Worst Spate of Downgrades Since 2021 Signals Pain
In the second quarter, around $94 billion of high-grade US debt was downgraded, compared with just $78 billion of upgrades, according to JPMorgan Chase & Co. strategists. It was the first time since early 2021 that downgrades outpaced upgrades in dollar terms, and more companies are at risk of being demoted later this year as economic uncertainty rises, JPMorgan strategists including Eric Beinstein and Silvi Mantri wrote this week.
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35 minutes ago
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Explainer-Why Trump's push for a 1% Fed policy rate could spell trouble for US economy
By Howard Schneider WASHINGTON (Reuters) -U.S. President Donald Trump says the Federal Reserve should set its benchmark interest rate at 1% to lower government borrowing costs, allowing the administration to finance the high and rising deficits expected from his spending and tax-cut bill. Trump should be careful what he wishes for. A Fed policy rate that low is not typically a sign that the U.S. is the "hottest" country in the world for investment, as Trump has said. It is usually a crisis response to an economy in serious trouble. The U.S. economy isn't in that kind of trouble now. But with near-full employment, ongoing economic growth and inflation above the U.S. central bank's 2% target, the super-low interest rates Trump seeks could easily backfire if investors in the $36 trillion Treasury market saw such a move as meaning the Fed had caved to political pressure and cut rates for the wrong reasons. Congress tasked the Fed with maintaining stable prices and full employment, not making deficit spending cheap, and slashing rates in the current environment could well reignite inflation. "I am not necessarily convinced that ... if the Fed tomorrow decided we are cutting to 1%, that this would have the traditional impact on long-term interest rates. The bond market fear would be that inflation would reignite and essentially we would have a loss of Fed independence and a de-anchoring of inflation expectations," said Gregory Daco, chief economist at EY-Parthenon. Though there is "scope to ease" from the current 4.25%-4.50% range, it is nothing like the magnitude of cuts Trump envisions, he said. Daco, noting the unemployment rate is 4.1%, the economy is growing around 2% and inflation is about 2.5%, said: "From a data perspective there is not anything to suggest the need for an immediate and substantial lowering." IS 1% NORMAL? A 1% Fed policy rate has not been uncommon in the last quarter of a century, but is no sign of good times, coinciding with joblessness of 6% or higher. Former President George W. Bush governed at a time when the rate was 1%. It occurred shortly after the U.S. invaded Iraq in 2003 and at the end of a string of Fed rate cuts following the dot-com crash and the September 11, 2001, attacks on the U.S. Former President Barack Obama inherited a near-zero Fed policy rate when he took office in January 2009. He also inherited a global financial crisis. Trump himself got the same near-zero interest rate treatment from the Fed in the last months of his first term in the White House - when the COVID-19 pandemic shut down the economy. WHAT THE FED CONTROLS, AND DOESN'T While hugely influential, the Fed has limited tools to influence the economy in normal times. U.S. central bankers meet typically eight times a year to set what is called the federal funds rate. Only banks borrow overnight at that rate, but it is a benchmark for other credit, influencing everything from corporate debt to home mortgages, consumer credit cards, and Treasury yields. Perhaps as importantly, it shapes expectations about where rates are headed. While closely correlated with the Fed's policy rate, those other rates are not set directly by the central bank. There's always a spread, including for what's been top of mind for Trump: the interest rate on U.S. Treasuries. SUPPLY, DEMAND AND RISK Global trading across an array of markets ultimately determines those other rates. A foreign pension fund's demand for Treasuries or mortgage-backed securities, for instance, influences what Americans pay for a mortgage or the U.S. government pays to finance its operations. Supply and demand are critical. U.S. government debt supply is determined by spending and tax levels set by the president and Congress. The federal government typically spends more each year than what it receives in tax collections and other revenue, and Treasury covers that annual deficit with borrowed money, issuing securities due in as few as 30 days to as long as 30 years. All things equal, larger deficits and more accumulated debt mean higher interest rates. Deficits and debt are expected to rise following the passage in Congress earlier this month of Trump's "One Big Beautiful Bill Act." On the demand side, the U.S. enjoys a privileged position that holds down government borrowing costs since it is still considered a relatively risk-free investment with plenty of supply, deep and well-functioning markets and a history of strong institutions and legal norms. Current returns above 4% are particularly attractive for large pension funds or retirees who want income while being assured their investment is safe. But, like any borrower, the U.S. government must pay a premium for the risk an investor takes on. Locking up money in a 10-year Treasury note means other opportunities are foregone. Rates of interest, inflation and economic growth may all change in that span, and investors want compensation for those risks. With the Fed policy rate as a starting point, all of those factors are piled on in the form of a "term premium." Intangibles, like trust in a country's institutions, also matter. When Trump's threats to fire Fed Chair Jerome Powell intensified in April, yields rose and the president backed off - a sign that global markets have an important vote in central bank independence. IS FED POLICY OUT OF LINE? Trump recently sent Powell a handwritten note with a list of central bank rates and penciled in where he thought the Fed's policy rate should be, near the bottom. U.S. central bank policymakers say it would be risky to cut rates until it is clear that Trump's new tariffs - many already imposed and more still to come - aren't going to stoke inflation. Central bankers often refer to policy formulas or rules that relate their inflation target to incoming and forecasted economic data to point to an appropriate interest rate. None suggest a Fed policy rate as low as Trump wants. Sign in to access your portfolio
Yahoo
37 minutes ago
- Yahoo
Analysis-A slew of T-bills coming? Money market funds say 'bring 'em on'
By Gertrude Chavez-Dreyfuss NEW YORK (Reuters) -More than $1 trillion in U.S. short-term bills are expected to flood the market over the next 1-1/2 years following the increase in the debt ceiling, as the Treasury replenishes its diminished cash balance while funding the country's huge fiscal deficit. There is, however, no shortage of buyers, with money market funds leading the way. Armed with a record $7.4 trillion in assets as of July 1, money funds, which invest in short-term, low-risk securities such as Treasury bills and repurchase agreements, or repos, are ready to take on more supply. The debt ceiling increased by $5 trillion to $41.1 trillion two weeks ago following the signing into law of the "One Big Beautiful Bill." The Treasury's operating balance had dropped to $313 billion on July 3, data from money market research firm Wrightson ICAP showed, the day before President Donald Trump's tax and spending bill was enacted. Treasury bills are critical to financial markets and the broader economy, given their role as safe and liquid assets, and are a key tool for funding government spending. In turning to short-term debt to fill its coffers, U.S. Treasury Secretary Scott Bessent had said it does not make sense to increase long-term bond sales at current interest rates. The Federal Reserve has kept the benchmark federal funds rate in the 4.25%-4.50% range since December. J.P. Morgan, Barclays, and TD Securities have estimated new issuance of Treasury bills alone over the next 18 months of between $900 billion and $1.6 trillion, higher than their initial projections before the debt ceiling resolution. "It sounds like a large amount of issuance coming from the Treasury, but we welcome it and feel that we will have no trouble accommodating it," said Susan Hill, senior portfolio manager and head of the government liquidity group at Federated Hermes, with assets under management of $631.1 billion. The firm has a suite of government and prime money market funds. Bank estimates on short-term supply over the next 1-1/2 years, however, paled in comparison to Treasury bills issued following the last debt ceiling saga two years ago. The Treasury had issued $1.1 trillion in three months from June 2023, as it reloaded its cash account that had dwindled to just $23 billion. Lou Crandall, Wrightson's chief economist, said the Treasury is in a much stronger position now than in 2023. "The debt ceiling impasse didn't go down to the wire this time, so they're starting out with $300 billion more in cash," said Crandall, providing ample cushion for the Treasury. Still, this year's projected T-bill supply exceeds that of past debt ceiling events. In 2011, the Treasury issued about $300 billion in T-bills in the months following the debt limit increase in August 2011. In 2013, the Treasury issued roughly $400 billion in bills by the end of that year. Fast forward to 2025, and bank estimates of additional T-bill supply for the next five months ranged from $650 billion to $830 billion. RAMPING UP; REVERSE REPO DECLINE With the spending bill's approval, the Treasury last Tuesday raised the size of last week's four-week and eight-week bill auctions by a larger-than-expected $25 billion each to $150 billion for both offerings. It also announced another $225 billion in three T-bill auctions scheduled this week. Those increases are likely to represent the bulk of adjustments for bill auction sizes for July, although the Treasury might not be quite done yet. "There's plenty of money market funds that had been avoiding maturities like those on August bills (due to the debt ceiling restrictions), so that part of the curve is going to be pretty well subscribed," said Jan Nevruzi, U.S. rates strategist, at TD Securities. There is just one hitch. The Fed's overnight reverse repo (RRP) facility, where money market funds park their excess cash, has fallen sharply to $182 billion as of July 11, from a peak of $2.5 trillion in December 2022. Without that excess cash sitting in RRPs, market participants wondered how money funds would absorb more Treasuries if they are fully invested. In 2023, money funds used that buffer sitting in RRPs to buy a deluge of T-bills in the market. In a reverse repo, investors lend overnight cash to the Fed at a 4.25% interest rate in exchange for Treasuries or other government securities, with a pledge to buy them back. The Fed's ongoing quantitative tightening, a process that shrinks its balance, allowed Treasuries and mortgage-backed securities to mature without reinvestment. That drained liquidity from the financial system and reduced excess cash that previously flowed into RRPs. Analysts, however, said money market funds will likely reallocate out of regular repos into T-bills. Repos have grown to 37% of money funds' assets, J.P. Morgan said in a research note. "The overall portion of money fund investments in the repo market is still quite large, so it becomes more of a decision of going out of that normal repo transaction into Treasury bills if the value is there," said Hill of Federated Hermes. Currently, three-month T-bills are yielding 4.353%, higher than the Secured Overnight Financing Rate, a repo rate, of 4.31%. Analysts also pointed to money market funds' continued appeal to investors that should further propel the growth in their assets, which means more cash for T-bills. Money market yields are 170 basis points higher than bank deposits, a historically wide spread, wrote Samuel Earl, U.S. rates strategist at Barclays. Households, which have $10 trillion in time deposits and savings accounts, are likely to continue to move deposits at banks into money funds, he added. Sign in to access your portfolio
Yahoo
37 minutes ago
- Yahoo
All-Time Highs for Stocks: These 2 ETFs Still Look Undervalued
The persistent high-interest rate environment has prevented the Vanguard Real Estate ETF from rallying. International stocks have outperformed but still look attractively valued. There's an excellent high-dividend Vanguard ETF that could still be a smart buy. 10 stocks we like better than Vanguard Real Estate ETF › The S&P 500 recently reached a new all-time high, and many stocks are at or near their own 52-week highs. But there are two important things for ETF investors to know. First, not all ETFs are near all-time highs. In fact, some are still down by 10% or more from their recent peaks. Second, just because a certain ETF is at a new high doesn't always mean that it's expensive. And with these principles in mind, here are three Vanguard ETFs that look incredibly attractive even with many stocks reaching new highs. The real estate sector hasn't exactly been a strong performer in recent years. In fact, the Vanguard Real Estate ETF (NYSEMKT: VNQ) has produced a 73% total return over the past decade, compared with 264% for the S&P 500. However, it's important to point out that the last decade has seen two Federal Reserve rate hike cycles and a pandemic that essentially rendered commercial real estate inoperable for a period of time. The actual businesses of real estate investment trusts (REITs) have generally performed well -- it's just a highly rate-sensitive business. Not only do higher rates cause borrowing costs to rise, but commercial property values have an inverse relationship with the prevailing risk-free interest rates, like Treasuries. While there's no way to know when the Fed will start cutting rates again, most experts agree that the general direction of interest rates over the next couple of years is likely to be downward. This should provide the tailwind the Vanguard Real Estate ETF needs to start producing outsized returns. The Vanguard International High Dividend Yield ETF (NASDAQ: VYMI) just hit a new all-time high on the day this article was written. But that doesn't necessarily mean it's expensive. In fact, compared with U.S. high dividend stocks, it looks extremely cheap. This ETF owns a portfolio of about 1,550 companies based outside of the United States that have above-average dividend yields. But these aren't just companies you haven't heard of -- household names like Toyota and Nestle are among the top holdings, and there are several other major components that you're probably familiar with. As of this writing, the ETF has a 4.1% dividend yield, but of course it might be slightly different by the time you're reading. Here's the key point. The average stock in the Vanguard International High Dividend Yield ETF's index has grown earnings at a 13.7% annual rate over the past five years and trades for just 12 times earnings. That's a remarkably low valuation, especially considering that the stocks in the U.S. counterpart Vanguard High Dividend Yield ETF (NYSEMKT: VYM) have an average P/E of more than 19 and have grown earnings slower. Of course, there are additional risks when investing in international stocks, such as foreign exchange rate risk, and there is still quite a bit of uncertainty surrounding U.S. trade policy. But this is a massive valuation gap, and it could still be a good time to buy. To be clear, I think all three of these ETFs are attractive right now, and I own shares of all three in my own portfolio. But I bought them because I think they'll perform very well over the next few years -- not the next few weeks or months. Keep that in mind when considering if they're right for your goals. Before you buy stock in Vanguard Real Estate ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Vanguard Real Estate ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $671,477!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,010,880!* Now, it's worth noting Stock Advisor's total average return is 1,047% — a market-crushing outperformance compared to 180% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of July 7, 2025 Matt Frankel has positions in Vanguard International High Dividend Yield ETF and Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Vanguard Real Estate ETF and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Nestlé. The Motley Fool has a disclosure policy. All-Time Highs for Stocks: These 2 ETFs Still Look Undervalued was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
