The views expressed in this column are those of the author and not SVB Financial Group.
You gotta start taking
if no one else is giving
And if you're not afraid to open your eyes
You may be pleasantly surprised
Things are never as bad as they seem
You just gotta learn to see
The forest for the trees
- Huey Lewis and the News
Many people are complaining today about low yields in the bond markets. They are complaining, that is, at the same time they are buying.
It's sometimes easy to whine and moan about various difficulties in life, but I believe if you aren't doing something to effect change, then you are probably just blowing off steam.
Not that I'm in favor of low yields — quite the contrary. I'd much rather be managing money in a 5 or 7 percent environment. (Heck, we'd even take 2 percent at this point.)
I'm just saying that if investors were really put off by low yields, they would use their funds for something else. Instead, we continue to break records for debt (public and private!) issuance, including last month's investment grade issuance topping well over $100 billion.
Why, for example, was Microsoft able to issue $1 billion of 3-year notes at a yield less than 1 percent? Because that was the clearing price; there was demand at that level. Perhaps that's the shocking part of this story.
As investors who normally remain in the shallow end of the pool and who have now moved out to the kiddie pool, we are continuously annoyed by those extreme swimmers now huddling together with us. They are driving yields lower and lower, with seemingly no matter to how much issuance there is. It's these investors who need to feel comfortable buying either longer term bonds, or reallocating back into the stock market before we will see yields "normalize."
Paula Solanes, one of our talented portfolio managers, wrote the main article for our Observation Deck newsletter this month entitled Q.E. 2.0. In this article, she correctly points out an interesting corollary to this crowding of the kiddie pool in her statement:
"However, there is no assurance that the economy will react as the Fed anticipates. Unfortunately, economics is not a precise science and exogenous factors might interfere, or counteract the Fed's actions."
In other words, we've had very low yields for a while, but they don't seem to be driving activity. Something else is affecting behavior.
I've offered many times over my view that this is a demand problem where end-consumers are in need of a significant breather and we should focus our efforts on assisting with their concerns of employment (due to a decimated jobs market) and wealth (due to a decimated housing market).
Investors see this as well. The fact that we don't seem to be making progress on this front in keeping those Michael Phelps types from ditching the kiddie pool for deeper waters.
GDP growth was revised up from 1.6 percent to 1.7 percent in the final second quarter report. Originally, the estimate was for 2.7 percent. Personal consumption expenditures and inventory investment were revised to the upside, while residential investment went down. Looking forward to the third quarter, the focus will turn to consumer spending and inventory build up to sustain growth. Expectations are for similar growth level.
Consumer spending rose 0.4 percent in August, exceeding the forecast of 0.3 percent. There has been fear that spending would slow given the stress in the housing and labor market. Consistently, consumer income rose 0.5 percent in August, the highest advance of the year, propelled by the resumption of extended and emergency unemployment benefits.
The core PCE rose 1.4 percent in August on a year-over-year basis, indicating that inflation has been benign and near the lower threshold of the Fed's long-term projections. From July to August, the core PCE rose 0.1 percent. In the most recent FOMC meeting, the Federal Reserve did comment that they thought inflation is well-contained.
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