since the Fed has dropped ST rates to multi decade lows and announced for quite some time that those low rates were here to stay, US based debtors exposure to short term debt is gigantic ( for instance, many corporations are up to their eyeballs in short term commercial paper ) . so one could argue that the effect of hiking ST rates is magnified these days compared to more normal times.
With all due respect to Heinz - is he for real? The Fed has been shouting from rooftops that they would be increasing interest rates, steadily and in small bits, since months before they even started the hikes. Anyone who has not positioned accordingly in the year or so that passed in between is probably too dumb to stay in business.
Ask Heinz to take a look at the banking sector, where for a while (3-4 months ago) I thought there could be a shorting opportunity on companies with interest rate exposure, for the reasons he mentioned. Guess what? It turns out that banks are not managed by idiots and these people don't fight the Fed. So they had, for the most part, adjusted their positions such that they would benefit from interest hikes, actually LOSE money if Fed DID NOT hike rates. [See their 10Q filings]
Examples:
· Wachovia said its earnings would be 1.8% higher if Fed funds rate rose to 3% in a year, and 0.8% lower if it decreased.
· Bank of America said net income from interest would gain 0.4% with higher rates and fall 0.7% with lower rates.
· Comerica will gain 5% in net interest income on higher rates and lose 4% on lower rates
· Bank of New York said it will gain up to 1.5% on higher rates and lose 0.1% on lower rates.
[Looking these up from the document we had compiled at the time]
Some are of course still vulnerable to interest rate hikes, compared to their peers: Citicorp and J.P. Morgan, for example, are more dependent on borrowing in the debt markets for their funding than on deposits.
see the long bond's unchanged now, after a big PPI number.
now why might that be?
the reason is imo that the bond market is looking beyond this number and concluding that it might tempt the Fed to invert the yield curve
Why would the Fed want to invert the yield curve, and how on earth is a high inflation number a temptation to do so?
Occam's razor - The simpler explanation is more likely to be true :-) |
