be neat to imagine what it would be like if we… Read More

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9 Jul 2014

When Interest Rates Rise

With the Federal Reserve now unwinding their bond purchasing program known as quantitative easing, it’s likely that the Fed will start to raise short-term interest rates at the end of 2015 or the beginning of 2016 (assuming no new information). Now that we ‘know’ that the Fed will raise rates, what will happen when interest rates rise?  The short answer is that it depends.  I know that’s an unsatisfying answer,… Read More

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14 May 2014

Treasury Bonds Mystery

Yesterday, someone asked me what’s going on in the markets.  I said that stocks are flopping around zero – plus two percent or minus two percent depending on what you look at, nothing really.  I said that the interesting story, in my opinion, was that the yield on bonds has been dropping all year, much to everyone’s surprise. When I hung up the phone, I looked up the yield and… Read More

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