Interest Rates 02 (Nov 14 - Dec 25)

[winston]

Get Short Treasuries Now and Get Paid Long Term

The simplest way to bet on higher rates is through the Proshares Short 20+ Year Treasury ETF (NYSE Arca: TBF).

It’s a $600 million fund designed to rise at the same rate as long-term Treasuries drop.

TBF is an inverse fund, so if long-term Treasuries rise, TBF will fall as the same rate.

Right now, it’s been acting well, as it looks to have bottomed in July and recently surged past the resistance levels of the last two months.

My suggestion is to add TBF to your portfolio now and use a hard stop at $20.30, the July low. That’s just 5% below current levels. I think on the upside TBF could regain $25 within 12 months, maybe sooner. So you’d be risking 5% for a potential 20% gain.

Right now the signs point to lower bond prices and higher rates.

Remember all trends, even secular trends, come to an end and then reverse.

If you catch them early, they can be very profitable.

Source: Money Morning

[winston]

Fed's Lacker says rates might need to rise a lot, case for hike strong

Richmond Federal Reserve President Jeffrey Lacker on Tuesday said there was a strong case for raising interest rates, arguing that borrowing costs might need to rise significantly to keep inflation under control.

Source: Reuters

http://www.reuters.com/article/us-usa-f ... ess%200900

[winston]

Investment Legend: 'Interest Rates Have Bottomed'

By Dr. Steve Sjuggerud

"This is a big, big moment," Jeff Gundlach said earlier this month in a webcast for his clients. "Interest rates have bottomed."

Gundlach is the founder and CEO of the investment firm DoubleLine Capital. He earned the nickname "Bond God" because his track record and prognostications have been extremely good in recent years.

But is he right? Did interest rates really bottom? Is this a big, big moment?

I believe he could be right. The ultimate bottom for interest rates could be behind us. But it's important to understand that predicting interest rates is tough.

Let me explain…

Gundlach has certainly earned his nickname. He has been right more often than "Bond King" Bill Gross in recent years.

But before you buy into his idea, consider this: This isn't the first time you've heard an "expert" say that interest rates are headed higher, right?

Since 1981, we've been threatened with the fear of higher interest rates from "experts" every year…

"Better act fast," your friendly realtor/banker/financial planner tells you. "Interest rates are going up any day now."

Your local experts were well-intentioned, I'm sure. But they were wrong. Interest rates have fallen relentlessly for 35 years.

Don't feel bad about it… Everyone believed along the way that higher interest rates were just around the corner.

So… let me ask you, if the "experts" have gotten it wrong, why should we trust Gundlach now? What could cause interest rates to spike from here?

A lot of things, actually. His theory is that, regardless of who wins the presidential election in November, government spending will soar…

From his recent webcast…

Hillary Clinton's Infrastructure Plan: "As President, Hillary will launch our country's boldest investments in infrastructure since the construction of our interstate highway system in the 1950s." $275 billion, five-year plan…

Donald Trump's Economic Vision for Infrastructure: "28% of our roads are in substandard condition and 24% of bridges are structurally deficient or worse. Trump's plan will provide the growth to boost our infrastructure… "

All that government spending requires government borrowing – and that means a lot more bonds. As more government bonds are issued, that will push down their prices… which means higher interest rates.

More important, the current bond market situation is "overly loved."

Investors recently placed their largest bets in 18 years on lower interest rates. (You have to go back to 1998 to find a time when speculators had a larger "long" position in 30-year Treasury bond futures than they had recently.)

Typically, when bets reach an extreme, the trend is nearing an end, and the opposite tends to happen.

So… what happened after 1998 – the last time investors placed huge bets on lower interest rates?

Interest rates bottomed out soon after… They went from 4.7% in late 1998 to a peak of nearly 6.8% in early 2000. We saw a similar instance in 2012 – though not as extreme – with similar results.

The point is that while making interest-rate predictions is hard, the facts back up the case this time.

The "Bond God" believes the bottom in rates is behind us. And I agree.

Source: Daily Wealth

[winston]

No interest-rate rise this year says Bond-God

Source: Daily Crux

http://thecrux.com/no-interest-rate-ris ... -bond-god/

[winston]

When This Line Hits 1%, The Credit Markets Are In Deep Trouble

by Michael Lewitt

The corporate bond market will not react well when/if the Fed raises interest rates by another 25 basis points.

Investors chasing yield in all the wrong places (i.e. the high yield bond market) are going to regret their refusal to acknowledge the lessons of history and economics (which teach us that reaching for yield is a fool’s game).

Unlike equity markets, which are overvalued but not dangerously so, credit markets are in an epic bubble that threatens to inflict major pain on investors.

While it is entirely possible that U.S. yields will follow those in the rest of the world into the gates of negative interest rate Hell, they will sooner or later rise as the Biblical flood of money unleashed by global central banks looks for places to nest.

Risk/reward in the credit markets is as poor as I’ve ever seen it in three decades, and that extends beyond the fixed income market to publicly traded private equity firms, Business Development Companies (BDCs), publicly traded private equity firms (APO, KKR, BX, etc.) and anything else dependent on cheap credit.

The edifice of leveraged finance constructed on the back of the massive Ponzi game perpetrated by governments and central banks is built on a foundation of sand.

Defaults are rising but still suppressed by low interest rates, which allow companies incapable of generating free cash flow to stay alive longer than they deserve. (If you’re interested in profiting off some of these disasters, I recommend buying puts on large high-yield ETFs like the iShares iBoxx High Yield Corp Bond ETF (NYSE Arca: HYG), and the SPDR Barclays Capital High Yield Bond ETF (NYSE Arca: JNK).

Corporate credit quality is deteriorating not only among junk borrowers but among investment grade companies that borrowed tens of billions of dollars to pay dividends and buy back overvalued shares.

While the inability to earn a decent return on capital in fixed income markets poses enormous challenges for investors, outright losses are far more dangerous. And that is what they are facing if rates rise even modestly.

And rates are definitely headed up…as this often-overlooked indicator tells us.

U.S. 3-month Libor (London Interbank Offered Rate, the most commonly used benchmark for calculating short-term interest rates) has recently risen to roughly 80 basis points after remaining at one side or the other of 30 basis points since the financial crisis. This move is being chalked up to technical factors (new money market regulations), but that’s not the case at all.

Libor is an uncannily accurate thermometer that measures the banking industry’s health: in a nutshell, low rates mean banks are doing well, while higher rates indicate reduced public confidence and a struggling industry.

Libor remains an incredibly important global benchmark and its rise will meaningfully increase borrowing costs across the global economy. The move isn’t large enough yet to affect the leveraged loan market but is getting close (Libor needs to hit 1% to start having an impact).

This move goes largely unnoticed by investors while they freak out at the mere whisper of a possible 25 basis point hike in the Federal Funds rate. This is another example of everyone looking in one direction and getting blindsided by something coming from the other direction.

Rising Libor is a sign of things to come. The only way rates can remain where they are is if the global economy keeps struggling, but that scenario is inconsistent with buoyant equity markets.

Source: Sure Money Investor

http://suremoneyinvestor.com/2016/10/th ... t-markets/

[winston]

Higher rates ?

Last week we talked about the set up for a move in global bond yields. And we discussed the case for why the bond market may have had it very wrong (i.e. rates have been too low, pricing in way too pessimistic a view on the current environment).

Well, today rates have finally started to remind people of how quickly things can change.

The U.S. ten-year yield finally broke above the tough 1.80% level and is now trading at 1.85%. German yields have now swung from negative territory just three days ago, to POSITIVE 19 basis points at the highs today. Importantly, German yields are now ABOVE pre-Brexit levels.

Still, we're approaching a second Fed rate hike and U.S. yields are almost 1/2 point lower than where they traded just following the Fed's first hike in December of last year. As for German rates (another key benchmark for world markets), we found with the Fed in its three iterations of QE, that QE made market rates go UP not down, as people began pricing in a better outlook.

That’s yet to happen in Germany. The ten-year yield was closer to 40 basis points when they formally kicked off QE–still above current levels.

But remember this chart we looked at last week.

image
In the white box, you can see the screaming run-up in yields last year. The rates markets had a massive position squeeze that sent ten–year German bond yields from 5 basis points (near zero) to 106 basis points in less than two months—a 20x move. U.S. ten–year yields (the purple line in the chart) moved from 1.72% to 2.49% almost in lock–step.

This time around, as we discussed last week, let's hope a rise in rates is orderly and not messy. Another sharp rise in market rates like we had last year would destabilize global markets, including the very important U.S. housing market.

But the buffer this time around should be the Bank of Japan. Remember, the Bank of Japan just last month announced they would peg the Japanese ten-year yield at zero. Even with the divergent monetary policies in Europe and Japan relative to the U.S. (central bank rate paths going in opposite directions), the spread between U.S. rates and European and Japanese rates should stay tame.

That means that Japan's new policy of keeping its ten-year yield at zero will/should prevent a run away U.S. interest rate market--at least until there is a big upgrade in the expectation in U.S. growth.

Source: Forbes

[winston]

Why rising interest-rates could be potentially lethal?

Source: Daily Crux

http://thecrux.com/why-rising-interest- ... ly-lethal/

[winston]

Chart: Interest rates could peak here

Source: Daily Crux

http://thecrux.com/chart-interest-rates ... peak-here/

[winston]

The 4 Most Important Effects of Rising Interest Rates

By David Floyd

Source: The Trading Report

http://www.thetradingreport.com/2016/12 ... est-rates/

[winston]

We could see lower interest-rates in early-2017

Source: Daily Crux

http://thecrux.com/sjuggerud-we-could-s ... arly-2017/