Taper Myths – Don’t Let Them Cost You Money!

“Banks have been stuffed with deposits, while they have been “starved for loan growth,” notes J.P. Morgan’s (Alex) Roever. So they’ve been forced to put their cash to work in high-quality assets to generate some net interest income. Over the next year, agency MBS yield spreads could widen by 20 to 30 basis points over benchmark Treasuries, he estimates. Once the Fed fully withdraws from the market by halting the reinvestment of monthly interest and principal payments, an additional 20 basis points could be added to that.”   (Barron’s 5/21/21)

BTW, a 20 basis point increase in spreads is also a drop in the bucket.

The end of an era

To my third bullet point above, “the end an era of Fed ease,” I say “not so fast.” Coming out of an emergency going back to normal does not signify anything other than that things are much better. In fact what you may see is at the first signs of a ‘taper tantrum’ that the Fed loses its resolve. The Fed backing off its plan at the first signs that the market is roiled has been what happened before. Frankly that is pretty discouraging.

Also in stockbroker school one of the first thing that they teach you is the common stocks are are a great hedge against inflation. There is a long history of data that would attest to this fact. For the equity asset holder inflation is a plus.

The ‘Worst” case and what happened to stocks (1974 to 1982)

Detective, Magnifying, Glass



Looks like bad news

I call this period the worst case for inflation and interest rates because it was absolutely the worst environment for these two elements that I ever experienced in my lifetime and I cannot find any historical president. Buckle your seatbelts! 

The average yield on the 10-year US Treasury note in 1974 was 7.56% with CPI inflation averaging 11% (1st Arab oil embargo). Between 1974 and 1982 CPI inflation averaged 9.13%. The yield on the 10-year Treasury peaked at 15.8% in September of 1981. It averaged 13.9% in 1982. We were at the beginning of the greatest secular bull market on record.

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Disclaimer: The information presented here represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain ...

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