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Do Low Treasury Yields Keep Stocks From Thriving?

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Do Low Treasury Yields Keep Stocks From Thriving?

Given that it’s normal for Treasury yields to go down as Treasury pricing goes up, one would think that low Treasury yields would be a good indication of a strong Treasury market. 

They should indicate that Treasuries—and therefore at least that corner of the stock market—are thriving. 

However, as recent evidence shows, this may simply not be the case.

The Equities Portion Of The Stock Market Did Do Better In April

In the third week of April, the S&P 500 managed to work its way up to -0.85%.

s&p

While the Dow Jones Industrial Average climbed to -1.05%. 

dow

Both were in the neighborhood of 1% from their record highs. 

This was, indisputably, a very positive sign for the equities market.

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Treasuries, While Strong, Are Not Gaining At The Same Rates As Stocks Are

Treasuries are still a desired commodity, meaning that their yields have remained almost as low as their lowest dip on Feb 11th, gaining only 50 basis points in the interim. 

This is in direct contrast to the S&P 500, which has gained 217 points since Feb 11th

s&p feb 11

Clearly, treasuries are just not keeping pace with equity gains.

With stocks doing poorly at the beginning of the year, investors were freaked and fled to the safety of Treasuries. 

But when the market began to bounce back in February, the U.S. Ten Year Treasury Note yield did not follow suit. 

In fact, it has gone through several spikes and valleys heading in a generally downward direction and landed well south of the S&P 500.

This Does Not Mean That The Low Yields Are Entirely A Bad Thing.

Yes, low yields on Treasuries can be an indicator of a spooked or depressed market. 

However, equity is currently outperforming Treasury yields, and just because Treasury yields are now being outperformed does not necessarily make them a bad investment.

Yields are still low, meaning that the government can borrow money at a very low-interest rate. 

The flip-side of this is, of course, that the government can borrow money at a very low interest rate, and there is concern that it may spend the borrowed money irresponsibly.

 Experts At The Federal Reserve Bank Of St Louis Point Out Some Benefits To Low Interest Rates In General

  • Lower interest rates makes borrowing easier. By lowering the cost of borrowing, low yields encourage companies to invest in capital goods. They also encourage individual consumers to buy items that often require loans, such as automobiles and permanent housing.
  • Banks can lend more easily.
  • Finally, asset prices can take a boost. With more access to money, people find themselves spending money on goods and services, or assets like houses or corporate equities. This increased demand, especially for the latter, leads to higher prices in these markets.

So, Low Yields Mean A Stronger Equity Market, Correct?

If Treasury bonds pull in only a very small rate of interest return, it stands to reason that investors will go for equity stocks instead.

J.P. Morgan Begs To Differ, Saying That Low Yields Are Keeping The Market Down

It claims that the same worries that pushed people to invest in treasuries to begin with are preventing them from branching back out into equities.

It also cites central bank policies, along with slow market growth to begin with, as having led to the low yields and accuses them of sustaining lower yields indefinitely.

J.P. Morgan’s Proposed Solution

Bite the bullet and very cautiously begin investing in the historically safer equities—they cite utilities, telecom, and real estate as good examples.  Without a certain amount of equity purchasing, low interest rates will yield no market growth of consequence.

They also recommend dropping cyclical stocks. 

The reason for this is the general trend of consistently low Treasury yields meaning slow market growth which will hurt these cyclicals and, by extension, those who invest in them.

In short, be a little brave and branch away from treasuries for a time.

Brad Friedlander Of Angel Oak Capital Advisors Estimates That The Situation Cannot Remain As It Currently Is.

He believes that both sectors are probably going to correct themselves.

 He suggests that equity will drop somewhat, and yields will grow somewhat leading to a compromise position for both. 

Unfortunately, that means that neither will yield spectacular results for their investors in the short term.

So What Does This Mean For The Average Investor?

It would appear that the overall market requires a balance of investments in Treasury bonds and equities. 

While Treasury bonds are very safe, they are also giving back little return on investment with such low yields at the moment. 

While equities are riskier, a certain amount of equity investment is also required for a healthy market. 

Good luck and skill with equity investment may yield higher gains than Treasury bonds. 

While no one is under any obligation to take one for the team and go into equity, pulling out of Treasury bonds for the time being would raise yields and—if J. P. Morgan is right—improve economic growth overall.

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US Federal Reserve Makes Emergency Interest Rate Cut

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US Federal Reserve Makes Emergency Interest Rate Cut

The US Federal Reserve has slashed interest rates in an emergency move to protect the world’s largest economy from the coronavirus outbreak, ramping up the global response as the disease spreads.

In a dramatic intervention as the G7 group of wealthy nations promised action around the world to protect jobs and growth amid the unfolding crisis, the US central bank said it was cutting interest rates by half a percentage point to a target range of 1% to 1.25%.

Launching the emergency measure as a pre-emptive strike to protect the US economy after pressure from Donald Trump to act, the Fed warned: “The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity.”

Jerome Powell, its chair, said: “Of course the ultimate solutions to this challenge will come from others, particularly health professionals. We can and will do our part, however, to keep the US economy strong as we meet this challenge.”

As the economic costs mount in a pivotal US election year, Trump said the Fed had not cut rates enough and should go further. Powell insisted the emergency move was not in response to the president’s pressure. “We are never going to consider any political considerations whatsoever,” he said.

Financial markets around the world rallied after the worst week for stocks since the financial crisis, in anticipation of massive coordinated stimulus to protect the global economy. The FTSE 100 closed up around 1% at 6,718.20. However, Wall Street slumped after a rebound on Monday, and was down 600 points by mid-afternoon in New York.

On a day of rapid developments in response to the escalating health crisis:

  • The G7 issued a statement saying wealthy nations would use “ all appropriate policy tools ” to tackle the economic fallout.
  • The UK government outlined contingency plans, including limits on police and fire service callouts.
  • Growing numbers of companies announced profit warnings and told staff to work from home.

Speaking on Tuesday morning before the emergency move from his transatlantic counterpart, Mark Carney said the Bank of England stood ready to cut rates if the British economy required.

In his final hearing before MPs on the Treasury committee before standing down on 15 March, when he will be replaced by Andrew Bailey, the Bank’s outgoing governor said the fallout in Britain could include an “economic shock that could prove large but will ultimately be temporary”.

“The Bank will take all necessary steps to support the UK economy and the financial system,” he added.

Carney said that lines of communication were open with other central banks, that the Bank’s rate-setting monetary policy committee (MPC) met on Monday and that it was still “assessing the economic impacts and considering the policy implications of various different scenarios”.

The next MPC rate decision is due on 26 March, after Carney leaves. However, economists at the Japanese bank Nomura said they anticipated an emergency UK rate cut before the end of the week.

Threadneedle Street has limited room to cut borrowing costs with interest rates at 0.75%, among the lowest levels in its 325-year history. There are also growing expectations that the chancellor, Rishi Sunak, will use next week’s budget to announce financial support to try to lessen the impact of Covid-19.

The coronavirus outbreak is causing widespread alarm. The Paris-based Organisation for Economic Cooperation and Development has warned global growth could be cut in half.

UK banks are starting to offer emergency financing to businesses that are showing signs of strain. Barclays, RBS and Santander have sent messages to thousands of firms to check whether factory disruptions in China have put their supply chains and cash flow at risk.

Barclays has extended its first batch of overdrafts and short-term loans, while the Guardian understands RBS is contacting about 5,000 of its large and small business customers who may be exposed to disruption, offering them similar support.

Twitter told its staff to work from home in response to the outbreak. It has made remote working mandatory for employees in Hong Kong, Japan and South Korea and said it was “strongly encouraging” its global workforce of 5,000 employees to do the same.

In the UK, the impact of the outbreak was reflected in company statements and updates on consumer behaviour. Kantar, the data company, said consumers were stockpiling hand sanitiser, with sales up 225% in February.

The British insurer Direct Line said it had received £1m of travel insurance claims relating to the outbreak. It will pay out for cancellation or curtailment of trips to places such as China, South Korea and northern Italy, if they were booked before the government advised against travel.

The product-testing company Intertek warned that temporary disruption to the supply chains of its clients in China would hit its 2020 performance, while Greggs said the coronavirus added a cloud of uncertainty to its future sales forecasts if shoppers stayed away from high streets.

The tour operator Tui also said it had suffered weaker bookings and set out plans to cut costs with a hiring freeze and postponing non-essential projects. After a plunge in its share value amid the coronavirus outbreak, the travel business is likely to be ejected from the FTSE 100 on Wednesday in the quarterly reshuffle of the index of leading UK company shares.

Copyright © 2020 theguardian.com. All rights reserved.

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How To Teach Your Kids About Credit Cards

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If you have kids in college, this article is for you. Teaching kids about credit cards is one of the most important tools you can give them The world of credit cards can be confusing and giving your kids a little education might save them a lot of headache and debt.

Students need to learn credit card lessons

BY JULIE JASON

Do you have children in college? Have you talked with them about how to handle credit?
When I wrote about this topic in 2008, students were inundated with credit card offers. According to Benjamin Lawsky, who, as a special assistant to the New York state attorney general, testified before the U.S. House of Representatives’ Subcommittee of Financial Institutions and Consumer Credit, “marketers set up tables in high-traffic spots on campus, such as cafeterias, student unions, bookstores, and other campus buildings … [and at] campus events including freshman orientation, activity fairs, athletic events and graduation fairs.”

Then came the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act).

Now, companies cannot sign up individuals under the age of 21 without a co-signer or proof of personal financial resources. Marketers offering incentives like pizza can no longer do so while at “an institution of higher education” or even within 1,000 feet of the school. They also may not make such offers “at an event sponsored by or related to” the school. Pre-approved offers of credit to individuals under the age of 21 also are prohibited.

Still, card offers are being made, and students need to know whether to act on them. You can expect that student credit cards will have less favorable terms than those offered to people who have a credit history; students are higher-risk borrowers.
Further, students, even those over age 21, may not understand that missing a payment or making a late payment not only increases the cost of credit, but also creates a negative credit history, something everyone should work to avoid.

“A bad credit history can make it harder for you to get mortgages, car loans and credit cards in the future,” explained Matt Schulz, a senior industry analyst at CreditCards.com, a credit card comparison website.

“If you do get them, crummy credit can also cost you a fortune over the years in the form of higher interest rates and fees. It can also stand in the way of getting a job,” explained Schulz.

What can a parent do?
Since going away to college is the first step toward independence, you want to be sure that you respect your child’s need for self-sufficiency. But that doesn’t mean he or she has to go it alone. There are simply too many serious, long-lasting repercussions.

Communication and planning are key.

First, before your child leaves for school, talk to him or her about the benefits and the detriments of getting a student card. Establishing a credit history is a benefit. So is learning the discipline of paying bills on time to avoid a negative history.

Second, research options together with your child. Look online at CreditCards.com (search for “student cards”), WalletHub.com (click on “Credit Cards,” then “College Student”) or creditkarma.com (go to “Credit Cards,” then “Student”). Consider the fees, rates and penalties of different cards, and make a joint decision on the type of card that might make sense. For example, you might consider prepaid cards or secured cards. Prepaid cards work like debit cards. No credit is extended. You prepay the card, and when the balance is low, you fund it. Secured cards require a cash deposit that acts as the credit line for the account. This allows a credit limit to be established, without risk to the bank.

Third, decide on an acceptable monthly budget and what to do if it isn’t followed.  Talk about how you would like your child to communicate with you if that happens.

Fourth, determine whether you and your child agree that he or she should not accept credit card offers before reviewing them with you.

Fifth, agree on how the two of you should check in with each other. Will you talk each month about finances, perhaps setting a date in advance? Will you encourage your child to let you know about challenges before they become problems?

In the beginning, your child will benefit from some gentle guidance. You don’t want him or her to be adrift in a financial morass that could have been avoided with a little planning and care. Financial literacy calls for learning a new skill, and it is not reasonable to expect a child to go on this financial journey alone.

For information on the impact of the CARD Act, read the Consumer Financial Protection Bureau’s report (the Card Act Report), which you can find at https://www.consumerfinance.gov.

* * *
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments ([email protected]). To hear Julie speak, visit www.juliejason.com/events.

(c) 2018 Julie Jason.
Distributed by King Features Syndicate Inc.

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JPMorgan Chase’s China License a Huge Win

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The financial sector seems to be alive and well under Donald Trump’s new administration. For all his talk of demonizing Wall Street, Trump seems to have taken a shine to banks and their executives. And even though President Trump has a rocky relationship with China, one of his closest banks just did something no bank has ever done before – receive a license to underwrite corporate bonds in China’s interbank bond market. Will other banks be far behind?

Is the JPMorgan Chase’s Relationship With the President the Reason for the Historic License?

JPMorgan Chase is living large. The bank’s CEO, Jamie Dimon, has a particularly close relationship with our new president, and was in fact Trump’s first pick for Treasury Secretary. The bank is up about 24% since the election. Last week, President Trump signed an executive order to loosen regulatory restrictions on banks and lenders by targeting the Dodd-Frank act, essentially giving JPMorgan the opportunity to double its lending, which is already near an all time high. Now, the largest U.S. lender just got entry into China’s $6.4 trillion bond market – the third largest in the world. Is it all connected? Is Dimon’s relationship with Trump to credit for its good fortune?

Yes and no.

Dimon is a close advisor and friend to Trump, meaning that for all his promises to clean up Wall Street, Trump’s actions are all currently focused to help the financial sector. But though Dimon can advise Trump, it’s ultimately up to the bank itself to chart its own course. And JPMorgan has done a stellar job of that.

The bank was granted a business license in September of 2016 to operate a fully owned fund management business in China thanks to the Chinese Central Bank’s decision to loosen entry restrictions. That license led to its approval to underwrite corporate debt in the China market, which is JPMorgan’s bread and butter. The bank earned about half of its investment banking fees from debt-underwriting last year, meaning that it now has the ability to double its revenue with one new market.

Watch this news clip from CNBC where JPMorgan Chase’s CEO, Jamie Dimon talks about President Trump’s reforms:

Thanks to China loosening entry restrictions, JPMorgan won’t be the only U.S. headquartered bank in town for long. But between that time and today, the lender should see ample profits and develop some competitive barriers to entry for other banks. Between the China license and the repeal of Dodd-Frank, expect shares of JPMorgan Chase & Co. (JPM) to rise UP.

 

The executive order for the repeal of Dodd-Frank Act has been signed, see the whole story here!

 

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