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The Treasury Bond – It’s Time Has Likely Come

The Treasury Bond – It’s Time Has Likely Come

Authored by Lance Roberts via RealInvestmentAdvice.com,

I received many emails and questions…

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5 months ago

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The Treasury Bond - It's Time Has Likely Come

Authored by Lance Roberts via RealInvestmentAdvice.com,

I received many emails and questions on “why” we are adding the U.S. Treasury bond to our portfolios. The question is understandable, given its dire performance in 2022, where bonds had the biggest drawdown since 1786.

However, there is, as they say, “more to the story than meets the eye.”

A previous survey from BNY Mellon shows that very few people understand the bond market and how it works.

“A BNY Mellon Investment Management national survey on fixed-income investing was stunning: A measly 8% of Americans were able to accurately define fixed-income investments.“

Such is not surprising since the financial media focuses only on the “sexier” side of the business – equities.

However, bonds are necessary from the investment perspective and the economic view. As we have discussed previously, low-interest rates are a function of an overly indebted economy. If rates rise too much, bad things have historically happened.

“The chart below is the interest service ratio on total consumer debt. (The graph is exceptionally optimistic as it assumes all consumer debt benchmarks to the 10-year treasury rate.)  While the media proclaims consumers are in great shape because interest service is low, it only takes small increases in rates to trigger a ‘recession’ or ‘crisis’ event.”

Of course, as noted, interest rates reflect economic growth. As economic growth slows and disinflationary pressures present themselves, rates will ultimately track economic growth lower.

A Long History Of Rates & Economic Growth

The chart below shows a VERY long view of interest rates in the U.S. since 1854.

As noted, interest rates are a function of the general economic growth and inflation trend. More robust growth and inflation rates allow higher borrowing costs to be charged within the economy. Such is why bonds can’t be overvalued. To wit:

“Unlike stocks, bonds have a finite value. At maturity, the principal gets returned to the lender along with the final interest payment. Therefore, bond buyers know the price they pay today for the return they will get tomorrow. As opposed to an equity buyer taking on investment risk, a bond buyer is loaning money to another entity for a specific period. Therefore, the interest rate takes into account several risks:”

  • Default risk

  • Rate risk

  • Inflation risk

  • Opportunity risk

  • Economic growth risk

“Since the future return of any bond, on the date of purchase, is calculable to the 1/100th of a cent, a bond buyer will not pay a price that yields a negative return in the future. (This assumes a holding period until maturity. One might purchase a negative yield on a trading basis if expectations are benchmark rates will decline further.) “

Therefore, it was unsurprising that the recent inflation surge preceded higher interest rates. However, that inflation push was artificial from massive monetary interventions. As monetary inputs fade, disinflation will push yields lower.

Disinflation from the contraction of liquidity will coincide with slower economic growth and, as noted above, lower interest rates.

Buy Bonds For Capital Appreciation & Protection

Understanding the dynamics between inflation, economic, and interest rates is a critical backdrop to understanding why now is likely the opportunity to increase bond exposure in portfolios for both income and capital appreciation. Most people view bonds as an income-only investment. With yields low, why own bonds? However, there is another aspect to bonds; capital appreciation.

There is an inverse relationship between bond prices and interest rates. When interest rates are low and rising, bond prices fall. However, when they are high and falling, bond prices rise.

In our portfolio management process, we buy bonds for three reasons:

  1. Capital appreciation – the same reason we buy equities

  2. Total return – interest income plus capital appreciation

  3. Risk reduction – lower volatility assets to offset higher volatility assets (equities.)

If you consider bonds as an “asset class,” the analysis changes from an income strategy to a capital appreciation opportunity.

Using a monthly chart, treasury bonds are at a critical oversold juncture. Historically, when bonds were this oversold such coincided with a financial event or recession. Such is not surprising given, as noted above, the impact of higher rates on a highly leveraged economy.

Since interest rates are the inverse of bond prices, we can look at this long-term chart of rates to determine when Treasury bonds are overbought or oversold.

  • In 2018, rates slid lower as the realization that Fed rate hikes would negatively impact economic growth and financial stability.

  • As 2019 progressed, the yield curve inverted, pushing rates lower as investors sought safety.

  • In March 2020, as the pandemic raged, the demand for safety caused rates to plunge to record lows.

  • In 2021, rates surged as stimulus-induced inflation surged.

Historically, bonds are the beneficiary of a “risk-off” rotation during market downturns. Such not only provides a return but reduces overall portfolio volatility.

Conclusion

The hope is that the Fed will again start dropping interest rates. However, as we have noted previously, the only reason for the Fed to cut rates would be to offset the risk of an economic recession or a financially related event. Should such occur, the “risk off” rotation would cause a drop in rates toward the pandemic-era lows. Such a decline would imply an increase in bond prices of approximately 50%.

In other words, the most hated asset class of 2022 may outperform stocks by a large margin if a recession occurs.

So, yes, we are opportunistically buying bonds for our portfolio.

 

 

Tyler Durden Fri, 05/26/2023 - 09:30

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UAW workers play hardball with General Motors

Striking United Auto Workers have upped the ante in the battle with GM over wages.

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1 hour ago

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October 24, 2023

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After reporting $3.5 billion in third-quarter profits, General Motors  (GM) - Get Free Report suffered yet another significant blow from striking United Auto Workers on Oct. 24. The union's latest decision is a bold move designed to force management to agree to a slate of terms, including higher wages, more retirement money, and additional time off.

GM workers with the UAW Local 2250 Union strike outside the General Motors Wentzville Assembly Plant on Sept. 15 in Wentzville, Mo. (Photo by Michael B. Thomas/Getty Images)

Michael B. Thomas/Getty Images

General Motors profits put it on the hot seat

General Motors argues UAW workers' wage demands would crimp its ability to invest in necessary technology, putting it at risk of losing market share to non-union competitors vying for a share of the emerging electric vehicle market.

Electric vehicle sales growth is far outpacing internal combustion engine (ICE) growth, a trend that's unlikely to change. In Q3, Cox Automotive's Kelley Blue Book reports electric vehicle sales in the U.S. skyrocketed 50%, increasing EV's share of total vehicle sales to 8%. 

Related: Former Ford CEO has a blunt warning for UAW union strikers

The stakes are undeniably high. 

General Motors' EV market share slipped against key rivals last quarter, a warning sign that it's already struggling to outmaneuver other carmakers. Wall Street analysts estimate EV sales will comprise 40% of all vehicles sold in America in 2030.

General Motors must spend big money if it hopes to remain the nation's biggest automaker. However, claims General Motors can't afford to meet striking workers' demands have fallen flat with workers in the wake of record profitability. 

More Business of EVs:

The company's third-quarter sales exceeded $44 billion, up 5% from one year ago, and earnings per share totaled $2.28 per share, up slightly from last year. The company has pocketed about $10 billion in profits through the first nine months of this year.

UAW workers target a crucial source of  General Motors' profit

Given General Motors' record earnings and stalled contract negotiations, the union has turned its attention to General Motors' biggest cash cow. 

Workers walked off the assembly line at Arlington Assembly on Oct. 24, halting production of the highly profitable Chevy Tahoe, Chevy Suburban, GMC Yukon, and Cadillac Escalade, at General Motors' largest plant.

“Another record quarter, another record year. As we’ve said for months: record profits equal record contracts,” said UAW President Shawn Fain. “It’s time GM workers, and the whole working class, get their fair share.”

So far, General Motors has offered striking workers less than Ford Motors  (F) - Get Free Report,  

According to a UAW statement, Ford's deal includes a better path to top wages, more retirement money, and a more compelling cost-of-living plan to account for annual inflation than General Motors' offer.

Initially, union workers demanded a 40% pay increase, a return to pensions, a 32-hour workweek, cost-of-living increases, a faster pathway to top wages, and other perks.

They rejected a General Motors offer earlier this month that included a 20% pay increase, a reinstatement of COLA inflation adjustments for top-wage tier workers in year two, reducing how long it takes to reach its top wage tier to four years, an increase in temporary worker pay to $20 per hour, and a boost to 401(k) retirement contributions to 8% from 6.4%.

The decision to expand the strike to Arlington Assembly increased the number of workers participating in its stand-up strike against General Motors, Ford Motors, and Stellantis to 45,000 across eight plants and 38 parts distribution centers. 

Overall, the UAW boasts nearly 150,000 members.

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Key Market Relationships for the Next Big Move

First off, we are heading out of town to New York where I will be visiting in studio several media channels and hosts.Then, we are off to Orlando for the…

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3 hours ago

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October 24, 2023

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First off, we are heading out of town to New York where I will be visiting in studio several media channels and hosts.

Then, we are off to Orlando for the MoneyShow.

On November 1st, Keith and I go on vacation until the middle of the month.

This is the last Daily I will be writing for a while.

However, I will have several clips in the next few days to share, and Geoff Bysshe will occasionally write the Daily in my absence.

That said, today, I began the day with the Benzinga Market Prep Show.

I am featuring this today as content because I hope it helps you look at the market objectively.

We did not discuss inflation, which, as you are aware, I believe can go hyper as geopolitical stress, social unrest, strikes for higher wages, and mother nature could each, or worse, all, kick into gear.

We discussed bonds, small caps, commercial real estate, retail, and a couple of stocks.

In that discussion, and on the heels of Bill Ackman's statements along with our technical indicators, we spell out the exact relationships to watch.

Monday's Daily explained how much long bonds factor into the equity (and commodity) equation.

We also cover small caps and the monthly charts, along with SPY, QQQ, Transports (IYT), and Retail (XRT).

If the decades have taught me anything, it's that the simpler you can make the definitions, the better the comprehension.

It is with that in mind that we show you how easy it will be in just a short time to see where this market heads next.

Benzina Pre-Market Prep

In addition to the analysis, Joel and I talk about the floor days and how we figured out momentum with our senses!

Plus, we go over a couple of picks.

Thank you all for your continued readership and support.

I hope you have many profitable weeks.

Happy Trading.

This is for educational purposes only. Trading comes with risk.

If you find it difficult to execute the MarketGauge strategies or would like to explore how we can do it for you, please email Ben Scheibe at Benny@MGAMLLC.com, our Head of Institutional Sales. Cell: 612-518-2482.

For more detailed trading information about our blended models, tools and trader education courses, contact Rob Quinn, our Chief Strategy Consultant, to learn more.

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"I grew my money tree and so can you!" - Mish Schneider

Follow Mish on Twitter @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish in the Media

Mish covers the bond rally and how the consumer could save the day in this video.


Hear Mish's thoughts on earnings, the macro environment, and her three stock picks on Bloomberg BNN.

Ever thought of owning commodities? Hear what Mish says about the key commodities you should consider in this video.


Mish participates in Crypto Town Hall X Space. You can sign in to your X account and watch it here.

In this video, Mish talks about trading Garmin Ltd. (GRMN) on Business First AM.


Mish and Dale Pinkert discuss the disconnect between news and markets-and how to best invest right now in this video from ForexAnalytix's pre-market show.


In this video from CMC Markets, Mish shares her short-term forecast for USD/JPY and popular commodity instruments ahead of the US PPI announcement and September's Fed meeting minutes, with recent dovish comments from Fed officials suggesting a potential shift in the committee's policies.


Mish joins Business First AM to discuss the market reaction to the war in Gaza in this video.


Mish covers bonds, small caps, transports and commodities-dues for the next moves in this video from Yahoo! Finance.


In this video from Real Vision, Mish joins Maggie Lake to share what her framework suggests about junk bonds and investment-grade bonds, what she's watching in commodity markets, and how to structure a portfolio to navigate both bull and bear markets.


Coming Up:

October 26: Cheddar TV on the NYSE

October 27: Live in-studio with Charles Payne, Fox Business

October 27: Live in-studio with Yahoo Finance!

October 27: Recorded in-studio with Investor's Business Daily

October 29-31: The Money Show

Weekly: Business First AM, CMC Markets

November 1–13 VACATION

ETF Summary

  • S&P 500 (SPY): 417–420 support
  • Russell 2000 (IWM): 170 now in the rearview mirror
  • Dow (DIA): 332 pivotal
  • Nasdaq (QQQ): 351 recent low and support
  • Regional Banks (KRE): 35 next support
  • Semiconductors (SMH): 140 support.
  • Transportation (IYT): 225 pivotal
  • Biotechnology (IBB): 120 pivotal
  • Retail (XRT): 57 key support still


Mish Schneider

MarketGauge.com

Director of Trading Research and Education

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Elizabeth Warren uses Hamas as her newest scapegoat in war on crypto

Massachusetts Sen. Elizabeth Warren is taking advantage sensationalist claims related to Hamas’ use of crypto. Unfortunately, those claims are largely…

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3 hours ago

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October 24, 2023

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Massachusetts Sen. Elizabeth Warren is taking advantage sensationalist claims related to Hamas' use of crypto. Unfortunately, those claims are largely false.

Massachusetts Sen. Elizabeth Warren is at it again. With mainstream press outlets including Germany’s Deutsche Welle running sensationalist headlines — “How cryptocurrency fueled Hamas’ terrorist attack” — Warren is using Hamas’ attack on Israel to fuel her own war on cryptocurrency.

Crypto’s role in the conflict came into focus on Oct. 10, when Israeli police froze crypto accounts used for donations to Hamas. It was not the first time. In 2021, Israel’s Terror Financing of Israel (NBCTF) seized crypto wallets linked to a Hamas fundraising campaign.

While Binance worked “closely with international counter-terrorism authorities" on the seizures, Warren led a group of more than 100 U.S. lawmakers in sending the Biden administration a letter letter asking it to crack down on Hamas and its affiliates’ cryptocurrency wallets — despite the organization’s relative struggle to raise crypto as part of its fundraising efforts.

“Congress and this administration must take strong action to thoroughly address crypto illicit finance risks before it can be used to finance another tragedy,” the letter said.

The lawmakers requested that the Biden administration also provide estimates on the value of crypto assets that remain in Hamas-controlled wallets, how much of Hamas’ operations are funded through crypto, and any information it has on the actors facilitating the sending of crypto to and from Hamas and other militant groups.

The U.S. Treasury Department sanctioned Gaza-based crypto broker “Buy Cash Money and Money Transfer Company (Buy Cash)” on Oct. 18, revealing it had been used for a whopping $2,000 Bitcoin transaction — a paltry sum compared to the hundreds of millions of dollars used to fund Hamas. One sanctioned wallet had $16 in it.

“We will continue to take all steps necessary to deny Hamas terrorists the ability to raise and use funds to carry out atrocities and terrorize the people of Israel,” said Treasury Secretary Janet Yellen. “That includes by imposing sanctions and coordinating with allies and partners to track, freeze, and seize any Hamas-related assets in their jurisdictions.”

Terrorists’ use of cryptocurrency has been dramatically overstated. The dollar remains the key tool for money launderers, with crypto playing a relatively tiny role. Why would terrorists use blockchain when its transactions can be tracked? Beyond this, terrorists arguably have little need for crypto when they have the ability to siphon aid funds from the international community. The United Nations spent nearly $4.5 billion in Gaza from 2014-2020, including $600 million in 2020 alone, even as Hamas reportedly turned European Union-funded water pipelines into home-made rockets.

Elliptic.co, a blockchain-analysis provider, suggested in a report this month that Hamas did receive cryptocurrency around the time of the attack. However, Hamas has not used crypto as a primary source of funding, instead opting to use the banking system, money service businesses, as well as informal “hawala” transfers. This global financing network  launders funds from charities and friendly nations to Hamas. Hamas started publicly seeking funds in crypto in 2019 through its Telegram channel. The group now uses payment processors to create crypto addresses and hide its cryptocurrency wallets.

The bulk of anti-terrorism efforts should not focus on terrorist use of cryptocurrency, considering the diverse ways these organizations procure funds. “There’s not one financing method for Hamas or other terrorist organizations. They’re opportunistic and adaptive,” former CIA analyst Yaya Fanusie, now an adjunct senior fellow with the Center for a New American Security, said in an interview with CNN. “Efforts to stop them are a constant game of cat-and-mouse.”

Due to crypto’s transparent nature, it’s proven to be no secret when Hamas uses crypto, as made clear by the recent crypto freezing action. When it does use crypto, Hamas generally receives small-dollar donations, ultimately representing a small fragment of the organization’s considerable $300 million annual budget. It’s disingenuous to state that terrorist use of crypto is a credible threat relative to the fiat-denominated funds moving through these organizations.

Warren’s anti-crypto pet project appears to be a red herring, and ultimately distracts from more fruitful conversations about how terrorist organizations actually raise funds through the traditional financial system.

Kadan Stadelmann is a blockchain developer and the Komodo Platform’s chief technology officer. He graduated from the University of Vienna in 2011 with a degree in information technology before attending the Berlin Institute of Technology for technical informatics and scientific computing. He joined the Komodo team in 2016.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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