patrick.net

B.A.C.A.H. says

Haircuts on sovereign debt have happened all over the world. He was merely suggesting that maybe it's our turn. He's not the first to suggest a haircut and I'm sure he won't be the last.

So, don't buy any Tbills, right?

The rate hike was less than a lot of people were expecting, and the stock market drops like 500 points. WTF?

ad says

Or they can just cut back on entitlements slightly relative to inflation, as they have been doing for about 2 years as part of the "haircut".

This is what they have been doing with Social Security for decades. Under report inflation by 50%, then base raises on the under reported number. This applies to Federal employees as well.

Al_Sharpton_for_President says

The fund invests in US Treasuries and so should benefit from the rise in rates.

For the new ones, yes. But for the huge bulk of the portfolio of older ones, haircuts will devastate the notional value.

Booger says

So, don't buy any Tbills, right?

It's the reason I don't go out more than two years.

Mentioning haircut was formerly akin to saying "Voldemort" at Hogwarts. By suggesting a haircut on the National Debt, Trump let the cat out of the bag.

So now the concept went from an Unspeakable Black Swan to a mere Black Swan. I am willing to accept the Black Swan risk to the maturities I have for less than = two years. But not beyond that.

I made a calculation that if things come to this, FDIC insurance will be more of a third rail than the treasury debt. As was mentioned on this thread, much of the treasury debt is held by foreign institutions. F*ck them.

FDIC insurance, with its 250k limit, is only for small retail depositors. However you can have just about an unlimited amount of FDIC insurance by spreading multiples of $250K around different banks. Even in banks in territories like Guam , PR, etc.

My political calculation is that the government would use printed money to back FDIC obligations. A haircut on treasury debt will threaten pension funds, (maybe) cause a run on the dollar, but will not lead to pitchforks to the extreme that bank failures would. We learned this from other countries that had debt problems during the financial crisis (Iceland, Greece, Cyprus). Their creditors got haircuts but insured deposits were made whole. That's a political guess by me. Some of you guys will shoot holes through it, whatever. It's my guess. Hopefully things won't come to that.

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A means test for Social Security would be what I would recommend, and/or increase the Social Security tax on those individuals making $200,000 or more a year.

Hold federal spending constant for 2 years during the increase in the Social Security tax.

Then assess the debt to GDP ratio, tax receipts, etc as part of feedback to the above actions.

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Blue says

zzyzzx says

It's 75

Too little to control inflation. Raising too high can’t be possible as well as the gov can’t pay interest payment on massive debt.

Is government owned debt mostly variable interest? Otherwise, rising rates would have no effect on current government debt.

HeadSet says

Is government owned debt mostly variable interest? Otherwise, rising rates would have no effect on current government debt.

Federal debt issued now is based on current rates, so any debt financed with a 10-year Treasury Note is at the current interest rate of around 3.25%.

That is the highest the 10 Year Treasury Note has been since around 2009.

ad says

Federal debt issued now is based on current rates

So that is still only new debt that is affected?

HeadSet says

ad says

Federal debt issued now is based on current rates

So that is still only new debt that is affected?

Yes it is for new debt. Old debt was issued at older rates.

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I listened to Powell say that there won’t be a soft landing and businesses will feel pain in order for the economy to see lower prices. He even mentioned wages lowering also but he mentioned that would be offset by a much lower inflation rate.

Powell might as well say that more productivity is needed to get to the 2% annual inflation goal.

More innovation is needed to increase economic value of goods and services. This will improve standard of living for the working class such as with lower food costs and they have more disposable income such as to save for retirement.

But how much of that is attainable in areas were productivity like with home construction do not matter since local ordinances and laws make it almost impossible to get residential building permits approved.

Florida is a lot different than California as far as that goes. Just look at how St Joe (ticker: JOE) is developing properties in Bay County, Florida.

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HeadSet says

Is government owned debt mostly variable interest? Otherwise, rising rates would have no effect on current government debt.

rate get reset to current level up on term maturity for every bond.

Blue says

rate get reset to current level up on term maturity for every bond.

I see your point so that means the federal government has to manage finances and monetary policy so that interest payments or debt service is not more than 12% of the federal budget. I hope they can grow tax receipts enough to compensate for this increase in debt service payments.

I was thinking about the I-series savings bond as its rate is adjusted every 6 months.

So, if I buy an I series bond now, it will likely go up in 6 months as far as interest payment because by then, the Fed Funds rate (which is now 3.25%) will be at least 4%.

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https://www.cnbc.com/2022/09/21/the-fed-forecasts-hiking-rates-as-high-as-4point6percent-before-ending-inflation-fight.html

The Fed forecasts hiking rates as high as 4.6% before ending inflation fight

Still weak.

https://www.cnbc.com/2022/09/21/treasury-yields-fall-ahead-of-federal-reserve-interest-rate-decision.html

2-year Treasury yield surges above 4.1% after Fed hike, highest level since 2007

Misleading URL.

zzyzzx says

2-year Treasury yield surges above 4.1% after Fed hike, highest level since 2007

Put in my brokerage order for that maturity this morning.

According to Vanguard the forecasted yield at auction on 9/26 is 4.125% annual.

I refused to get the two year at this time last year. The yield then was 30 basis points. I got the 2-yr Treasury FRN instead which pays the market 90-day rate on a daily adjustment. So those are yielding 3.17% today.

Monday's yield estimated to be 4.125%, compared to 0.30% a year ago. This represents a 13x increase in the cost of borrowing for two years, since a year ago.

ad says

So, if I buy an I series bond now, it will likely go up in 6 months as far as interest payment because by then, the Fed Funds rate (which is now 3.25%) will be at least 4%.

There's no formal linkage between the fed funds rate and the ibond base rate.

The base rate is arbitrarily set by the Treasury Department. Lately they've been setting it at zero.

I harangued on this site that the government does not set interest rates, that those are set by the auctions in the marketplace. I was wrong to say that because I forgot about the rates it sets on Savings Bonds. But those are small amounts, only for retail investors.

B.A.C.A.H. says

The base rate is arbitrarily set by the Treasury Department. Lately they've been setting it at zero.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#infl

I checked above, and the total rate is 4.81% for the I-Series bond. It is 0% for the fixed rate and 4.81% for the adjustable rate which is set every 6 months. It was last set this past May.

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ad says

total rate is 4.81% for the I-Series bond

That's for six months. Annual rate is x2 = 9.62%, the rate that's often cited in the media.

B.A.C.A.H. says

That's for six months. Annual rate is x2 = 9.62%, the rate that's often cited in the media.

Yes, I know that total rate 4.81% is only for 6 months.

You are correct as the website for I series bonds states "The composite rate for I bonds issued from May 2022 through October 2022 is 9.62%"

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Read below quote from Bloomberg News. This means that the S&P 500 will only close about 5% higher than its all time high set in February 2020. And accounting for inflation, it would close much lower than the February 2020 level.

" Goldman Sachs Group Inc. slashed its year-end target for the S&P 500 Index to 3,600 from 4,300, arguing that a dramatic shift in the outlook for interest rates moving higher will weigh on valuations for US equities. "

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100 coming up?

Social security is set to rise 8.7% this year. Gotta take care of the Boomers!

https://finance.yahoo.com/news/fed-seen-aggressively-hiking-5-090000581.html

Fed Seen Aggressively Hiking to 5%

zzyzzx says

https://finance.yahoo.com/news/fed-seen-aggressively-hiking-5-090000581.html

Fed Seen Aggressively Hiking to 5%

Yeah, the Federal Funds rate is likely to reach 5% by March 2023. Its virtually guaranteed to reach 4% in November, as it is increased from currently 3.25%. And they likely will increase it to 4.5% in December or January.

If inflation starts to drop from currently 8.2% to below 5% by February next year, then I could see the Fed holding rates around 4.5%.

When inflation holds steady around 3% to 4.5% then I see the 30 year mortgage steadying around 5.5%.

The 30 year mortgage rate has to stabilize and be no more than 5.5% for housing sales or liquidity to not freeze up in 2023.

Its all based on inflation or CPI eventually steadying below 5% as interest rates charged by banks are dependent on inflation.

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https://www.investopedia.com/goldman-sachs-boosts-rate-outlook-to-5-6823502

Goldman Sachs Boosts Rate Outlook to 5%

zzyzzx says

Goldman Sachs Boosts Rate Outlook to 5%

" Goldman Sachs economists said they expected the central bank will lift its benchmark rate to a range of 4.75% to 5% in March, 25 basis points more than earlier expected. The projection assumes an increase by 75 basis points this week, 50 basis points in December, and 25 basis points in February and March. The economists cited three reasons for the Fed hikes beyond February, including “uncomfortably high inflation,” the need to cool the economy, and to avoid a premature easing of financial conditions. "

What happens if the November or December CPI are below 6% ? Do they still cut rates in early 2023 ?

I would expect they increase the Fed Funds rate to 4.25% and hold steady for the first three months of 2023 if that is the case.

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One POV is that inflation will continue, and that the interest rate increases will slow down the economy, possibly leading to a recession. STAGFLATION.

The actions of the Fed are compared to steering a car using the rearview mirror.

November 2, 2PM EDT. Stay tuned.

ad says

What happens if the November or December CPI are below 6% ?

Interesting question, but not very likely to happen.

Lately I am wondering if after the Democrats' wipeout; will the Federal Reserve stop raising rates?
I was just thinking since they will be wiped out so badly the Fed people will not feel any political pressure; "you assholes lost all on your own, not our problem."
So, perhaps the Federal Reserve will continue to raise rates; that is going to suck for guys like me.
OH WELL. Time to kick back in Baja and do some more diving/beaching/exploring/eating/etc.

https://finance.yahoo.com/news/fed-set-to-raise-rates-powell-rate-hike-path-101845316.html

Fed again raises interest rates by 75 basis points

Weak!

Shit, I hope they stop raising rates.
Inflation will stop itself if Congress would just stop giving money.
I am not in favor of the 8.7% raise in Social Security either. It's nonsense.
I predict that the Fed will lose its nerve after next week's elections.

The Fed Funds rate is now at 4%. I can see them increasing it to 4.25% this December unless inflation or CPI drops below 5.5%.

I would not be surprised if they decide to raise it to 4.5% this December if CPI for November remains above 7%.

They are not too far off from peak 2007 interest rate levels.

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ad says

The Fed Funds rate is now at 4%. I can see them increasing it to 4.25% this December unless inflation or CPI drops below 5.5%.

I would not be surprised if they decide to raise it to 4.5% this December if CPI for November remains above 7%.

They are not too far off from peak 2007 interest rate levels.

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I thought they make a decision every 3 months, not every month.

clambo says

Inflation will stop itself if Congress would just stop giving money

Is there any doubt in your mind that they (and Biden) are going to continue to spend like the proverbial drunken sailor?

GNL says

ad says

The Fed Funds rate is now at 4%. I can see them increasing it to 4.25% this December unless inflation or CPI drops below 5.5%.

I would not be surprised if they decide to raise it to 4.5% this December if CPI for November remains above 7%.

They are not too far off from peak 2007 interest rate levels.

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I thought they make a decision every 3 months, not every month.

GNL, they are meeting this December. But I agree with what you stated as I thought also they only meet quarterly in regards to interest rate decisions.

"Often it comes down to a few words in the Federal Reserve’s press release. With its November statement, the Fed has offered an early signal that we may be getting closer to peak interest rates of around 5%. The Fed anticipates moving toward smaller rate hikes either in December or at the subsequent meeting in February 2023. However, Fed Chair Jerome Powell did indicate at the November press conference that it was “very premature” to be talking about a pause in rising rates. We’re not there today."
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https://www.forbes.com/sites/simonmoore/2022/11/02/why-the-feds-december-meeting-may-help-signal-peak-interest-rates/?sh=7f5650d73acf

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https://finance.yahoo.com/news/world-plunging-towards-societal-collapse-154000368.html

World ‘plunging towards societal collapse’ as era of cheap money ends

zzyzzx says

https://finance.yahoo.com/news/world-plunging-towards-societal-collapse-154000368.html

World ‘plunging towards societal collapse’ as era of cheap money ends

Its just an adjustment or almost a reset. When accounting for inflation, the S&P 500 has about a 5% negative return since February 2020. Housing may take about 2 to 3 years to adjust as well.

I see a lot of the homes converted to vacation rentals or AirBnB homes will start to lower their rates also as part of this adjustment.

Let's just hope the 22 to 35 year old population who gets laid off can handle this and pull themselves by their bootstraps. This may mean temporarily working 2 part time jobs, in order to make ends meet as well as continue to get back into a similar job.

I remember 2001 and 2008 and they were hard times as far as layoffs. But it seems this time that the population in general is fragile compared to back in 2001 and 2008.

At least we likely won't see a deflationary spiral. Perhaps at worst we get mild amount of stagflation.
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