bond market outshines stock market; both have fallen this year, although rising interest rates have been worse for bond investors due to the inverse relationship between rates (yields) and bond prices.
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About 600 institutional investors from 23 countries participate in chats on the bear trap site. During an interview, McDonald said the consensus among these money managers is that “things are breaking down” and that the Federal Reserve will have to make a policy change pretty soon.
Reading: When will the stock market crash
Pointing to the turmoil in the UK bond market, McDonald’s said government bonds with 0.5% coupons due in 2061 were trading at 97 cents on the dollar in December, 58 cents in August and only 24 cents in recent weeks.
When asked if institutional investors could simply hold onto those bonds to avoid recording losses, he said that due to margin calls on derivative contracts, some institutional investors were forced to sell and take massive losses.
read: the turbulence in the British bond market is a sign that the disease is growing in the markets
and investors have yet to see the financial statements reflecting those losses; they happened very recently. Writedowns on bond valuations and record losses on some bonds will hurt the bottom line for banks and other institutional money managers.
interest rates are not historically high
Now, in case you think interest rates have already skyrocketed, check out this chart showing 10-year US bond yields. treasury bonds tmubmusd10y, 3.956% over the last 30 years:
The 10-year yield is right in line with its 30-year average. now look at the forward price-earnings movement for the s&p 500 spx, +2.48% since March 31, 2000, which is as far back as it gets for this metric:
The index’s forward-weighted P/E ratio of 15.4 is well below the level of two years ago. however, it is not very low compared to the average of 16.3 since March 2000 or the 2008 crisis low score of 8.8.
on the other hand, rates don’t have to be high to hurt
McDonald said that interest rates didn’t have to go as high as they did in 1994 or 1995, as you can see in the first chart, to wreak havoc, because “there are a lot of low coupons today.” role in the world.”
“So when yields go up, there’s a lot more destruction” than in previous central bank tightening cycles, he said.
It may seem like the worst of the damage has been done, but bond yields can still go up.
heading to the next consumer price index report on October 1. On February 13, Goldman Sachs strategists warned clients not to expect a change in the Federal Reserve’s policy, which has included three consecutive 0.75% increases in the fed funds rate to its current target range. from 3.00% to 3.25%.
The Federal Open Market Committee has also been pushing up long-term interest rates through reductions in its US bond portfolio. treasury securities. After reducing these holdings by $30 billion a month in June, July, and August, the Federal Reserve began reducing them by $60 billion a month in September. and after reducing its holdings of federal agency debt and agency mortgage-backed securities at a rate of $17.5 billion a month for three months, the federal reserve began reducing these holdings by $35 billion a month in September.
bca research bond market analysts led by ryan swift wrote in a note to a client on october 1. 11 who continued to expect the Fed to not pause its tightening cycle until the first or second quarter of 2023. They also expect the high-yield (or junk) bond default rate to rise to 5% from the current rate of 1 ,5%. . the next fomc meeting will be held on november 11. 1-2, with a policy announcement on Nov. 2.
McDonald said that if the Fed raises the Fed Funds rate by another 100 basis points and continues its balance sheet cuts to current levels, “they will crash the market.”
a pivot may not prevent pain
McDonald expects the Fed to care enough about the market’s reaction to its monetary tightening to “back off for the next three weeks,” announcing a smaller 0.50% increase in the fed funds rate in November “and then stop”.
also said there will be less pressure on the fed after the us decision. uu. midterm elections on November 10, 8.
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