Interest Rates 02 (Nov 14 - Dec 25)

[winston]

CHART: This trusted signal is pointing to higher interest rates in 2018

by Brett Eversole

Again, bond prices and interest rates move in opposite directions. So this optimism about bonds means that futures traders are expecting rates to fall…

History says the opposite should occur.

Source: True Wealth Systems

http://thecrux.com/heres-why-long-term- ... e-in-2018/

[winston]

This is the level of interest rates that could make things really ugly for stocks

by Patti Domm

Strategists say the speedy rise in Treasury yields has spooked investors, but a 10-year yield of over 3 percent could be an even bigger problem for the stock market.

Treasury yields, which move opposite price, have been rising quickly on inflation expectations, and jumped further Friday on signs of budding wage inflation.

The Dow plunged 665 points as investors digested the bond market move which took the 10-year yield to 2.85 percent.

Bob Doll: "If we get to 3.25 slowly, stocks will be okay. If we get to 3.25 quickly, stocks won't be okay".

Source: CNBC

https://www.cnbc.com/2018/02/02/this-is ... yptr=yahoo

[winston]

Permabear Albert Edwards says the 10-year Treasury yield will eventually go negative

But it will first hit 3% before retreating

By Sunny Oh

Source: Market Watch

https://www.marketwatch.com/story/perma ... yptr=yahoo

[winston]

What is the LIBOR-OIS Spread, and Why Does It Matter?

The LIBOR is the average interest rate that banks charge each other for short-term, unsecured loans. The utility of LIBOR is to give banks around the world a rough idea of how much it costs (interest rate) to borrow money in the short-term.

For consumers, the LIBOR is important because it is generally what banks then use as a starting point for determining mortgage rates, student loans, credit cards, etc.

The Overnight Index Swap (OIS) rate represents a specific country's central bank rate, which in the case of the U.S. is our fed funds rate as determined by the Federal Reserve.

At the end of the day, the spread between the LIBOR and the OIS should give market participants an idea of credit conditions in a particular country. A higher spread means that banks are demanding more interest for dollars lent, which may also mean they see increasing risk in the credit markets.

In short, a widening LIBOR-OIS spread means that banks want extra interest to compensate for extra risk.

You probably know what I'm going to say next: the LIBOR-OIS spread has been widening fairly substantially since the beginning of the year.

Banks have been steadily charging each other more for short-term money, and as a result the LIBOR has been creeping up to levels we saw in the years leading up to the financial crisis in 2008.

We're not at 'sound the alarm' levels yet. But the steady ascent has been noteworthy and rather quick in calendar year 2018. In short, financial conditions are tightening here in the U.S., and very few people are talking about it.

Bottom Line for Investors

The 2008 financial crisis was an extreme case where tightening financial conditions brought the economy to a screeching halt. In our view, we are nowhere near those conditions today.

But, we believe that investors should be on notice that a rising LIBOR-OIS spread - coupled with the Federal Reserve shrinking its balance sheet while raising interest rates - are the types of factors that can quietly slow down an economic expansion and slow the flow of money into risk assets. And, in our opinion, those two effects together can serve as a type of gravity on stock prices.

In the near term, say the next 3-6 months, I think the momentum of corporate earnings growth and the impact of fiscal stimulus will keep this risk at bay. But we will be watching it develop closely, and I'd encourage investors to do the same.

Source: Zack's

[winston]

Why the market fears higher interest rates (and where you can find shelter)

by Dr. Richard Smith

China and other emerging market countries are vulnerable to a global rate rise led by the USA. Pain here could in turn hit commodity prices.

Regional investment banks do most of their lending locally rather than internationally, so they don’t have as much exposure to vulnerable emerging markets.

KRE SPDR S&P Regional Banking ETF

Source: TradeStops

http://thecrux.com/why-the-market-fears ... d-shelter/

[winston]

‘A massive contrarian opportunity’

by Steve Sjuggerud

Interest rates have been on the rise. Ten-year government bonds broke 3% for the first time in years last week. But history tells us the run-up could be ending soon.

Rising rates are keeping investors up at night… But we shouldn’t worry about their biggest fear.

The massively contrarian bet on lower interest rates is the smart bet from here.

Source: Daily Wealth

http://thecrux.com/how-to-profit-from-i ... est-fears/

[winston]

Malaysia, Indonesia, among emerging central banks that hiked lending rates

RUSSIA - Russia raised its key rate for the first time since late 2014 on Sept. 14, nudging it up to 7.5 percent from 7.25 percent.

TURKEY - Turkey jacked up its benchmark rate by 625 basis points on Sept. 13 to 24 percent, having now hiked rates by 11.25 percentage points since late April.

UKRAINE - Raised its key policy rate by half a percentage point on Sept. 6. to 18 percent to coincide with the arrival of an International Monetary Fund mission.

MALAYSIA - On Jan. 25, Bank Negara Malaysia raised its main overnight policy rate by 25 basis points to 3.25 percent.

ARGENTINA - The central bank raised its benchmark rate to a dizzying 60 percent from 45 percent on Aug. 30 in an effort to stem a slide in the peso - the world's worst-performing currency this year - and to curb inflation running at 31 percent.

INDONESIA - The central bank has stepped up its battle to defend a beleaguered currency, raising interest rates for the fourth time since mid-May on Aug. 15 as Turkey's financial crisis ripples across emerging markets.

THE PHILIPPINES - Policymakers administered the biggest rate hike in 10 years on Aug. 9, ramping up key interest rates by 50 basis points to 4.0 percent and leaving the door open for further policy tightening to fight high inflation despite economic growth losing steam.

CZECH REPUBLIC - The Czech central bank raised its benchmark interest rate by 25 basis points to 1.25 percent on Aug. 2 - its third hike this year - and held out the possibility of another increase soon as it seeks to contain inflation in the strong economy and compensate for a weak currency.

INDIA - The Reserve Bank of India raised interest rates for the second straight meeting on Aug. 1, lifting the repo rate to 6.5 percent, but retained its "neutral" stance as it aimed to contain inflation while not choking growth.

DOMINICAN REPUBLIC - The central bank raised the benchmark interest rate by 25 basis points to 5.50 percent on July 26.

PAKISTAN - Faced with increasing inflationary pressure in the wake of a currency depreciation, the central bank upped interest rates by 100 basis points to 7.5 percent on July 14, adding to a hike in May.

TRINIDAD AND TOBAGO - The central bank raised the repo rate by 25 basis points to 5.00 percent on June 29.

MEXICO - On June 21, policy makers at the central bank decided in a unanimous decision to raise its benchmark interest rate 25 basis points to 7.75 percent in a bid to counteract the effects of a peso slump and keep a downward inflation trend on track.

TUNISIA - The central bank raised its key interest rate to 6.75 percent from 5.75 percent on June 13, the second hike in three months, to tackle inflation that has reached the highest level since 1990.

ROMANIA - The central bank has raised rates three times already this year, hiking rates by 25 basis points to 2.50 percent in its last move on May 7 in its battle to curb a sharp jump in inflation.

GEORGIA - The central lifted its key interest rate to 7.25 percent, from 7 percent, on Dec. 13 after its forecasts suggested inflation would overshoot the bank's 4 percent target.

Source: The Star

https://www.thestar.com.my/business/bus ... w6ZGk8g.99

[behappyalways]

Thailand Central Bank Delivers First Rate Hike Since 2011
https://www.bloomberg.com/news/articles ... since-2011

[behappyalways]

The World Better Get Used to Negative Rates
https://www.bloomberg.com/opinion/artic ... e-the-norm

[winston]

INTEREST RATES

Bonds rallied again as yields dropped again. Investor's Business Daily sports a good article this weekend about whether the 3 month/7 year inversion meant anything.

It appears to acknowledge that pair can indicate recession, but also notes that other recessions had other inversions as well, not just that pair.

Moreover, it discusses WHY we have this inversion and how its genesis differs from those in other recessions, e.g. this one is caused by the FOMC backing off rate hikes while the others were a result of the Fed continuing with rate hikes.

Interesting reading and answers some of the questions we have had regarding how solid the leaders and their patterns look, how good copper and oil look, even as there was a short inversion of the 3 month/10 year instruments.

The 3 month yield fell below the 10 year: 2.403% versus 2.407% 10 year (10 year).

The 2 year is still below 10 year: 2.266% versus 2.407% 10 year, the spread at 14BP, down on the week.

10 year: 2.381% versus 2.381%.

3 month: 2.403% versus 2.437% versus 2.434%

2 year: 2.266% versus 2.226% versus 2.21 versus 2.268%

Historical: the last sub-2% rate was in November 2016 (1.867%). Last trade over 3% was November 2018.

Source: Investment House