What to Do When Interest Rates Rise

Last year, when the Federal Reserve realized that the inflation, which was earlier thought to be “transitory,” might be feeding on itself and soon spiral out of control, it acted swiftly to respond with an aggressive interest rate hike cycle, one of the quickest on record.

As a result, we have gone from living in a world of virtually free money, marked by a target federal funds rate of 0% to 0.25%, for more than 12 years since the global financial crisis to a world of constricted credit, with a target rate at 4.50% to 4.75%, the highest since 2007.

Right on cue, the market and economy responded to the end of the era of easy money with withdrawal tantrums. Although the Fed has been able to bring down CPI inflation from a 40-year high of 9.1% in June 2022 to 6.4% in January 2023, it has come at the cost of increased market volatility, stressed margins due to increased borrowing costs, and bank runs due to bond price devaluations.

Given that the federal funds rate appears to be nothing short of a force of nature for the capital markets and the economy at large, its deeper understanding would serve market participants well.

What is the Federal Funds Rate?

The federal funds rate is the interest rate that banks charge other institutions for lending excess cash to them from their reserve balances on an overnight basis.

Legally, all banks are required to maintain a percentage of their deposits as a reserve in an account at a Federal Reserve bank. This mandated amount is known as the reserve requirement, and compliance of a bank is determined by averaging its end-of-the-day balances over two-week reserve maintenance periods.

Banks, which expect to have end-of-the-day balances greater than the reserve requirement, can lend the surplus to institutions that expect to have a shortfall.

The Federal Open Market Committee (FOMC) guides this overnight lending of excess cash among U.S. banks by setting the target interest rate as a range between an upper and lower limit. This target interest rate is called the federal funds rate. Continue reading "What to Do When Interest Rates Rise"

Are We Better Off Today Than Two Years Ago?

Two weeks from now Americans will head to the polls to vote in what has been billed as “the most important election of our lifetime.” That may be a bit of hyperbole, but it will no doubt be one of the most important – maybe not as important as the previous one in 2016, but certainly a close second.

Since then, there have been some huge changes in the financial markets and the economy, nearly all of them wildly – and demonstrably – positive. CNBC was nice enough to quantify them the other day in this chart, and the numbers are startling.

I’ll just mention a few:

  • S&P 500: Up 32% since the 2016 election.
  • Average hourly earnings: Up 5%, to $27.24 from $25.88.
  • Nonfarm payrolls: up 4.4 million, to 149.5 million from 145.1 million.
  • Unemployment rate: 3.7%, down from 4.9%.
  • Consumer confidence: up 37 points, to 138 from 101.
  • Corporate tax rate: 21%, down from 35%.
  • Assets held by the Federal Reserve: down 6%, to $4.22 trillion from $4.52 trillion.

Needless to say, there have been some negatives: Continue reading "Are We Better Off Today Than Two Years Ago?"

Don't Bet On Crises To Keep Bond Rates Lower

Despite the recent dip in the 10-year Treasury note yield back below 3%, don’t count on it staying there. Lately, it seems, the only thing keeping the rate below that level is some sort of international crisis – Italy, North Korea, trade wars, etc. But the basic fundamentals determining that rate – economic growth and supply and demand, in other words – are calling for even higher rates, well above 3%.

On the supply side, more Treasury debt is coming to market all the time, like an incoming tide in the Pacific Ocean. On the demand side, there are fewer buyers – and I mean big buyers. More about that in a minute. At the same time, the economy is growing stronger, which by itself is going to put upward pressure on rates.

In other words, if you’re betting that the 10-year yield is going lower, or will stay around or below 3%, you’re really only holding it as a safe haven. Nothing wrong with that, lots of investors do that. But if you’re hoping to profit when something in the world goes wrong, you may be playing a losing game.

First the economy. Last week on CNBC’s Squawk Box, the gold dust twins, Warren Buffett and Jamie Dimon, tried to outdo themselves in how great the U.S. economy is performing. Continue reading "Don't Bet On Crises To Keep Bond Rates Lower"

Uncle Sam's Bargain Bonds

George Yacik - INO.com Contributor - Fed & Interest Rates - Uncle Sam's Bargain Bonds


According to a widely reprinted and circulated report in the Wall Street Journal, for the first time since 2000, U.S. government bonds now yield more than all of their developed world counterparts. Looking just at the 10-year security, the yield on the benchmark Treasury note now yields more compared to a record number of countries, and the yield differential between the U.S. government note and its German bund counterpart is its widest in almost 30 years.

Basically, this means that the arguably safest investment available anywhere in the world – the one American business schools still hold up as a “riskless” benchmark – yields way more than most other sovereign debt, including Italy’s, Canada’s and Australia’s – but no, not Greece’s, although they’re not too far off.

Let’s look at the numbers. Continue reading "Uncle Sam's Bargain Bonds"

That Elusive 3 Percent Yield

George Yacik - INO.com Contributor - Fed & Interest Rates - 3 Percent Yield


On Wednesday morning, the yield on the benchmark 10-year Treasury note moved back over 3%. In just the past five years, though, that has only happened twice before, but then only for a day or so. Is this the time the yield breaks 3% and stays there?

The most recent time before Wednesday, of course, was just two weeks ago. On April 24 the yield moved a hair above 3.0%%, then hit 3.03% the next day. It then quickly retreated below the magic number and hasn’t gone above it until now.

Before then, the last time the yield hit 3% – and I mean just – was at the very end of 2013 and the very beginning of 2014. It hovered right at 3% for a few days and then subsequently dropped sharply, eventually falling to well below 2.0% over the next year. The last time the note has been comfortably over 3% and remained there, was back in the summer of 2011.

What is it about that 3% mark that fixates investors – or rather, attracts them? Just like in 2013, that 3% figure seems to serve as a buy signal for investors.

Are they making a mistake? Is it really a buying opportunity, or just a bond market head fake? Continue reading "That Elusive 3 Percent Yield"