Tag: bond yields

Tweets of the Day on Bonds, Jobs, Leverage, China, Oil, and Artificial Intelligence

Mary Pat Campbell

Link:https://mishtalk.com/economics/tweets-of-the-day-on-bonds-jobs-leverage-china-oil-and-artificial-intelligence/

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Everyone knows, or at least should know, that the “Big 3” rating agencies that rate about 98 percent of all debt all issue trash ratings. Here’s the background on how that happened.

Rating agencies used to get paid by investors on the basis of how well they did at estimating the likelihood of default. The better your ratings, the more sought out your opinions.

In the mid 1970s, the SEC created nationally recognized statistical ratings organizations (NRSROs). Following that idiotic regulation, the rating agencies got paid on the basis of how much debt they rated, not how accurate their ratings were. Fees come from corporations issuing debt, not investors seeking true default risk.

The more stuff you rate AAA, the more business you get from companies who want their debt rated. The new model is ass backward, and why ratings are trash. A genuine fiasco happened with ratings during the Great Financial Crisis with tons of garbage rated AAA went to zero.

There should not be NRSROs. The SEC made matters much worse, except of course for the Big 3 who have a a captured, mandated audience, coupled with massive conflicts of interest.

Author(s): Mike Shedlock

Publication Date: 5 Aug 2023

Publication Site: Mish Talk

Bond prices mean revert after all

Mary Pat Campbell

Link: https://allisonschrager.substack.com/p/bond-prices-mean-revert-after-all?utm_campaign=post&utm_medium=web

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On day one of Fixed Income School, you learn that bond prices mean-revert. While a stock or a house’s price can continue to increase as the company or land becomes more valuable, yields can only go so low. Nobody will pay to lend someone else money, or at least, they won’t pay much to do that. Bond prices can only climb so high before they fall. While some evidence shows that yields trended downward slightly as the world became less risky, they still tended to revert to a mean greater than zero.

It’s easy to blame Silicon Valley Bank for being blissfully ignorant of such details. They purchased long-term bonds and mortgage-backed securities when the Fed was doing QE on steroids! Did they expect that to last forever? Well, maybe that was a reasonable assumption, based on the last 15 years, but I digress.

Many of these smaller banks, particularly Silicon Valley, are in trouble because they were particularly exposed to rate risk since their depositors’ profit model relied on low rates. So, when rates increased, they needed their money—precisely when their asset values would also plummet. It’s terrible risk management. But, to be fair, even the Fed (the FED!) did not anticipate a significant rate rise. Stress tests didn’t even consider such a scenario, even as rates were already climbing. Why would we expect bankers in California to be smarter than all-knowing bank regulators?

According to the New York Times, Central Bankers still expect rates to fall back to 2.5%. Why? Because of inequality and an aging population. But how does that work, and what’s the mechanism behind it? No good answer, or not one that squares with data before 1985, but we can hope. Sometimes we just want something to be true and for it to be true for politically convenient reasons.

Author(s): Allison Schrager

Publication Date: 20 Mar 2023

Publication Site: Known Unknowns at Substack

Bond Yields Have Been On a Tear Since August 4. What’s Going On?

Mary Pat Campbell

Link: https://mishtalk.com/economics/bond-yields-have-been-on-a-tear-since-august-4-whats-going-on

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Five Factors Spooking the Bond Market and Impact

Debt Ceiling Battle: Short Term, Low Impact

Supply Chain Disruptions: Medium Term, Medium Impact

Trade Deficit: Long Term, Low-to-Medium Impact

Biden’s Build Back Better Spending Plans: Long Term, High Impact

Wage Spiral: Long Term, High Impact

Author(s): Mike Shedlock

Publication Date: 8 Oct 2021

Publication Site: Mish Talk

EXPLAINER: Why rising rates are unsettling Wall Street

Mary Pat Campbell

Link: https://apnews.com/article/coronavirus-pandemic-financial-markets-stock-markets-inflation-prices-96e01a1db876bd4ad7e183e8cb4874e8

Excerpt:

WHY ARE INFLATION AND GROWTH EXPECTATIONS RISING?

Coronavirus vaccines will hopefully get economies humming this year, as people feel comfortable returning to shops, businesses reopen and workers get jobs again. The International Monetary Fund expects the global economy to grow 5.5% this year following last year’s 3.5% plunge.

A stronger economy often coincides with higher inflation, though it’s been generally trending downward for decades. Congress is also close to pumping another $1.9 trillion into the U.S. economy, which could further boost growth and inflation.

Author(s): STAN CHOE and ALEX VEIGA

Publication Date: 26 February 2021

Publication Site: Associated Press