www.mksense.blogspot.com
Foreign purchases of U.S. securities fell in January as overseas investors sought to diversify their holdings. However, purchases of U.S. treasuries held up fairly well. China, the largest holder of U.S. treasuries, reduced its holdings of U.S. treasuries by $5.4 billion to $1.15 trillion. Japan, the second largest holder of U.S. treasuries, increased its holdings of U.S. by $3.6 billion to $885.9 billion. It should be noted that this data is from January and does not include the very strong treasury auctions (including a record 10-year note auction) which occurred in February. Some market participants have expressed concerns that Japanese insurers could sell some of their U.S. treasury holdings to pay claims.
The market is taking that possibility in stride as the U.S. dollar and U.S. treasuries remain the world’s safe haven in times of turmoil. Also, approximately 93% of Japan’s government debt is held by Japanese investors, including Japanese institutions. It is just as possible that institutions sell Japanese debt to pay for claims.
When Fed governor Kevin Warsh vacates his post later this month, he will be the latest of Fed Chairman Ben Bernanke’s so-called “inner circle” to leave the Fed. However, Mr. Warsh expressed concerns that implementing QE2 came with possible unintended consequences. This caused Fed watchers to wonder if the relationship between Mr. Warsh and Mr. Bernanke were irreparably damaged. Mr. Warsh’s departure follows those of former vice chairman Donald Kohn and former New York Fed president Timothy Geithner, who left to become treasury secretary. In their place are former San Francisco Fed president Janet Yellen, who is taking over as vice chairwoman and current New York Fed president William Dudley. Both Ms. Yellen and Mr. Dudley supported QE2 and are considered to be dovish with regards to inflation.
The New York Fed is considered to be the most influential of the regional Fed banks. This gives the accommodative Mr. Dudley a relatively loud voice with regards to Fed policy. As vice chairwomen, Ms. Yellen can be expected to have the ear of chairman Bernanke. Some believe that the new makeup of the Fed makes it more likely that the Fed will follow through with its QE2 purchases and be very cautious when considering raising the Fed Funds rate.
Inflationary concerns have been lessened during the past four trading sessions as the earthquake in Japan and the resulting nuclear problems have market participants concerned that Japan’s economy will be impaired by the disaster, reducing the demand for energy products and raw materials (although Keynesians may be of the opposite opinion, Toyota, Nissan and Honda have shut down assembly lines in Japan which is not good for the Japanese economy). Crude oil is down $2.61 today to $98.58. Of course it could be that speculators are taking some of their profits off the table.
If there is a lesson to take away from recent market performances, it is that we should expect the unexpected. The question remains about whether or not the economic recovery is strong enough to withstand disruptive global events. Whether or not it can remains to be seen, but one would probably get few arguments if one opined that the recovery would not be able to withstand recent events if the Fed had already begun to remove stimulus.
No surprises from the FOMC today. As expected, the Fed Funds rate remains at 0.00% - 0.25% and the Fed remains committed to following through on QE2. The FOMC language was cautiously optimistic, also as expected. Here is a copy of the FOMC text:
Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually.
Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer- term inflation expectations have remained stable, and measures of underlying inflation have been subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.
Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. The Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization. subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
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Tuesday, March 15, 2011
Monday, March 7, 2011
Treasuries For Sale
For years pundits have warned us that foreign investors, specifically China, were going to look elsewhere for a place to invest their capital. Some have said that low interest rates, a weaker dollar and record budget deficits have resulted in the day of reckoning drawing near. However, data indicates that foreign buying of U.S. treasuries has increased.
Bloomberg News reports:
“Investors outside the U.S. have boosted their holdings of longer-maturity Treasuries to the highest level since the credit markets froze in 2008, helping curb rising yields amid concern inflation is accelerating.”
“International buyers held 90 percent of their $4.44 trillion of U.S. government debt in notes and bonds as of December, the same as in September 2008 when Lehman Brothers Holdings Inc. collapsed, Treasury data released last week show.”
Market participants, such as Pimco’s Bill Gross and Sun Trust’s Andy Richman express views that buying treasuries at these yield levels given that the economy is healing and inflation pressures are building (I think the are overstating here), is unwise. I agree with them Investors would be unwise to buy long-dated treasuries at these levels, but foreign central banks are not investor. They have a different mission.
As I have written ad nauseum, foreign central banks and export businesses are flush with dollars from foreign trade. Central banks are tasked with “managing” exchange rates between their home currencies and the dollar. They have no choice but to buy treasuries. For duration and liquidity purpose, the 10-year note is the vehicle of choice.
Inflation fears are largely overblown. Without wage increases, higher oil prices can only have a limited effect on inflation. In fact, higher oil prices are self-limiting. At some point, cash strapped consumers will be squeezed. First they will defer discretionary purchases. Then they will spend more frugally on necessary items. Then they will cut back as much as possible on fuel purchases. The result will be significant headwinds for the economy, probably not enough to cause a recession, but enough to keep inflation well under 3.00% and GDP under 4.00%.
Bloomberg News reports:
“Investors outside the U.S. have boosted their holdings of longer-maturity Treasuries to the highest level since the credit markets froze in 2008, helping curb rising yields amid concern inflation is accelerating.”
“International buyers held 90 percent of their $4.44 trillion of U.S. government debt in notes and bonds as of December, the same as in September 2008 when Lehman Brothers Holdings Inc. collapsed, Treasury data released last week show.”
Market participants, such as Pimco’s Bill Gross and Sun Trust’s Andy Richman express views that buying treasuries at these yield levels given that the economy is healing and inflation pressures are building (I think the are overstating here), is unwise. I agree with them Investors would be unwise to buy long-dated treasuries at these levels, but foreign central banks are not investor. They have a different mission.
As I have written ad nauseum, foreign central banks and export businesses are flush with dollars from foreign trade. Central banks are tasked with “managing” exchange rates between their home currencies and the dollar. They have no choice but to buy treasuries. For duration and liquidity purpose, the 10-year note is the vehicle of choice.
Inflation fears are largely overblown. Without wage increases, higher oil prices can only have a limited effect on inflation. In fact, higher oil prices are self-limiting. At some point, cash strapped consumers will be squeezed. First they will defer discretionary purchases. Then they will spend more frugally on necessary items. Then they will cut back as much as possible on fuel purchases. The result will be significant headwinds for the economy, probably not enough to cause a recession, but enough to keep inflation well under 3.00% and GDP under 4.00%.
Wednesday, March 2, 2011
"Well the eagle's been flying slow, and the flag's been flying low, and a lotta people say that America's fixing to fall."
There is an interesting article on page C12 of today’s Wall Street Journal by Berkeley Professor Dr. Barry Eichengreen entitled: “Why the Dollar's Reign Is Near an End”. In the article Dr. Eichengreen states that the U.S may have to share its role as the world’s reserve currency with the euro and, eventually, the yuan.
He argues that technology has made it easier to exchange one home currency for another. Previously, determining exchange rates between two specific currencies of smaller countries was not easily accomplished. Now, electronic trading platforms have made FX markets much more liquid and transparent.
He also makes the argument that the euro and the yuan will rival the dollar in the future as the EU and China rise as trading blocs. His theories are based on his belief that the EU and its member countries will become more fiscally responsible and that China will open up its markets, loosen its grip on the yuan and become less of a command economy.
A counter article authored by the Journal's own Michael Crittenden entitled: "The Case for the Dollar's Continued Dominance" discusses why the dollar could remain the world's reserve currency. Many economists interviewed support this belief:
University of Wisconsin economics professor Menzie Chinn states:
"How much of a financial center can they be if they insist on continuing to control the financial sector? Until Beijing frees up its financial markets, who wants to have a lot of assets denominated in renminbi?”
Pimco’s Tony Crescenzi states:
“We try to think of the alternatives, and none exist of any consequence."
Even members of the ECB believe that dollar may still reign supreme. ECB Vice President Vitor Constâncio said, "I do not see a major reform of the international monetary system on the horizon, as there is no real substitute for the U.S. dollar in the medium term."
Like it or not we currently live in a world of fiat currency. A currency’s value is only as strong as the system which issues it. During times of turmoil one does not wish to go to sleep at night and worry that a government may change exchange policies or even collapse altogether overnight. Things look rosy for many emerging market economies, but one still must be concerned about their abilities to deal with inflation and the potential civil unrest which could occur.
China has given us indications of how it will deal with inflation. Basically it isn’t addressing inflation, at least not its causes. For the most part it has ordered (it is a command economy) banks to reduce lending and CNBC reported this morning the China’s government is considering ordering salaries raised so consumers can better afford higher prices. Not exactly steps toward a freely-floating currency. A freely-floating and portable yuan would significantly reduce government control over China’s economy. It would likely reduce China’s comparative advantage in manufacturing.
What about the EU? The EU, as of now, is not a United States of Europe. Although it does have a central bank (the ECB) which dictates monetary policy. Fiscal policy is set by the individual sovereign nations. The EU has no authority over sovereign fiscal policies. This can handcuff the ECB.
The ECB has a single mandate of price stability. However, inflation and economic conditions are not the same throughout the EU. On one hand there is Germany with a booming economy and record-low unemployment. On the other hand there are the PIIGS. Spain has unemployment in the area of 20%, and there is unrest in Greece due to proposed wage and benefit cutbacks to government workers. In a perfect world, troubled EU members would ease monetary policy to reinvigorate economy. However, EU sovereign nations cannot print money. Policies which help reinvigorate the PIIGS could lead to inflation pressures in Germany. Anti-inflation policies designed to keep prices in the stronger EU economies in check could be catastrophic for the PIIGS.
The dollar is not pre-ordained to be the world’s reserve currency. The dynamics of other economies and societies could change in ways which enable their economies and currencies to rival the U.S. However, until those changes are implemented (if they are ever implemented), the dollar will probably remain the world’s reserve currency ("the same as it ever was...").
He argues that technology has made it easier to exchange one home currency for another. Previously, determining exchange rates between two specific currencies of smaller countries was not easily accomplished. Now, electronic trading platforms have made FX markets much more liquid and transparent.
He also makes the argument that the euro and the yuan will rival the dollar in the future as the EU and China rise as trading blocs. His theories are based on his belief that the EU and its member countries will become more fiscally responsible and that China will open up its markets, loosen its grip on the yuan and become less of a command economy.
A counter article authored by the Journal's own Michael Crittenden entitled: "The Case for the Dollar's Continued Dominance" discusses why the dollar could remain the world's reserve currency. Many economists interviewed support this belief:
University of Wisconsin economics professor Menzie Chinn states:
"How much of a financial center can they be if they insist on continuing to control the financial sector? Until Beijing frees up its financial markets, who wants to have a lot of assets denominated in renminbi?”
Pimco’s Tony Crescenzi states:
“We try to think of the alternatives, and none exist of any consequence."
Even members of the ECB believe that dollar may still reign supreme. ECB Vice President Vitor Constâncio said, "I do not see a major reform of the international monetary system on the horizon, as there is no real substitute for the U.S. dollar in the medium term."
Like it or not we currently live in a world of fiat currency. A currency’s value is only as strong as the system which issues it. During times of turmoil one does not wish to go to sleep at night and worry that a government may change exchange policies or even collapse altogether overnight. Things look rosy for many emerging market economies, but one still must be concerned about their abilities to deal with inflation and the potential civil unrest which could occur.
China has given us indications of how it will deal with inflation. Basically it isn’t addressing inflation, at least not its causes. For the most part it has ordered (it is a command economy) banks to reduce lending and CNBC reported this morning the China’s government is considering ordering salaries raised so consumers can better afford higher prices. Not exactly steps toward a freely-floating currency. A freely-floating and portable yuan would significantly reduce government control over China’s economy. It would likely reduce China’s comparative advantage in manufacturing.
What about the EU? The EU, as of now, is not a United States of Europe. Although it does have a central bank (the ECB) which dictates monetary policy. Fiscal policy is set by the individual sovereign nations. The EU has no authority over sovereign fiscal policies. This can handcuff the ECB.
The ECB has a single mandate of price stability. However, inflation and economic conditions are not the same throughout the EU. On one hand there is Germany with a booming economy and record-low unemployment. On the other hand there are the PIIGS. Spain has unemployment in the area of 20%, and there is unrest in Greece due to proposed wage and benefit cutbacks to government workers. In a perfect world, troubled EU members would ease monetary policy to reinvigorate economy. However, EU sovereign nations cannot print money. Policies which help reinvigorate the PIIGS could lead to inflation pressures in Germany. Anti-inflation policies designed to keep prices in the stronger EU economies in check could be catastrophic for the PIIGS.
The dollar is not pre-ordained to be the world’s reserve currency. The dynamics of other economies and societies could change in ways which enable their economies and currencies to rival the U.S. However, until those changes are implemented (if they are ever implemented), the dollar will probably remain the world’s reserve currency ("the same as it ever was...").
Friday, February 18, 2011
Not Quite
It was only a few short weeks ago that pundits were all over the airwaves warning us about mega-inflation, rapidly-rising interest rates and a mass exodus of foreign investors from the U.S. dollar.
Since then we have had a 10-year treasury note auction with record buying by foreign investors, including central banks.. We also saw take consumer prices, softer-than- retail sales, a leveling off of jobless claims after some improvement, lower capacity utilization and lower interest rates.
Many market participants expected the Fed to begin hinting that it is ready to change course. However, Fed Chairman Ben Bernanke defended his policies during a G20 meeting this morning.
In his speech he implored China to increase the value of the yuan. Mr. Bernanke stated that commodity prices have risen “significantly” due to increased demand from emerging economies. He went on to say that countries which freely float their currencies “have seen their competitiveness erode relative to countries that have intervened more aggressively in foreign exchange markets.”
This is precisely why China closely manages its currency. China’s policy makers know full well that if the yuan appreciates too much, either China’s export prices would have to rise or their profit margins could be squeezed. Neither option is particularly desirable for China’s policy makers. Smaller profit margins could squeeze businesses. Higher prices could mean lost market share as other emerging economies would likely become price competitive.
There is another method to Mr. Bernanke’s madness. The Fed has been much criticized for helping to push commodities prices higher by keeping rates low, thereby weakening the dollar. There is more than one way to lower commodity prices. Yes, the Fed could begin to tighten, but that could put added downward pressure on real estate prices as higher rates make homes less affordable. It could also nip the recovery in the auto sector in the bud. Another possible result of Fed tightening could be higher borrowing costs for corporations. Such a scenario could severelynegatively impact corporate borrowers, especially those on the lower end of the credit quality scale.
Another alternative for would be for China to permit the value of the yuan to rise to what the market will bear, thereby slowing China’s economy and reducing the demand for commodities. China’s demand for U.S. treasuries (U.S. dollars) would probably shrink and U.S. long-term rates could rise and the yield curve steepen. However, higher long-term yields could entice other investors thereby limiting further dollar weakness. Round and round we go. The bottom line is that China’s “management” of its currency is making life difficult for central bankers around the globe. It does not appear as though drastic changes to China’s currency policies are imminent.
To consumers, inflation is an price increase which affects their daily lives. To the Fed, inflation are price increases of goods and services which have inelastic demand curves which can impair economic activity. Currently the Fed is dealing with inflation among commodities, but stagnation in the price of services and wages. In fact, some areas of the service economy are cutting prices to increase business. Housing continues to be a problem. Sure, the Fed can raise rates, strengthen the dollar and help bring down food and energy inflation, but what would that do to housing of the manufacturing-led recovery? The result would probably be the economy grinding to a halt.
We all must realize that the economy many of us had come to view as normal was not sustainable. Home prices cannot be expected to double every few years. Equity markets cannot be expected to rise 20% each and every year. Not everyone can own a McMansion and a $40,000 SUV. The sooner this is acknowledge, the sooner the country can move forward.
Please read Andy Kessler's op / ed in Wednesday's WSJ.
Since then we have had a 10-year treasury note auction with record buying by foreign investors, including central banks.. We also saw take consumer prices, softer-than- retail sales, a leveling off of jobless claims after some improvement, lower capacity utilization and lower interest rates.
Many market participants expected the Fed to begin hinting that it is ready to change course. However, Fed Chairman Ben Bernanke defended his policies during a G20 meeting this morning.
In his speech he implored China to increase the value of the yuan. Mr. Bernanke stated that commodity prices have risen “significantly” due to increased demand from emerging economies. He went on to say that countries which freely float their currencies “have seen their competitiveness erode relative to countries that have intervened more aggressively in foreign exchange markets.”
This is precisely why China closely manages its currency. China’s policy makers know full well that if the yuan appreciates too much, either China’s export prices would have to rise or their profit margins could be squeezed. Neither option is particularly desirable for China’s policy makers. Smaller profit margins could squeeze businesses. Higher prices could mean lost market share as other emerging economies would likely become price competitive.
There is another method to Mr. Bernanke’s madness. The Fed has been much criticized for helping to push commodities prices higher by keeping rates low, thereby weakening the dollar. There is more than one way to lower commodity prices. Yes, the Fed could begin to tighten, but that could put added downward pressure on real estate prices as higher rates make homes less affordable. It could also nip the recovery in the auto sector in the bud. Another possible result of Fed tightening could be higher borrowing costs for corporations. Such a scenario could severelynegatively impact corporate borrowers, especially those on the lower end of the credit quality scale.
Another alternative for would be for China to permit the value of the yuan to rise to what the market will bear, thereby slowing China’s economy and reducing the demand for commodities. China’s demand for U.S. treasuries (U.S. dollars) would probably shrink and U.S. long-term rates could rise and the yield curve steepen. However, higher long-term yields could entice other investors thereby limiting further dollar weakness. Round and round we go. The bottom line is that China’s “management” of its currency is making life difficult for central bankers around the globe. It does not appear as though drastic changes to China’s currency policies are imminent.
To consumers, inflation is an price increase which affects their daily lives. To the Fed, inflation are price increases of goods and services which have inelastic demand curves which can impair economic activity. Currently the Fed is dealing with inflation among commodities, but stagnation in the price of services and wages. In fact, some areas of the service economy are cutting prices to increase business. Housing continues to be a problem. Sure, the Fed can raise rates, strengthen the dollar and help bring down food and energy inflation, but what would that do to housing of the manufacturing-led recovery? The result would probably be the economy grinding to a halt.
We all must realize that the economy many of us had come to view as normal was not sustainable. Home prices cannot be expected to double every few years. Equity markets cannot be expected to rise 20% each and every year. Not everyone can own a McMansion and a $40,000 SUV. The sooner this is acknowledge, the sooner the country can move forward.
Please read Andy Kessler's op / ed in Wednesday's WSJ.
Sunday, February 13, 2011
Housing Bubble Explained.
Not great, but cute explanation of the housing bubble:
http://www.xtranormal.com/watch/11131655
http://www.xtranormal.com/watch/11131655
Wednesday, February 9, 2011
Buy Mortimer
What don't these people understand? Foreign central banks need to buy dollars. They need to support the dollar in order to keep their currencies from rising in value, too much. They need to maintain favorable exchange ratios.
What about inflation? Why would they buy the 10-year of inflation may be on the rise? They bought the 10-year as a way to combat inflation. Say what?
That's right. Most inflation has been in commodities and energy. These are denominated in dollars. By purchasing treasuries, the dollar is strengthened and that to have a deflationary effect on commodity prices. Mark my words, the 10-year note will need at least all of 2011 to get to 4.00% and it may take more than one year for both Fed Funds and three-month LIBOR to get past 2.50%. Rates are not poised to explode higher.
What about inflation? Why would they buy the 10-year of inflation may be on the rise? They bought the 10-year as a way to combat inflation. Say what?
That's right. Most inflation has been in commodities and energy. These are denominated in dollars. By purchasing treasuries, the dollar is strengthened and that to have a deflationary effect on commodity prices. Mark my words, the 10-year note will need at least all of 2011 to get to 4.00% and it may take more than one year for both Fed Funds and three-month LIBOR to get past 2.50%. Rates are not poised to explode higher.
Wednesday, February 2, 2011
Groundhog Day!
Today is Groundhog Day and once again the ADP data exceeded the street consensus estimate. This time by 47,000 jobs. However, the prior data were revised lower buy 50,000 jobs. What does this mean for Friday’s payrolls data? Possibly nothing. Last month, stronger-than-expected ADP numbers did not portend stronger private payrolls data. Friday is going to be interesting.
The street is forecasting 140,000 new private jobs for January (the same as the street’s ADP forecast) and for 143,000 new jobs, all in. If this comes to fruition, this is below the pace believed to be necessary to keep up with the number of new workers entering the workforce or to lower the unemployment rate.
However, the unemployment rate could fall, even with sub-par job growth. Due to the method in which the household survey is conducted, respondents answering that they are not working, but are not actively seeking employment are not counted as being unemployed. An increasing number of discouraged displaced workers can actually make the unemployment rate fall. Conversely, if these displaced workers become more optimistic and answer that they are looking for work, the unemployment rate could rise, even though the job picture is becoming brighter. The devil is in the details.
Today’s Wall Street Journal “Credit Markets” columns discusses floating rate notes and that issuers feel comfortable coming to market with such structures because many investors believe that inflation pressures are building and the Fed will have to raise rates, thereby flattening the yield curve. The article also notes that for the past year, floaters may not have been a good place to be (something alluded to in Making Sense).
The article quotes a fixed income market participant who states:
"People have had the view for the last year, or year and a half, that short-term rates aren't going higher any time soon, and that is not an environment where you think you can make money on floating-rate debt.”
As we published last week, we may be getting closer to the time when the Fed has to take action by raising short-term rates, but that could still be a long way off. Remember, issuers come to market with structures which they believe are good sources of financing for them. Investors can influence the terms of bond structures by voting yea or nay with their investment dollars. Floaters can be valuable hedges versus various outcomes, depending on the structure. However, they are not (as is often explained in basic financial publications of financial adviser training) a way to eliminate interest rate risk. No issuer would ever come to market with such structures for obvious reasons.
The street is forecasting 140,000 new private jobs for January (the same as the street’s ADP forecast) and for 143,000 new jobs, all in. If this comes to fruition, this is below the pace believed to be necessary to keep up with the number of new workers entering the workforce or to lower the unemployment rate.
However, the unemployment rate could fall, even with sub-par job growth. Due to the method in which the household survey is conducted, respondents answering that they are not working, but are not actively seeking employment are not counted as being unemployed. An increasing number of discouraged displaced workers can actually make the unemployment rate fall. Conversely, if these displaced workers become more optimistic and answer that they are looking for work, the unemployment rate could rise, even though the job picture is becoming brighter. The devil is in the details.
Today’s Wall Street Journal “Credit Markets” columns discusses floating rate notes and that issuers feel comfortable coming to market with such structures because many investors believe that inflation pressures are building and the Fed will have to raise rates, thereby flattening the yield curve. The article also notes that for the past year, floaters may not have been a good place to be (something alluded to in Making Sense).
The article quotes a fixed income market participant who states:
"People have had the view for the last year, or year and a half, that short-term rates aren't going higher any time soon, and that is not an environment where you think you can make money on floating-rate debt.”
As we published last week, we may be getting closer to the time when the Fed has to take action by raising short-term rates, but that could still be a long way off. Remember, issuers come to market with structures which they believe are good sources of financing for them. Investors can influence the terms of bond structures by voting yea or nay with their investment dollars. Floaters can be valuable hedges versus various outcomes, depending on the structure. However, they are not (as is often explained in basic financial publications of financial adviser training) a way to eliminate interest rate risk. No issuer would ever come to market with such structures for obvious reasons.
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