Monthly Archives: March 2018

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


Why Millennials Aren’t Investing


March 19, 2018

While Millennials are criticized for carrying high debts and student loans, they are statistically much better savers than previous generations. Currently between the ages of 22 and 37, Millennials are saving more than any other age group! A survey from Bankrate found that 62% are saving more than 5% of their income and 29% of young adults report that they save more than 10% of their income. The latter group have even attracted the description “super savers”. Interestingly a greater proportion of Americans who make $30,000 – $50,000 per year are super savers than their young professional (“YoPro”) peers who make $50,000 -$70,000. While all this saving is commendable, millennials are extremely hesitant to put money in the stock market.

Only 1 in 3 Millennials is investing in the stock market. It’s probably no surprise that investors who grew up during the 2008-09 financial crisis would hesitate to dive in head first. Over 82% of Millennials say their investment decisions are influenced by the Great Recession. Many Millennials saw 50% or more wiped off their parents’ or older siblings’ wealth and are likely still scarred.

There seem to be four main reasons for Millennials’ preference to stay in cash. First, 50% say they are put off by the thought of losing money in a bad investment. Some are referring to this hurdle as the “Someday Scaries” – playing off the term “Sunday Scaries” which describes the feeling of anxiety before the upcoming work week. Young Americans know they will someday need to be more financially secure, but are scared to risk losing the money that they have saved. Unfortunately, many of these hesitant Millennials are jeopardizing their retirement, given that, over a long period of time, the stock market has historically performed much better than cash. For example, the S&P has returned almost 10% annually since its inception in 1928.

The second biggest reason for not investing (35%) was believing they do not meet the minimum required amount of money needed to invest. Hopefully this percentage will decrease as free investing apps like Robinhood, Acorns, and Stash gain popularity. One new app called Stockpile allows parents/grandparents to fund an account with a stock gift card that gives the lucky recipient shares of stock starting at just $5. Apps aside, most brokerage accounts offer $5 trades so this barrier to entry is becoming almost nonexistent.

The final reasons for not investing are less easy to resolve. 31% say they don’t know whom to trust to help them invest, and 24% admit they just do not know how to get started. Trust is obviously very important and you never want to rush that decision. Getting started investing in the stock market is certainly an area where you need to do your homework and walk before you run.

With 2008 fading in the rear-view mirror and investing becoming so easily accessible on smartphones, I hope many of these barriers to entry will soon be eroded away completely.

Dan Hall