Whither US Interest rates? - The 2015 update

With Kevin Richards

Sunday, February 01, 2015    

IF you like bonds, then the direction of key interest rates is a factor to watch.

About 18 months ago, I wrote in this space about where I expected US interest rates to end up in 2014.

What I wrote back then was “What is true also is that the days of 1-handle benchmark interest rates are over. Where the consensus lies is that yields will remain over 2.50 per cent p.a. on 10-year US Treasury rates and could break the three per cent threshold before year end. This is largely driven by a market response to the likely action of the Fed, which in our view has been largely exaggerated and ignores the trends in inflation and unemployment rates. For the Fed to make a more aggressive move with tapering, the economy would not only have to beat analysts’ expectation on jobs growth, but needs to be roughly twice the current pace of job creation. Expect rates to continue fluctuating within this new band, so aggressively seek out bonds with appropriately risk adjusted returns.”

Let’s start with the upside. The 10 Year US Treasury yield ended 2013 at 3.03 per cent, actually breaking the three per cent threshold as predicted. For the first three quarters of the year I was correct, the rate hovered within the 2.50 per cent to three per cent band and fell once tapering had ended to close the year at 2.17 per cent moving in the opposite direction of where most market analysts, including myself, had expected.

The Fed noises and the release of economic data have not created the expectation that the Fed is likely to raise interest rates anytime soon, forcing analysts to defer their rate hike expectation to as late as second quarter 2015. Who would have thought that in 2015 we would be back to “one-handle” interest rates on US treasuries, while the unemployment rate stands at 5.6 per cent versus 7.5 per cent in July 2013? The 10 Yr yield rallied on Wednesday after the FOMC meeting closing the day at 1.72 per cent or levels not seen since May 2013.

What has largely been driving treasury yields is the constant combing of the Federal Open Market Committee’s (FOMC) language after a meeting to get a clear enough read of where the Fed Governors have their heads. The use of terms such as “moderate” or “solid” have sent analysts into overdrive trying to predict when the Fed is likely to increase Fed funds rate, but everything has to be taken into context.

Economic Growth

The US economy recorded an annualised growth rate of five per cent in the third quarter of 2014, the highest in nearly 11 years and double that recorded two years prior. This has largely been driven by consumption and investment spending increases. This performance seems to have been sufficient enough for the Fed to upgrade its assessment of economic activity from “moderate pace” at the December 2014 meeting to “solid pace” by the January 2015 meeting.

The decline in oil prices has contributed to the boost in personal consumption spending because of the rise in purchasing power. While businesses are also increasing their investments, they may not be doing so at an aggressive pace, but consistent enough for the Fed’s comfort.

The big clincher is in the housing market. Although US housing starts are more than 25 per cent higher than in July 2013 and at the highest level in the last six and a half years, the pace of growth is slow but steadily inching back to pre-crisis levels. You may recall that one of the main objectives of quantitative easing (QE) was to kick-start housing, so the expectation for housing performance is high.

In my view, slow and steady is not sufficient to get a rise in interest rates out of the Fed just yet, especially with moderating trends developing.

Inflation

A little inflation goes a long way to spur business activity, but the Fed’s target inflation rate of two per cent has not been achieved. Annual inflation in the US fell to 0.8 per cent in December 2014 from the previous month of 1.3 per cent — both well below the Fed’s target rate. The decline is largely driven by the fall in energy prices. The Fed in its January statement stated that it expects that the longer-term effect of energy price declines will dissipate along with labour market improvements over time and should tend back towards the target rate.

Global Market

One consideration that has crept into the Fed’s discourse is what it considers “International Developments”. Whereas the Fed had always considered developments in the global economy in weighing its interest rate decisions and other actions, it is interesting to note that they have now included this in their post-meeting statement.

This could be in part supported by the action of several other central banks globally, not least of them the European Central Bank, who began a wide-scale government bond-buying programme similar to the Fed’s previous action in the US.

The Fed would also be taking note of the slowing growth in economies such as China and the impact that a strong US dollar may be having on the global economy. A strong US dollar does not augur well for US exports, especially in the context of weak global aggregate demand.

In summary, the US economy, while peeking at the edge of the forest, is still not out of the woods.

The ever dynamic global environment in which we live brings to the table new considerations that could influence the decision to hike rates.

The slow pace of growth in the housing market coupled with the threat to US exports and the business environment from a strong dollar and weak global economy is sufficient enough to give the Fed pause.

While the Fed’s language is still intimating a rate hike by second quarter 2015, I believe that the hike is likely to happen much later in the year. With all that said, welcome back to the period of one-handle rates. Let’s see how long before it outlives its welcome.

Kevin Richards is Vice President, Sales and Marketing at Sterling Asset Management Ltd. Sterling is a licensed securities dealer and provides investment management and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: info@sterlingasset.net.jm or visit our website at www.sterling.com.jm.

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Whither US Interest rates? - The 2015 update

As interest rates rise and fall, equip yourself with flexible instruments

With Marian Ross

Sunday, September 28, 2014    

AS investors anticipate a rise in interest rates, the first half of the year has seen a tremendous rally in equity markets and oddly enough, in fixed income markets as well.

The 10-year US treasury (UST) yield started the year at around three per cent. Between June and September 2013, bond markets sold off as investors priced in the much anticipated interest rate hike.

However, today the yield on the 10-year UST is hovering in the 2.5 per cent range. This could be attribtued to many different things, chief among them the rise in geopolitical tensions in Eastern Europe and the Middle East, as well as the weak performance of the Eurozone economies.

Whatever the cause, investors must equip themselves with instruments and strategies that are dynamic and flexible.

Today we will take a closer look at fixed income instruments that may be very useful during times of rising interest rates. These instruments combine features of debt and equity in order to give investors exposure to the upswing in the equity markets, but also provide the principal safety and income of traditional fixed income instruments.

Once such instrument is an “autocallable”.

Autocallable instruments give the investor a reward if a pre-established condition is met. In most cases, the condition usually stipulates that the price of a particular asset must stay within a specified range for the reward to be dispensed. An important feature of this security is the embedded call option.

The instrument is automatically “called” (ie redeemed) by the issuer if the upper limit of the range is breached.

During the time period when the condition is not in breach and the asset price is within the stipulated range, the holder is usually paid some form of return on his principal, which can take the form of a coupon.

For example, an autocallable may be designed so that if the price of an Apple stock stays within the range of US$99 to US$200, the noteholder will receive a coupon of 8 per cent per annum.

However, should the price exceed US$200, the note will be called by the issuer. Similarly, if the price falls below US$99 on the observation date, no coupon is paid for that period.

Autocallables are usually very short in tenor and therefore help investors to reduce their duration risk.

As discussed in previous articles, staying short is important in a rising interest rate environment.

What makes an

autocallable attractive?

The coupon paid on the note and the range of price movement relating to the reference asset that is stipulated are the key features that determine the attractiveness of an autocallable note. Important questions to ask include: what is the price history of the underlying asset? When did it breach the “barriers” as identified in the terms and conditions of your note? (How often? How long ago?) What are the expectations regarding future price movement?

Be sure that you are convinced of the rationale for the potential movement (or lack thereof) in the price of the reference asset that is linked to the note.

Has a sufficiently compelling argument been presented to you to substantiate the movement that is necessary to generate the coupon payment?

Who issued the autocallable?

As an investor, you should ensure that the issuing company is capable of repaying you and honouring its obligations under the terms and conditions of the security.

For example, an autocallable issued by Barclays Bank will carry a much higher credit rating than any note issued by a local Jamaican bank. Jamaican investors can access the safety and security of the international capital markets right here at home.

When are autocallables a good buy?

It’s important to highlight that the availability of attractive autocallables is unpredictable due to the fact that they are related to spikes in the volatility of the equities market. As interest rates rise, so does volatility. The attractiveness of autocallables is a function of the prevailing environment and market behaviour. As volatility (and interest rates) rise, so will the attractiveness of autocallable instruments. Investors should look out for rises in volatility in the US equity market as a potential signal for attractive autocallables.

Benefits to investors

- Short tenors: These notes can be structured with relatively short tenors ranging from one to five years. This minimises the duration risk associated with the instrument.

- Exposure to reference assets without buying them outright: These notes allow investors to benefit from movements in the price or value of a security without having to purchase the asset outright. In cases where an investor is not comfortable with the prospect of a long term equity purchase but would still like to take advantage of price movement in the short to medium term, autocallables can facilitate this exposure.

- Hedging: For institutional investors, structured notes such as autocallables can be particularly useful because these conditions can be designed as a hedge for your existing asset portfolio / operations.

Marian Ross is Assistant vice president, business development at Sterling Asset Management. Visit our website at www.sterling.com.jm or provide feedback at: info@sterlingasset.net.jm

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As interest rates rise and fall, equip yourself with flexible instruments

Interest rates are falling

The Bank of Jamaica is reporting that during the April to June quarter, market interest rates fell marginally, reversing the trend since March last year.
This was influenced by a decline in the cost of funds in the private repo market.
There was also a decline in the average yields on Treasury Bills.
The domestic bond market remained dormant during the three months.
With regard to Treasury Bills, the fall in yields, though still elevated,reflected the impact of a slower pace of depreciation in the exchange rate, relative to the previous quarter, as well as an improvement in short-term inflation expectations.

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Interest rates are falling

LIME increases its rates

LIME has increased call rates for some international destinations.
The telecoms firm last week announced rate increases ranging from 62%, to as high as 700%.
The rate increases affects calls to Africa and Asia, but do not affect calls made to the Caribbean, USA, Canada or the UK.
LIME has also hiked rates for residential internet services.
The company said as of September 1, its cheapest residential internet package will be at cost of J$2,350 per month, to as high as J$4,000.
The rate hike does not affect its Browse and Talk plan.

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LIME increases its rates

Guyana, Suriname among countries with World’s highest suicide rates

WASHINGTON D.C., United States, Friday September 5, 2014, CMC –Two Caribbean Community (CARICOM) countries have some of the highest suicide rates in the world, according to figures released by the World Health Organization (WHO).

It said that in the Americas, the average estimated suicide rate is 7.3 per 100,000 inhabitants, which is lower than in other WHO regions and lower than the global average of 11.4 per 100,000.

“However, Guyana has the highest estimated suicide rate for 2012 in the world, and Suriname has the sixth-highest.”

The WHO said that data from the Americas show that suicide rates first peak among young people, remain at the same level for other age groups, and rise again among older men.

(Credit: WHO)

According to the WHO first global report on suicide prevention published on Thursday, more than 800,000 people around the world die from suicide every year – around one person every 40 seconds.

The WHO report titled “Preventing suicide: a global imperative” seeks to make suicide a top priority on the global public health agenda.

It has been launched a few days before World Suicide Prevention Day is observed on September 10.

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The report noted that an estimated 75 per cent of suicides occur in low- and middle-income countries.

“Unfortunately, suicide all too often fails to be prioritized as a major public health problem,” said WHO Director-General Dr. Margaret Chan.

“Despite an increase in research and knowledge about suicide and its prevention, the taboo and stigma surrounding suicide persist, and often people do not seek help or are left alone. And if they do seek help, many health systems and services fail to provide timely and effective help.”

The report notes that, globally, rates of suicide are highest in people aged 70 years and over. In some countries, however, the highest rates are found among the young.

The WHO noted that suicide is the second-leading cause of death in 15- to 29-year-olds globally.

In general, more men die by suicide than women. In countries of the Americas, rates range 2 to 6 times higher for men than for women.

It said pesticide poisoning is one of the most common methods of suicide, especially in low- and middle-income countries, and accounts for one-third of cases globally.

“The relatively high proportion of suicides by firearms in high-income countries is primarily driven by high-income countries in the Americas, where firearms account for 46 per cent of all suicides; in high-income countries outside the Americas, firearms account for only 4.5 per cent of suicides.

“Evidence shows that limiting access to the means of suicide can help prevent such deaths, as can a commitment by national governments to the establishment and implementation of coordinated plans of action,” the Who reported.

“The most important message is that suicide can be prevented, especially if we identify people at risk and intervene early,” said Dr. Jorge Rodriguez, chief of the Mental Health Unit at the Pan American Health Organization (PAHO), Regional Office for the Americas.

“People who have attempted suicide are at higher risk of attempting it again, he noted, making it important for health personnel to provide follow-up of such cases, with family and community support.”

The new WHO report identifies a series of measures that can help prevent suicide, including creating national strategies for suicide prevention; restricting access to the most common means of suicide, including pesticides, firearms and certain medicines and providing medical follow-up for people who have attempted suicide.

In addition, the WHO is advocating that countries should incorporate suicide prevention as a central component in health services, identify and treat mental health and substance abuse disorders as early as possible and that there should also be responsible reporting on suicide by the news media.

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Guyana, Suriname among countries with World’s highest suicide rates

Jump in mortgage rates hurts new home sales

WASHINGTON, USA — Americans cut back sharply in July on their purchases of new homes, a sign that higher mortgage rates may slow the housing recovery.

US sales of newly built homes dropped 13.4 per cent to a seasonally adjusted annual rate of 394,000, the Commerce Department said Friday. That’s the lowest in nine months. And sales fell from a rate of 455,000 in June, which was revised down from a previously reported 497,000.The housing rebound that began last year has helped drive economic growth and create more construction jobs. But mortgage rates have climbed a full percentage point since May. The increase has begun to steal some momentum from the market.Sales of new homes are still up seven per cent in the 12 months ending in July. Yet the annual pace remains well below the 700,000 that is consistent with a healthy market.July’s drop “may mark an uh-oh kind of moment for the housing recovery,” said Mark Vitner, an economist at Wells Fargo Securities.Homebuilder stocks declined sharply Friday, even as overall market indexes rose. Shares of Toll Brothers Inc, DR Horton Inc and Lennar Corp. — three of the largest US builders — all fell more than three per cent in afternoon trading.And major homebuilders’ shares have been dropping steadily since late May. The slide began after Federal Reserve Chairman Ben Bernanke first signalled that the Fed might reduce its bond purchases later this year. The bond purchases have helped keep mortgage rates and other borrowing costs low.The average rate on a 30-year mortgage reached 4.58 per cent this week, according to Freddie Mac. That’s up from 3.35 per cent in early May and the highest in two years.The impact on would-be buyers’ finances is significant.Take someone who locked in the early May rate on a US$200,000 mortgage. They would have a monthly payment of around US$875. But the same mortgage at last week’s average rate would cost US$1,025 a month.The difference adds up to US$150 more each month — or US$54,000 over the lifetime of a 30-year loan. The monthly figures don’t include taxes, insurance or initial down payments.Potential buyers appear to have noticed that financing a home purchase has become more expensive. The number of Americans applying for mortgages to buy homes has plummeted 16 per cent since the end of April. And builders began work on the fewest single-family homes in eight months in July.Still, mortgage rates remain low by historical standards. The same US$200,000 loan would cost a buyer US$1,330 a month at a seven per cent rate, the average since 1985.Most economists expect the housing recovery will continue, albeit at a slower pace.

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Jump in mortgage rates hurts new home sales

Sarwan rates Pooran after power-hitting display

Sport

Sunday, August 04, 2013

GEORGETOWN, Guyana (CMC) — Former West Indies middle order batsman Ramnaresh Sarwan says he was impressed with the performance of teenaged debutant Nicholas Pooran in the Limacol Caribbean Premier League (LCPL) match between Trinidad and Tobago Red Steel and Guyana Amazon Warriors on Wednesday.The 17-year-old wicketkeeper batsman for the Red Steel blasted six sixes and one four on his way to a 24-ball 54 that earned him the fastest innings award.“It was amazing to see this little guy hit the ball so cleanly,” declared Sarwan, the captain of the Warriors.“That pitch we played on was keeping low and it was difficult to get under the ball to clear the ropes. However, this young man was able to do it regularly, which was really amazing to see.”Warriors secured victory over Steel by 19 runs despite the power-hitting of Pooran, which won the hearts of the Guyanese fans.His effort provided some impetus for Red Steel who were chasing 156 for victory, but only managed 136 for nine off their 20 overs.“I was really impressed with him and I wish him all the best in the future, he is a good find for his team and very exciting to watch,” said Sarwan, who had some words of encouragement for the young player.“He would not find success as easy as to come in the future, because people will start to work him out. He has to continue doing his hard work and keeping ahead of the game in order to continue to be successful.”SARWAN… it was amazing to see this little guy hit the ball so cleanly

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Sarwan rates Pooran after power-hitting display

Former Aussie skipper rates Lara ahead of Tendulkar

Sport

Sunday, July 21, 2013

LONDON, England (CMC) — Former Australia cricket captain Ricky Ponting has rated former West Indies captain Brian Lara ahead of Indian Sachin Tendulkar as he feels the Trinidadian enabled the regional side to win more matches.Despite Tendulkar being the highest run maker in Test history, Ponting said that Lara won more games for his team.“Sachin and Lara were the two standout batsmen for me. Lara won more games for his team than Sachin probably has. I’d lose more sleep as captain knowing Lara was coming in to bat next day than I would with Sachin,” Ponting was quoted as saying by the Evening Standard newspaper.“You always found a way to restrict Sachin if you needed to. Lara could turn it on in half an hour and take a game away from you. For me, it has never been about making hundreds; it is about winning games and series.”

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Former Aussie skipper rates Lara ahead of Tendulkar