by Bryan Perry
August 13, 2024
The backdrop for being invested in floating rate assets for the past two years has been ideal. The Fed funds rate was near zero in early 2022. From there, 11 rate hikes followed in the order noted below:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The cause of this series of historically robust rate increases was a surge of stubborn (i.e., non-transitory) inflation fueled by several substantial stimulus programs by the federal government, which initially allocated $4.5 trillion in COVID-19 relief funds from the CARES Act, Consolidated Appropriations Act and the American Rescue Plan. Then, despite a robust recovery, we got an Inflation Reduction Act ($369 billion), CHIPS And Science Act ($280 billion) and Jobs Act ($550 billion), bringing the total to $5.7 trillion spent or yet to be spent – sending the federal deficit to the moon.
At first, the Fed got way behind the inflation curve by holding rates near zero far too long, then they held rates “higher for longer.” Now, they have probably waited too long to start the easing process, given the weaker trends in labor, manufacturing, and a noticeable decline in travel this summer. As the post COVID phenomenon of “revenge travel” wanes, consumers are taking a more cautious approach due to a rising sense of an economic slowdown in the making (source: Deloitte.com’s “2024 travel outlook”).
The bond market has wasted no time in making up its mind that the recent data says that disinflation is now at work, most notably laid out in the latest inflation data (CPI, PPI and PCE) for June. This week, investors will receive the CPI and PPI for July, both of which are expected to come in at just 0.2%.
Looking forward, the headwind for bond yields is not so much deflation, but for insuring demand for the ongoing record debt issuance of U.S. Treasuries to fund our soaring spending and budget deficits.
To put this into perspective, over the past year, the national debt has increased by $2.41 trillion, which translates into to $6.6 billion in red ink each day. As of July 31, 2024, the total national debt has surpassed $35 trillion. Put another way, over the last decade, our national debt rose 86%, while GDP grew 63%.
Conquering the inflation of goods and services is one thing, but creating a potential scenario of economic fallout from the risks of failed bond auctions is unacceptable. The monthly debt totals are charted below:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This debt surge should alarm taxpayers and policy makers alike. However, neither major candidate running for the Presidency seems to be aware of the intense fiscal discipline required to avert what the Congressional Budget Office (CBO) sees of investors in Treasuries losing confidence in the government’s ability to manage its budget, leading to Treasury auctions with fewer bidders, causing a sharp rise in rates. While that risk is currently low, the threat of such a scenario would rise if deficit spending isn’t addressed.
Investors who wish to draft a fixed income portfolio apart from Treasury risk might consider investment grade corporate bond ETFs, building a laddered portfolio. Investing in Fortune 500 debt is arguably a better option than relying on more hyper-indebted government debt, which shows no sign of resolution.
Laddered bond ETFs are offered by several firms for companies with strong debt ratings, diversification, attractive yields and monthly payments that make for an attractive investment proposition. The Invesco Bullet-Shares is an example of laddering maturities over 10 years while locking in a return of around 5%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
No one can really know if and when the Treasury market will offer debt issues that face waning demand not meeting future supply expectations. For now, however, a blend of Treasuries and investment grade corporate bonds might make sense to those seeking safe haven assets managed by America’s strongest companies with fortress balance sheets. With the Fed on track to lower interest rates, it is no surprise that blue-chip debt is under accumulation and will likely continue to be so throughout 2024.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Look to Japan for the Cause of the Latest Volatility
Income Mail by Bryan Perry
A Rotation into Corporate Debt is Underway
Growth Mail by Gary Alexander
The Perma-Bears are Roaring Again
Global Mail by Ivan Martchev
A Dramatic Increase in Yen Correlations
Sector Spotlight by Jason Bodner
August is Market Extinction Month
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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