Friday, August 18, 2023

Markets edge in the face of high interest rates

Dow went up 45, advancers over decliners more than 3-2 & NAZ was off 75.  The MLP index added 1 to the 235s & the REIT index inched up to the 358s.  Junk bond funds were mixed & Treasuries had more buying which reduced yields but remain at very high levels (more below).  Oil fluctuated above 80 & gold added 6 to 1921.

AMJ (Alerian MLP Index tracking fund)


 

 




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Treasury yields fell as investors considered the economic outlook, especially regarding inflation & assessed what could be on the horizon for Federal Reserve monetary policy.  The yield on the 10-year Treasury was down by 3 basis points to 4.278%.  This comes after the 10-year yield reached levels last seen in Oct 2022 yesterday & the 2-year Treasury  yield was down by more than 1 basis point to 4.947%.  Yields & prices have an inverted relationship & 1 basis point equals 0.01%.  Investors considered the state of the economy & assessed the outlook for Fed interest rate hikes after Wed's release of the minutes from the central bank's most recent meeting.  The minutes pointed to the possibility of further rate hikes, with policymakers noting that inflation remains too high & further restrictive monetary policy may be needed to sufficiently ease pressures from higher prices.  Any such policy moves would depend on the state of the economy, the minutes indicated.  Many investors were expecting the Fed's Jul meeting, at which the central bank raised rates by 25 basis points, to mark the end of the rate-hiking cycle.  Recent economic data has painted a somewhat mixed picture about the effect of the Fed's rate hikes so far, which aimed to cool the economy & ease inflation.  While data suggests that inflationary pressures are easing, other areas of the economy, including the labor market, have shown resilience.  Fears about elevated rates dragging the US economy into a recession have not come true so far.

10-year Treasury yield slides as investors consider economic outlook

The rapid increase in interest rates over the past year could cause some collateral damage to the US gov's finances, because as interest rates rise, so will the federal gov's borrowing costs on its $32.7T in debt.  Interest payments on the national debt are projected to be the fastest-growing part of the federal budget over the next 3 decades, according to the latest estimates from the Congressional Budget Office (CBO).  Thanks to a combination of high inflation, rising interest rates & unrelenting growth in the national debt, interest payments are expected to triple from nearly $475B in fiscal year 2022 to a stunning $1.4T in 2032.  By 2053, the interest payments are projected to surge to $5.4T, more than the gov spends on Social Security, Medicaid, Medicare & defense.  As a share of the economy, total interest on the national debt will hit a record 3.2% of GDP, which is the broadest measure of goods & services produced in the country, by 2030.  That percentage will more than double to 6.7% by 2053.  "By 2051, spending on interest will be the single largest line item in the federal budget, surpassing Social Security, Medicare, Medicaid, and all other mandatory and discretionary spending programs," said the Committee for a Responsible Federal Budget (CRFB), which advocates for reducing the federal deficit.  For years, the US has been able to borrow cheaply as interest rates have remained historically low.  However, as the federal funds rate increases, so will short-term rates on Treasury securities, making federal borrowing more expensive.  "The growth in interest costs presents a significant challenge in the long-term as well," the Peter Peterson Foundation said.

The US is paying a record amount of interest on its national debt

The average rate for a 30-year fixed mortgage is now at its highest level in over 20 years, Freddie Mac reported.  Freddie Mac's latest Primary Mortgage Market Survey shows that the average rate for the benchmark 30-year fixed note hit 7.09% this week for the first time since 2002, topping 7% for the first time since last Nov after rising from 6.96% the week before.  At this time last year, 30-year fixed rate products averaged 5.13%.  The rate for a 15-year fixed mortgage also rose, averaging 6.46% after coming in at 6.34% last week.  One year ago, the rate for a 15-year fixed note averaged 4.55%.  "The economy continues to do better than expected, and the 10-year Treasury yield has moved up, causing mortgage rates to climb," said Sam Khater, Freddie Mac’s chief economist.  "Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales."  A recent report from Realtor.com showed that the number of available homes on the market in Jun was down more than 47% from the typical amount before the COVID-19 pandemic began in early 2020.  The Federal Reserve's aggressive interest-rate hike campaign sent mortgage rates soaring last year, & sellers who locked in a low mortgage rate before the pandemic have been reluctant to sell & jump into a higher rate on a new property, leaving few options for buyers.  High inflation has driven the Federal Reserve to raise its benchmark interest rate 11 times since Mar 2022 & its fed funds rate has hit the highest level in 22 years.  Realtor.com economist Jiayi Xu said that rates could remain high for the foreseeable future.  "Despite still high prices and elevated interest rates, July’s retail sales data showed consumer spending continues to increase solidly as demand is being boosted by high wage growth," Xu said.  "While this robust data might alleviate worries about an imminent recession, it could give rise to concerns that interest rates might stay elevated for an extended period."  "Meanwhile, it is worth noting that the Fed is moving cautiously to ensure that the effects of earlier rate hikes are fully revealed," Xu continued.  "As a result, the Fed may opt to take another "wait-and-see" strategy in the upcoming FOMC (Federal Open Market Committee) meeting, which may help potentially mitigate the recent upward trajectory of mortgage rates."

Mortgage rates reach highest level in over 20 years

Dow opened lower but buyers returned to cautiously take it higher.  There is no dramatic news, so buying is being done carefully.  The big dark cloud of high interest rates is keeping many buyers away from the stock market.

Dow Jones Industrials

 






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