Category Archives: The Weekly

Taxes Just Became a Lot Less Certain


April 2, 2018

We are now three months into 2018 and there is still much confusion around the impact of the tax legislation passed in November.  One big area of uncertainty is how to check whether tax withholdings from pay checks are correct.  Having just reviewed my paycheck, I found my federal withholding rate materially lower than in previous years. I know our payroll services provider has applied the new tax tables, but it is hard for me to get completely comfortable with the new lower withholding level. After all, it was only recently that the IRS provided employers, and payroll services providers, with the new withholding guidelines and the new W-4 form for employees. Tax planning, and tax awareness, will be critical this year given all the changes.

In the past, Americans have generally adopted a conservative approach to their tax obligations by “over withholding” throughout the year and thus receiving a tax refund. Typically, 76 percent of Americans tax return filers received a refund in April of the following year. The IRS is predicting the level might fall to around 73 percent as a result of the new legislation. The IRS provides an online workbook for tax filers to estimate their withholding. The IRS and Treasury Department officials are encouraging tax filers to be proactive, and use the new tax calculator to help them determine whether their withholdings are appropriate.

Take home pay is likely to be a big driver of personal consumption trends in 2018, and, of course, the new tax laws were designed to stimulate growth. Last Wednesday, the growth of real gross domestic product (GDP) for the fourth quarter of 2017 was revised upwards to an annual rate of 2.9 percent. This impressive growth rate was achieved before the impact of the new tax laws. By comparison, early data for January and February on personal income, savings and expenditures, suggest consumers were more apt to save then spend. Estimates for Q1 2018 GDP growth are running at around 1.5%, although this might also be affected by the tendency for first quarter growth to be sluggish.

There are a couple of takeaways from the above.  First, it is probably a good idea for some Americans to sit down with their accountant and review how the new legislation will impact their situation.  If the situation is simple, with income mostly dependent on W-2 earnings, then the IRS online workbook might be helpful. The many conversations we already had this year with CPAs have revealed that tax accountants are still working through the many nuances of the new tax laws, and the seemingly endless scenarios for individual tax payers. Second, consumers are just now beginning to find they have more disposable income because their withholdings have decreased. Only time will tell what behavior will result – and remember almost 80% of the economy is consumption driven.

Gary B. Martin


2nd & 10 in the Bond Market

2nd and 10 crop









March 26, 2018

All football fans know that “second and ten” refers to the second down in a football game where a team still has ten yards to go to gain another first down. Irrespective of the field position of the ball, second and ten offers a reasonable chance of progressing down the field. Of course second and one would be better, but fourth and thirty is a lot worse.

In the bond market we also refer to twos and tens albeit in a quite different way. “Twos” are Treasury notes that have 2 years until maturity, and “tens” are Treasury notes that have 10 years until maturity. Not only do we observe the level of each maturity, we also monitor the difference between the rates on each maturity, which is known as the “spread” or “slope”. An increase in the difference is referred to as a “steepening” yield curve, and a decrease is known as a “flattening” yield curve.

The rate for twos is driven by many factors, but is heavily dependent on expectations of short term Fed policy. The  rate for tens is driven by a broader set of longer term issues, including inflation, supply/issuance, corporate bond market activity, relative attractiveness versus other assets, and the behavior of foreign buyers.

When the Fed started slowly tightening its monetary policy, and raising rates, in December of 2015, twos were 1.00% and tens were 2.24%. The Fed did not raise rates again until a year later before picking up the pace and raising rates three times in 2017. The first hike for 2018 occurred last week.  Now twos are 2.31% and tens are 2.89%, so twos have risen by 1.31% while tens have only risen by 0.65%.  A full breakdown of the changes during that time is provided in the table below:

2nd and 10 chart

The spread between twos and tens (or short term rates and long term rates) can be just as important as the level for each. The table shows that, since December 2016, the spread has steadily and consistently declined from 1.27% to 0.58%. It is noteworthy that the current lower spread  is at a time when short term rates are expected to increase twice more in 2018, with two to three further hikes in 2019. If these expectations are realized. the Fed Funds Rate will rise to approximately 2.75%, which is close to the current 10 year rate.

A higher spread, or steep yield curve, has often preceded an economic upturn. A flat yield  curve frequently signals an economic slowdown. An inverted spread, when long term rates are lower than short term rates, can be a harbinger of recession.

Of course yield curve levels and spread are just a rough indicator of what might happen next, just as second and ten in football provides a rough guide to the chance of field progress. Nevertheless, yield curves are a key part of any evaluation of the entire field position of the markets and the economy.

Lloyd Flood