Month: October 2023

Good Morning Ladies and Gentlemen

“If term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.”

 Lorie K. Logan, president and chief executive officer
of the Federal Reserve Bank of Dallas

What is happening?

Although it seems that the inflation momentum has been broken, there has been a massive sell-off in the bond markets over the past few weeks and interest rates have risen. The term premium shot up, even though inflation was mainly in line with expectations. Many market participants were surprised by this interest rate tsunami and lost money on their long bond exposure.

A question of demand and supply

Monetary authorities are shrinking or trying to shrink their respective balance sheets, i.e. they are increasingly dropping out as buyers of government bonds. The Fed, for example, is cutting its mountain of Treasuries by USD 50 bn per month. This means that high sovereign issuance is meeting less and less demand, and finally, investors are asking for ever higher compensation for the risk of investing in long-term bonds. The yield on ten-year U.S. Treasuries briefly scratched the 5% mark last Friday.

The war in the Middle East’s influence

However, an external event has broken the interest rate trend since last weekend. The war in the Middle East has led to a flight to safe havens, and government bond yields have thus returned somewhat from their highs.

The difficulty

Ladies and Gentlemen, the difficulty for global monetary authorities will be taming inflation without risking economic calamities. That is quite a task, and as we have learned in last week’s “Stefan’s Weekly”, in an ideal world and theory, rising interest rates should tame inflation, while government spending on infrastructure projects and the like should prevent the economy from stalling and yet, unfortunately, the theory is not always ideal.

Possible Conclusion

If we go back to Lorie K. Logan’s quote, “If term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening” at the beginning of today’s “Stefan’s Weekly” we may conclude that the market is effectively doing the Fed’s work. The Fed would need to tighten less or tighten no more; in other words, I believe there is a fair chance that no more rate hikes are coming. Interesting, no?

Your point of view

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

“If term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.”

 Lorie K. Logan, president and chief executive officer
of the Federal Reserve Bank of Dallas

What is happening?

Although it seems that the inflation momentum has been broken, there has been a massive sell-off in the bond markets over the past few weeks and interest rates have risen. The term premium shot up, even though inflation was mainly in line with expectations. Many market participants were surprised by this interest rate tsunami and lost money on their long bond exposure.

A question of demand and supply

Monetary authorities are shrinking or trying to shrink their respective balance sheets, i.e. they are increasingly dropping out as buyers of government bonds. The Fed, for example, is cutting its mountain of Treasuries by USD 50 bn per month. This means that high sovereign issuance is meeting less and less demand, and finally, investors are asking for ever higher compensation for the risk of investing in long-term bonds. The yield on ten-year U.S. Treasuries briefly scratched the 5% mark last Friday.

The war in the Middle East’s influence

However, an external event has broken the interest rate trend since last weekend. The war in the Middle East has led to a flight to safe havens, and government bond yields have thus returned somewhat from their highs.

The difficulty

Ladies and Gentlemen, the difficulty for global monetary authorities will be taming inflation without risking economic calamities. That is quite a task, and as we have learned in last week’s “Stefan’s Weekly”, in an ideal world and theory, rising interest rates should tame inflation, while government spending on infrastructure projects and the like should prevent the economy from stalling and yet, unfortunately, the theory is not always ideal.

Possible Conclusion

If we go back to Lorie K. Logan’s quote, “If term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening” at the beginning of today’s “Stefan’s Weekly” we may conclude that the market is effectively doing the Fed’s work. The Fed would need to tighten less or tighten no more; in other words, I believe there is a fair chance that no more rate hikes are coming. Interesting, no?

Your point of view

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

“‘The distinction between ideal theory and nonideal theory was first introduced by John Rawls in his classic “A Theory of Justice”. Given certain facts about human nature and possible social institutions, Rawls’s ideal theory is an account of the society we should aim for and involves two central assumptions. First, it assumes full compliance of relevant agents with the demands of justice. Second, it assumes that society’s historical and natural conditions are reasonably favourable. These two assumptions are individually necessary and jointly sufficient for his ideal theory. For Rawls, nonideal theory primarily addresses how the ideal might be achieved in practical, permissible steps from the actual, partially just society we occupy.”

 Christopher Thompson

10-year U.S. government bond yield

The 10-year U.S. government bond yield is slightly over 4.7%. The 5.2% mark represents significant resistance for the 10-year yield.

JOLTS

U.S. job openings rose by 700,000 in August compared to the previous month. This figure is calculated monthly by the U.S. Bureau of Labour Market Statistics. JOLTS means “Job Openings and Labor Turnover Survey”. In addition to the JOLTS report, initial jobless claims since July also indicate the strength of the U.S. labour market. Some market participants view this resilience negatively because it may indicate that the Fed has difficulties slowing the economy and may be forced to raise interest rates again.

Ideal theory

If yields rise, stock markets tend to react negatively. The question is whether a high yield of 10-year U.S. government bonds also means a low in the stock market. An example is October 2022, when the high yields meant the low for the year in the S&P 500. A look at 1994 shows similar behaviour in the spring of that year. The S&P 500 continued its downward movement in the fall of 1994 when interest rates did not fall immediately but remained on a plateau and disappointed investors. October 1987 also offers a negative prime example of a sharp rise in interest rates. The stock markets panicked at that time after forming a lower high point.

1987 or even 1929 all over again?

There are enough considerations that the current situation is similar to that of 1929 or 1987. One could argue that the season (October) of 1987, strongly rising yields in 1987 and 1929, and the jump in the VIX (1987) are clear signs. Ladies and Gentlemen, those who know me know that it is stronger than me, and I apologise for it, yet I cannot take these arguments for granted because today’s situation is different.

Big difference

There is one significant and colossal difference: in 1929 and 1987, the markets increased excessively and reached new highs in the months before the crashes. In the current cycle, the high of January 2022 (in the Nasdaq November 2021) was not reached again. This year’s high in July 2023 actually means a lower high.

Lessons from the past I

In the autumn of 1987, the crash in the stock markets led to a sell-off in yields. In the autumn of 1994, the October-December yield plateau (yields stayed up) unnerved the equity markets and led to a 10% correction.

Lessons from the past II

There is absolutely no guarantee that sharply falling yields will cause stock markets to rise. As long as yields maintain their upward trend or stagnate at the top, equity markets may not like it. But then again “theory” may not be ideal.

Conclusion and 10-year U.S. government bond yield

As I mentioned earlier, the 10-year U.S. government bond yields slightly over 4.7%. The 5.20% mark represents significant resistance for the 10-year yield. I am fascinated by the current market environment and I recognise threads but also opportunities and in general see the glass half full, but then and as always, that is just my humble point of view.

Nonideal Theory

At the end of the day, Ladies and Gentlemen, the ideal theory does not always unfold and nonideal theory is reality, whether we are talking about human beings in general, constitutional law, politics, the philosophy of financial markets, or any other aspect of life.

Your point of view

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li