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Yahoo
24-07-2025
- Business
- Yahoo
Following significant rate hikes, bonds are back in the game
Guess who just got back today Them wild-eyed boys that had been away Haven't changed, had much to say But man, I still think them cats are crazy The boys are back in town —Thin Lizzy Government bonds: The gift that (usually) keeps on giving Historically, bonds have provided investors with two main benefits. First, their yields have provided a reasonable, if unspectacular return. Second, they have offered diversification value, muting overall portfolio losses during bear markets. By owning high quality bonds, you got paid for protecting your portfolio during times of market turmoil, which is akin to receiving (rather than paying) a premium for fire insurance — a remarkably sweet deal indeed. However, these benefits have historically ranged from significant to nonexistent, depending on the investment environment. A bear market sedative As the accompanying table illustrates, in five of the six equity bear markets before that of 2022, bonds provided investors with much needed gains, thereby mitigating the overall damage to their portfolios. During the tech wreck of the early 2000s, a balanced portfolio that was 60 per cent weighted in the S&P 500 and 40 per cent weighted in seven- to 10-year U.S. Treasuries declined 16.41 per cent, as compared with a fall of 42.46 per cent for the all-stock portfolio. In the global financial crisis (GFC) of 2007-2009, the balanced portfolio lost 23.92 per cent versus a loss of 45.76 per cent in equities. The ZIRP era and the erosion of bond powers During the GFC, central banks entered hyper-stimulus mode to stave off a collapse of the global financial system and avoid a worldwide depression. ZIRP (zero interest rate policy) stances became the norm for monetary authorities around the world, with rates remaining at historically low levels for the next 14 years. Although stimulative policies were successful in making the recession less severe than would have otherwise been the case, they also robbed bonds of their two key attributes. First, high quality bonds ceased to offer reasonable yields. Second, ultra low rates also limited the ability of bonds to provide capital gains during times of equity market turmoil, thereby hindering their diversification value. In 2016, Pacific Investment Management Co. co-founder and 'Bond King' Bill Gross commented that to repeat the bond market's 7.5 per cent annualized return over the past 40 years, yields would have to drop to negative 17 per cent. The math just didn't work. A clear warning sign As the saying goes, 'Hindsight is 20/20.' It is easy to understand what should have been done after an event has already happened, even if it was not obvious at the time. However, market behaviour during the COVID crash offered a clear warning that all was not well in bond land. The accompanying table compares countries by their pre-pandemic short-term rates and the returns of their 10-year government bonds during the subsequent bear market. There is a near perfect relationship across countries in terms of where their short-term rates stood prior to the pandemic and the subsequent return of their 10-year bonds. In the countries that initially had relatively high short-term rates, such as the U.S., Canada and Norway, 10-year bonds produced substantial gains and mitigated the damage caused by the vicious decline in stocks. In countries that started with rates that were neither relatively high nor low, such as the U.K. and Australia, 10-year bonds provided some, albeit lower, amounts of protection. Lastly, in countries that started with the lowest rates, such as Sweden, Japan, Germany and Switzerland, not only did government bonds fail to mitigate stock losses but their returns actually declined. Given the strong correlation between where pre-COVID rates stood in different countries and the subsequent ability of their bond markets to offset stock market losses, it was clear there was little, if any, gas left in the tank in the post-COVID world of zero rates, leaving investors largely unprotected. From hedge to Texas hedge Post-COVID, not only did ultra-low rates obliterate the insurance value of bond holdings, but the unprecedented amounts of monetary and fiscal stimulus that had been injected into the global economy left bonds particularly vulnerable to capital losses. Against this backdrop, when the rubber of stimulus hit the road of inflation in early 2022, central banks were forced to raise rates at a clip not seen since the Volcker era of the 1980s, resulting in painful declines in bond prices. Canadians snap up most U.S. bonds since 2023 TD Bank uses automation to trade more bonds In livestock trading, a Texas hedge refers to a scenario where cattle ranchers buy cattle futures contracts despite already owning cattle, thereby doubling their risk exposure. In 2022, when fears of a Fed-induced recession caused stock prices to tank, bonds not only failed to provide diversification but acted as a Texas hedge, declining alongside stocks. From early August 2020 through late October 2022, the Bloomberg U.S. Aggregate Bond index suffered a peak-trough loss of 18.5 per cent. Bonds are back in the game Following the most significant rate hiking cycle in decades, bonds are once again 'back in the game.' They offer reasonable yields, thereby restoring their prospects for delivering moderate returns, decreasing their risk and enhancing their diversification value. Given these resurgent qualities, bonds once again constitute a valuable component of many investors' portfolios. Noah Solomon is chief investment officer at Outcome Metric Asset Management LP. _____________________________________________________________ If you like this story, sign up for the FP Investor Newsletter.
Mint
04-07-2025
- Business
- Mint
Wall Street worries as crisis-level deficits become the government's default mode
U.S. budget deficits were already approaching $2 trillion when Republican lawmakers set out to extend and expand tax cuts this year. Interest rates were high and the bond market was jumpy, producing worrying spikes in borrowing costs. Republicans forged ahead anyway, defying warnings from Wall Street to Washington that they were pushing the country further down a dangerous fiscal path. On Thursday, the House voted in favor of the sprawling tax-and-spending bill that was passed on Tuesday by the Senate. The resulting legislation headed for President Trump's desk adds $3.4 trillion to federal deficits through 2034 compared with a scenario in which Congress did nothing, according to the Congressional Budget Office. The extent of the projected shortfall increased as the measure worked its way across Capitol Hill, as the Senate made some business tax breaks permanent. Economists, investors and politicians have often warned that the U.S.'s growing debt burden would punish future generations. The market has been willing to tolerate spikes in borrowing during crises such as a war or Covid, seeing it as a logical, and temporary, response to a sharp growth slowdown. What stands out now to those sounding the alarm the loudest is that America is bingeing on debt when there's no such emergency requiring it. The deficit as a share of the economy is already around the levels reached in the era of the 2008 financial crisis and the pandemic. Many investors are concluding that financial profligacy isn't a bug, but rather a feature of U.S. policymaking. 'The government is like a teenager with a credit card that has no limits until it has to be paid," said Bill Gross, founder of Pimco. ''Payment due' comes not with default but with a weak dollar and higher interest rates." Trump and his GOP backers in Congress dismiss those bleak projections and, armed with their own budget math, paint a very different fiscal reality. They say tax cuts will accelerate growth and, along with new tariffs and heavy cuts to social programs such as Medicaid, will actually put the nation on sounder financial footing. The long-term verdict might be rendered in U.S. bond markets. The U.S. borrows money by issuing Treasurys, and an oversupply of those bonds would drive up yields, which rise when prices fall. Because interest rates on other debt are linked to Treasury yields, that would also lift costs on mortgages, car loans and corporate bonds. The market has been calm lately. But it has sent warning flares about the fiscal trajectory, most recently in May when yields on 30-year bonds climbed close to a two-decade high. Some investors, meanwhile, are concerned that massive debt projections are weighing on the dollar, which just posted its biggest first-half decline since 1973. The deficit, or annual gap between government revenue and spending, was $1.8 trillion, or around 6% of gross domestic product, last fiscal year. Moody's estimates it will reach nearly 9% of GDP by 2035, pushing publicly held federal debt—or the sum of all the annual shortfalls—from a little under 100% of GDP now to more than 130%. That compares to the previous record of 106% in 1946. Ken Rogoff, a Harvard University professor and former chief economist for the International Monetary Fund, said the U.S. is leaving itself little room to go on a borrowing binge when it really needs to. 'We typically look to borrow 20% or 30% of GDP in these big crises," he said. 'It's not clear markets will tolerate that." Even if Congress wasn't adding new tax cuts this year, federal debt would grow from around $29 trillion to $50 trillion in 2034, according to the CBO. The bill's advance, though hardly unexpected on Wall Street, has dimmed budget hawks' already modest hopes that lawmakers would make deficit reduction more of a priority. Ray Dalio, founder of Bridgewater, warns that staying on the current path will ultimately lead to some mix of a bond-market slide, a severe economic contraction or an inflation-fueling intervention by the Federal Reserve. The GOP bill 'reflects a political system that favors indulging voters over prudence," he said. Trump says skyrocketing growth will avert any downsides. 'For all cost cutting Republicans, of which I am one, REMEMBER, you still have to get reelected," he wrote in a social-media post shortly before senators began voting on the bill earlier this week. 'Don't go too crazy! We will make it all up, times 10, with GROWTH, more than ever before." Members of Congress during the House vote on Thursday. The U.S. government borrows money to pay for the shortfall between what it collects in taxes and what it spends on programs, such as defense and Social Security, by issuing Treasury securities that mature over varying periods of time. Buyers of this debt range from foreign banks to hedge funds to everyday investors. In principle, Treasurys are subject to the forces of supply and demand, like any other item. If the government issues more Treasurys than investors want or need, it will need to win them over with higher interest rates. If investors are worried about that happening in the future, they will likely sell bonds now, causing an immediate jump in yields. Treasurys, though, have long been viewed as the ultimate safe investment, especially in rocky economic times, because they are backed by the world's richest country and are effectively guaranteed to be repaid at maturity. That has historically kept America's borrowing rates in check, even as the volume of debt grew. Yet deficit worries still go back a long way, in government and on Wall Street. Peter Peterson, the late co-founder of the Blackstone Group who also served as President Richard Nixon's secretary of commerce, became concerned when planning for a talk on President Ronald Reagan's budget in 1981. Its big increase in defense spending and substantial tax cuts didn't make sense to him, and he was especially worried about the looming costs of Social Security and other entitlement programs. 'To put the matter bluntly, Social Security is heading for a crash," he wrote in a 1982 essay so long that the New York Review of Books split it into two parts. That same year, Salomon Brothers chief economist Henry Kaufman, known as Dr. Doom for his pessimistic forecasts, warned that proposed tax cuts and the resulting deficits would effectively block recovery from an ongoing recession. Worries about the deficit flared up regularly in the decades that followed—taking a break in the 1990s when the Clinton administration briefly engineered a surplus. But the concerns were little more than minor impediments to a long bull market in bonds that dragged Treasury yields steadily lower. Rogoff, the Harvard professor, who with Carmen Reinhart wrote the 2009 book 'This Time Is Different: Eight Centuries of Financial Folly," has long argued that high levels of debt can weigh on growth. A 2012 paper he wrote with Reinhart and her husband, Vincent Reinhart, found that for advanced economies since 1800, debt levels above 90% of GDP corresponded to significantly lower levels of growth. The U.S. shot past that 90% threshold when the government spent massively in its efforts to bolster the economy during the pandemic. The overall level of America's GDP is significantly higher than what forecasters on the eve of the pandemic expected it would be in 2025, but Rogoff still thinks that at some level deficits matter. 'The appetite for U.S. debt may be very large, but it's clearly not infinite," he said. The Department of Treasury building in Washington. Nearly a third of publicly held U.S. debt is owned by foreigners, including foreign central banks. If they start worrying more about America's large debt load, they could become less willing holders. A wholesale dumping of U.S. debt by foreigners—a doomsday scenario—is extremely unlikely, according to Jeremy Stein, a Harvard economist who was a Fed governor from 2012 to 2014. 'But I wouldn't be surprised if, over the next couple of years, as their portfolios roll off and they have to reinvest, they start shifting that reinvestment more towards, say, Europe or German bonds," he said. Stein also worries that as the supply of Treasurys increases, hedge funds will become even bigger players in the market for U.S. debt. That could raise the odds of market disruptions, because fast-money traders occasionally run into problems that force them to sell. A mix of factors has created the current fiscal imbalance, including recessions, an aging population and rising federal assistance to households. Those spending policies were largely championed by Democrats. Republicans, meanwhile, have led the charge in cutting taxes. This year's budget negotiations revealed fissures among Republicans, with some expressing more concern about deficits than others. With the 2017 tax cuts set to expire at the end of the year, many in the party argued that an extension shouldn't count as a deficit increase because it was merely a continuation of current policy. Others, though, opposed that approach, citing concerns about national debt. House conservatives, led by Reps. Jodey Arrington (R., Texas) and Lloyd Smucker (R., Pa.), along with others such as Rep. Chip Roy (R., Texas), forced the House's budget framework to link tax cuts and spending cuts, with no more than a $2.5 trillion gap between them. By that approach, if the House could find $2 trillion in spending cuts, it could have $4.5 trillion in tax cuts. If it could only find $1.5 trillion, the tax cuts would have to shrink, too. 'We can't continue to have quote, a free lunch, by just saying that every single tax cut pays for itself," Roy said in an April interview. The House, on May 22, passed a version of the tax bill that adhered to those demands. CBO estimated that it would cost $2.4 trillion over a decade. In June, 38 Republicans led by Smucker signed a letter saying they wouldn't support legislation coming back from the Senate that violated their framework. Doing so, they wrote, 'would invite higher borrowing costs and undermine the economic growth that Americans need." In the end, though, it is estimated the Senate's version of the legislation would add $1 trillion more to the deficit over the next 10 years than the House bill—well above what those House Republicans said they would accept. All of them voted for it anyway on Thursday. Johnson showed the tally of the vote in the House on Thursday. The question of how much deficits matter ultimately depends on the bond market—and the corresponding effect on borrowing costs for businesses and consumers. Worries about government borrowing have already caused a couple of selloffs in Treasurys over the past two years. One came two summers ago, when the Treasury Department announced that it would need to borrow more than investors had expected in the coming months. Another occurred in May, after Moody's became the last major ratings firm to downgrade the U.S. to below triple-A. In both cases, the selloffs were temporary. Bond prices rebounded and yields fell, suggesting to some analysts that investors are only sporadically worried about deficits. Others, though, note that yields on longer-term Treasurys, in particular, are higher than what would be expected based just on the projected path of short-term rates set by the Fed. That extra yield, known on Wall Street as a term premium, can only be estimated. But one popular estimate, published by the Federal Reserve Bank of New York, indicates the premium for the 10-year Treasury note has reached its highest level since 2014. Deficits are 'absolutely at the back of anybody's mind who's buying anything" other than the shortest-term Treasurys, said Priya Misra, a fixed income portfolio manager at J.P. Morgan Asset Management. 'You have to think about how much you want to get paid up for a fairly unsustainable debt trajectory." Deficits are still not the biggest influence on yields, which are largely determined by economic data and investors' expectations for Fed policy. A run of mild inflation data has helped bring yields lower recently. Investors also say that the Trump administration has ways it could mitigate the impact of deficits on the market. The most meaningful is its ability to lean more on ultrashort-term debt to meet coming borrowing needs, thereby minimizing pressure on longer-term bonds, which matter more for consumer and business borrowing costs. The administration has strongly suggested it intends to do that by leaving the sizes of longer-term debt auctions unchanged at least through the end of the year. When it does come time to increase auction sizes, many analysts expect the Treasury Department to mostly focus on debt that matures in just two to seven years. If demand is stronger for shorter-term bonds, it makes sense to 'just give the investors what they want," said Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets. Write to Sam Goldfarb at and Justin Lahart at
Yahoo
26-06-2025
- Business
- Yahoo
Legendary fund manager issues stock market prediction as S&P 500 tests all-time highs
Legendary fund manager issues stock market prediction as S&P 500 tests all-time highs originally appeared on TheStreet. It's been a remarkable ride since President Donald Trump announced widespread tariffs on April 2. Trump's so-called 'Liberation Day' announcement included harsher tariff rates than hoped, forcing investors to rethink their expectations for the U.S. economy. There's evidence that a U.S. economic slowdown is underway, and despite tariff negotiations, tariffs could still push the economy into stagflation or recession. The economic risk raises questions over what's likely to happen to stocks, which usually perform best when a humming economy fattens wallets, allowing households and businesses to ramp up spending. The post-Liberation Day stock market drop lopped 19% and 24% off the S&P 500 and Nasdaq Composite, respectively, from all-time highs in decline was concerning, but "buy the dip" investors took advantage, boosting buys into extremely negative sentiment with most measures flashing "oversold." Since April 9, when President Trump paused most reciprocal tariffs that had been announced on April 2, the S&P 500 and Nasdaq 100 have rocketed higher, gaining 22% and 30%. The returns have been so significant that major market indexes, including the benchmark S&P 500, are flirting with all-time highs again, prompting veteran Wall Street bond manager Bill Gross to chime in with an updated outlook. Gross has been navigating good and bad markets since 1971. He is the co-founder of Pacific Investment Management Co., or PIMCO, a Goliath money manager with $2 trillion under management. His former role atop the $270 billion PIMCO Total Return Fund earned him the 'Bond King' moniker before he left to join Janus Henderson Investors from 2014 to 2019. Given his long track record, investors may want to pay attention to what he's thinking happens next. Many are debating what may happen to the economy next. Some believe that tariffs will tax already cash-strapped consumers later this year, slowing economic activity, as businesses also crimp spending awaiting trade deal insight. Others think tariff risks are fleeting and overblown. The jobs market remains healthy, given that unemployment is relatively low at 4.2%. However, the unemployment rate was 3.4% in 2023, and companies have announced over 696,000 layoffs this year, including 93,816 job cuts in May, up 47% year over year, according to Challenger, Grey, & weakening jobs market prompted the Federal Reserve to cut interest rates by 1% last year; however, it has since gone to the sidelines, pausing further cuts, over fear that more reductions could fuel inflation, particularly given that the tariff impact is only beginning to be felt by consumers and businesses. The dilly-dallying on monetary policy has prompted sharp criticism, though, including from the White House. Ostensibly, recognizing that tariffs may slow GDP and worsen unemployment, President Trump has threatened to fire Fed Chair Jerome Powell, and his Director of the Federal Housing Finance Agency, William (Bill) Pulte, has called for his resignation. If the economy cools and the Fed is unwilling to budge on interest rates, Congress may not be able to help, given that the country's huge deficit and mountain of debt are impacting fiscal policy. America's deficit exceeds $1.8 trillion, accounting for 6.4% of gross domestic product. At the same time, total public debt outstanding is roughly 122% of GDP, far higher than its 75% level in 2008 during the Great Recession. The economic backdrop threatens earnings growth, but the stock market has so far looked beyond the risks, assuming that trade negotiations will bear fruit, inflation expectations will retreat, and corporate earnings will continue growing, rather than ratchet lower. The fact that Bill Gross has been tracking Wall Street for over 50 years means he's seen plenty of stock market pops and drops, including the Nifty 50, skyrocketing inflation in the 1970s, the S&L crisis in the late 80s and early 90s, the Internet boom and bust, the Great Recession, Covid, and the 2002 bear market. More Experts Fed official sends strong message about interest-rate cuts Billionaire fund manager sends surprising message on trade deficit Hedge-fund manager sees U.S. becoming Greece In short, Gross has been-there, done-that, so his take on markets is worth paying attention to. He doesn't see much reason to be a buyer of US Treasuries. Many turn to Treasuries as a safe haven amid economic or geopolitical worry. Given the economic risks listed above, the ongoing Russia/Ukraine War, and a dust-up in the Middle East, we certainly have that. Yet, Treasury yields haven't made much progress lower (remember yields fall when bond prices rise and vice versa). Gross doesn't think there's much incentive for them to fall much further. "Long-term research indicates US 10 year has traded at CPI plus 175," wrote Gross on X. "With inflation at 2.5% that puts a 10 year at 4.25% or so. That was history — but deficits/ensuing supply of bonds/and a weak dollar should keep CPI from falling below 2.5% and the 10-year from falling below 4.25%." The 10-year Treasury note yield is currently 4.29%. As a result, he predicts a "little bear market for bonds." With little incentive to shift portfolios towards Treasuries for gains, what does that mean for stocks? "Stocks are AI-dominated and continue to suggest 1-2% economic growth despite tariffs and geopolitical unrest," wrote Gross. "I suggest a 'little bull market' for stocks." Undeniably, artificial intelligence stocks continue to win favor with investors as companies big and small look for ways to exploit it for profit growth. After a pause earlier this year, technology stocks have turned it on lately. The SPDR Technology ETF () is up about 8% in June alone, and unlike the S&P 500, it has already notched a new all-time high. That said, don't get too excited. Gross doesn't seem to expect much more upside than we've already witnessed. "Nothing dramatic either way for now," concluded fund manager issues stock market prediction as S&P 500 tests all-time highs first appeared on TheStreet on Jun 25, 2025 This story was originally reported by TheStreet on Jun 25, 2025, where it first appeared. 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
Yahoo
26-06-2025
- Business
- Yahoo
Why the tech trade has more room to run even as the Nasdaq 100 hovers at all-time highs
UBS said investors should stick with tech even as the sector barrels past all-time highs. In the bank's view, AI adoption is still in its early stages and the boom will carry tech higher. "Accelerating AI use is set to drive further monetization across industries," UBS says. The Nasdaq 100 reached a new peak this week, but there's no reason to expect the booming tech trade to take a breath, UBS wrote this week. As President Donald Trump announced a ceasefire agreement between Israel and Iran, the tech-heavy index coasted to a record closing high on Tuesday. The Nasdaq's recent gains have been propelled by rallies in top chip makers like Advanced Micro Devices, Broadcom, and Nvidia, three artificial intelligence leaders that have spent the last month moving steadily higher. These companies' ability to withstand volatile market conditions and continue making progress has caught the attention of top commentators. Investor and former Pimco exec Bill Gross recently predicted a "little bull market" for stocks, citing the dominance of the AI market. Now, UBS says investors should stick with the tech trade, as the AI party is still just kicking off and AI adoption is accelerating. Citing data from a recent Census Bureau survey on the use of AI in the workplace, UBS said use of the technology is rising steadily. "AI adoption rates rose to 9.2% in the second quarter of this year, from 7.4% in the previous three-month period and 5.7% in the December 2024 quarter," states the report. "This means AI adoption is likely to soon cross the 10% threshold that took US e-commerce 24 years to reach." UBS highlights the example of Amazon Q, a virtual assistant powered by generative AI that is reportedly "saving around USD 260mn every year through coding assistants." It also notes that 20%-30% of Microsoft's coding is completed by AI and that PayPal uses AI to handle 80% of its customer service interactions. In addition, the report highlights the benefits of utilizing AI in healthcare. Its authors note that it has proven highly effective in areas such as detecting abnormal tissues that might have previously been overlooked. All of this suggests that AI adoption is likely to increase in the near future, paving the way for the sector's leading stocks to continue rising. "We believe a peak in overall AI adoption is still a long way off, and accelerating AI use is set to drive further monetization across industries," UBS states. Read the original article on Business Insider 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
Yahoo
26-06-2025
- Business
- Yahoo
Why the tech trade has more room to run even as the Nasdaq 100 hovers at all-time highs
UBS said investors should stick with tech even as the sector barrels past all-time highs. In the bank's view, AI adoption is still in its early stages and the boom will carry tech higher. "Accelerating AI use is set to drive further monetization across industries," UBS says. The Nasdaq 100 reached a new peak this week, but there's no reason to expect the booming tech trade to take a breath, UBS wrote this week. As President Donald Trump announced a ceasefire agreement between Israel and Iran, the tech-heavy index coasted to a record closing high on Tuesday. The Nasdaq's recent gains have been propelled by rallies in top chip makers like Advanced Micro Devices, Broadcom, and Nvidia, three artificial intelligence leaders that have spent the last month moving steadily higher. These companies' ability to withstand volatile market conditions and continue making progress has caught the attention of top commentators. Investor and former Pimco exec Bill Gross recently predicted a "little bull market" for stocks, citing the dominance of the AI market. Now, UBS says investors should stick with the tech trade, as the AI party is still just kicking off and AI adoption is accelerating. Citing data from a recent Census Bureau survey on the use of AI in the workplace, UBS said use of the technology is rising steadily. "AI adoption rates rose to 9.2% in the second quarter of this year, from 7.4% in the previous three-month period and 5.7% in the December 2024 quarter," states the report. "This means AI adoption is likely to soon cross the 10% threshold that took US e-commerce 24 years to reach." UBS highlights the example of Amazon Q, a virtual assistant powered by generative AI that is reportedly "saving around USD 260mn every year through coding assistants." It also notes that 20%-30% of Microsoft's coding is completed by AI and that PayPal uses AI to handle 80% of its customer service interactions. In addition, the report highlights the benefits of utilizing AI in healthcare. Its authors note that it has proven highly effective in areas such as detecting abnormal tissues that might have previously been overlooked. All of this suggests that AI adoption is likely to increase in the near future, paving the way for the sector's leading stocks to continue rising. "We believe a peak in overall AI adoption is still a long way off, and accelerating AI use is set to drive further monetization across industries," UBS states. Read the original article on Business Insider
