June, 2017



Asset Management for Insurers




Neel Kashkari - President, FRB-Minneapolis, Dissenter, Outside the Box Thinker.


The Fed raised the overnight rate last week in a widely anticipated move.  The vote was 8-1.  The single dissension was Mr. Neel Kashkari.  Interesting background.  Mechanical engineer, worked at NASA, Goldman Sachs, ran for governor of California, President FRB-Minneapolis.  At the core of his dissent: The Fed has more tools to combat inflation than it does to stimulate, especially now. Read more about Mr. Kashkari in the AQS Point of View.


Federal Reserve Publishes Q un-E.


To put it simply:  Stop reinvesting gradually.


The Fed has to this point, reinvested principal and interest from Treasuries and agency holdings right back onto the balance sheet.  Last week, the Fed augmented the previously published Policy Normalization Principles and Plans, to include some specific numbers and time frames.


You can read the document from the Fed's website or you can cut to the chase and trust our summary.  Your choice.


We apply some math to the caps and balances.  With over $426 billion in Treasuries maturing in 2018 and over half the Treasuries held maturing in the next 5 years, the ride may get bumpy.  The same strategy is outlined for MBS holdings.  See early guesses at mortgage rates as a result in this month's AQS Point of View.


Consumer Debt - Post Crisis Record


Just prior to the financial crisis, consumer debt touched $12 trillion (with a 'T').  Recently, that value reached a new record, $12.7 trillion.  Of that, housing debt is about $9 trillion and the $3.7 trillion balance is led by student, auto and credit card debt.  Some items of interest:

  • In a UBS survey, 17% of U.S. consumers are likely to default on a loan payment over the next year, up from 12% in Q3.
  • Santander, one of the largest subprime lenders stopped allowing payments by credit card.
  • A 2016 Fed survey showed 46% of Americans could not pay a $400 emergency expense without borrowing
  • Tightening auto loan standards.

See more in the month's AQS Point of View.


Rising Rates - All Rates?


The truth is, an increase in the Fed Funds or 'overnight' rate tends to slow economic expansion.  The rates of longer maturities, priced relative to anticipated inflation, tend to go down.  The yield curve flattens.

The graph below sets the record straight - for the last 20 years anyway.

Click image for a larger view





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Looking Forward


The FOMC Primer


In January, 2013, the FRB produced a document, "The Federal Reserve's Balance Sheet and Earnings: A primer and projections"


It provides insight into the Fed's game plan.  It's proving right so far.

Mutual Fund and ETFs - 12 months


Net inflows create demand for new issuance (see right).  

Click for larger image.

Corporate Bond Issuance - 12 months


Still healthy issuance.  Credit spreads remain tight.  Issuers taking advantage.  

Larger image here.  



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