【Bloomberg News,
- Franklin Templeton ‘signs of bond FOMO’
Franklin Templeton, a $4 trillion global asset manager, warned that the recent bond market rally has gone too fast and too far, and that the market seems to be reflecting excessive expectations on prices for the Fed’s rate cut. Sonal Desai, chief investment officer of bonds, diagnosed on Bloomberg TV on Friday local time that the decline in U.S. bond rates did not conform to fundamentals amid signs of “alienation anxiety syndrome (FOMO)” by investors. The 10-year U.S. bond rate, which was over 5% on Oct. 23, fell below 4.4% at one point on Friday as traders raised bets on next year’s Fed rate cut to 100 basis points due to slowing U.S. inflation and employment data. Desai pointed out, “The market reflects more than a perfect landing in prices, but there are still inflation risks and there are not enough indicators to support the expectations of a rate cut reflected in next year’s prices.” As a result, Franklin Templeton expects the market to gradually return expectations for a Fed cut, with the 10-year U.S. bond rate heading back to 5%.
- Avoiding U.S. bond market losses?
At least along the current path, the U.S. bond market is likely to avoid the less than glorious milestone of three consecutive years of losses that would have been its worst performance since the 18th century. As inflation was weaker than expected, the Bloomberg U.S. bond index rose 1.4% last week and rose 0.4% this year. The corresponding index, which tracks $25 trillion worth of investment-grade government and company bonds, posted a record loss of 13% in 2022, following a 1.5% loss in 2021. Although the index had never been negative for three consecutive years, such a fate seemed inevitable a month ago as the 10-year U.S. bond rate surpassed 5% for the first time in more than a decade and the loss reached about 3% this year.
However, the situation has changed rapidly since then, turning in favor of bond bullishists. The U.S. Treasury Department slowed the pace of increase in long-term issuance in its quarterly fundraising bid, and the labor market began to show signs of cracking. In addition, in the words of Priya Misra of JPMorgan Investment Management, the October inflation report proves “impeachable inflation.” Now, interest rate traders believe the Fed’s rate hike is complete and are betting that it will cut a total of 100 basis points within the year, starting in the middle of next year. Ed Al-Hussainy, a global rate strategist at Columbia Threadneedle Investments, said, “There is a growing probability that the labor market will be at turning point,” and predicted that if economic indicators fall short of expectations or risk-preference sentiment is hurt, it will be a boon to long-term bonds.
- Collins ‘Further austerity, not to be taken off the table’
Boston Federal Reserve Governor Susan Collins insists policymakers should leave room for further tightening despite progress in inflation. “It takes patience and determination to return to the 2% inflation target within a reasonable period of time,” he said. “I won’t take any further policy tightening off the table,” he said in a CNBC interview on Friday local time, urging, “We have to follow that path.” Later, he told reporters that one of the factors he was watching to determine whether further tightening was necessary was expected inflation, which is now well fixed but should be monitored. While there is some evidence that constrained interest rates are helping to rebalance the economy’s supply and demand, it points out that long-term U.S. bond rates have fallen somewhat since the last FOMC meeting. In addition, economic indicators are so noisy and progress so far is uneven, and the basic scenario is that the Fed’s policy remains constrained “for the time being.” San Francisco Fed Governor Mary Daly also emphasized the Fed’s willingness to stabilize prices. “We don’t want to declare victory in the fight against inflation or be overly optimistic about economic disruptions,” he said, adding, “We must continue our difficult mission and make sure we reach our goals as smoothly as possible.” Michael Barr, the Fed’s vice chairman in charge of financial supervision, diagnosed that interest rates were at or near the level necessary to achieve the Fed’s price stability goal.
- a soft landing breeze
Expectations for a soft landing in the U.S. economy are sending a warm breeze to small- and medium-sized stocks as well as junk bonds on the New York Stock Exchange, as a series of recently released economic indicators support the Fed’s conviction that it will win the war on inflation without triggering a recession. The Russell 2000 index jumped 5.4% last week, while the junk bond ETF is expected to see a record monthly inflow of funds. Sameer Samana of the Wells Fargo Investment Institute said it could be nothing more than a “dream” and warned that if economic growth and inflation pick up speed again, the Fed could resume its rate hike march, which could eventually lead to a more severe hard landing. Deutsche Bank points out that the Fed has defied the market’s dovish pivot expectations on six occasions over the past two years. John Porter of Newton Investment Management also said, “Investors are now all-in on what they completely ignored two or three weeks ago,” fearing a too-quick psychological shift. Lindsay Rosner of Goldman Sachs Asset Management advised that the probability of a soft landing should not be viewed as 100%, saying, “The lesson over the past few years has been that all good investors have been humble in their economic prospects.”
- OpenAI Rebellion
Sam Altman, co-founder and CEO of OpenAI, which sparked the ChatGPT craze, has been widely opposed by major investors over his surprise dismissal from the board on Friday local time and is demanding his return, sources familiar with the matter say. Microsoft, which owns more than $10 billion in OpenAI, is pressing to bring Altman back and replace the current board with several investors, including Slive Capital and Tiger Global Management, the sources said. The directors have considered resigning but are now dealing with the demands of outside investors, with the situation fluid and no final plans yet set. In case the current board steps down, investors are considering a list of new board members, and Brett Taylor, former co-CEO of Salesforce, is said to be the most likely candidate.
OpenAI’s board is embroiled in a heated controversy as it suddenly decided to oust Altman without giving specific reasons. Altman is a leading commercial success for the nonprofit OpenAI, which is currently open to the possibility of a return and intends to demand a change in the way the company operates if it does. Microsoft CEO Satya Nadella, who was not informed of the board’s decision in advance, is in touch with Altman and has pledged to fully support his future plans, sources say. Meanwhile, Elon Musk’s space company SpaceX launched its second test flight of the large spacecraft “Starship” on Saturday, but failed to enter space orbit.