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Thought Leadership on Strategy, Markets, Risk Management, Industries and/or Regulatory Topics

August 2, 2023

4 Minute Read

Fitch Downgrade Highlights Deteriorating Fiscal Outlook

Fitch Ratings surprised market participants late Tuesday by downgrading the sovereign credit rating of the U.S. Government from AAA to AA+, citing “expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance…over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.” Fitch left…

April 7, 2023

6 Minute Read

Buried Treasure? Funding Post-Retirement benefits made easier under SECURE 2.0

Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act in December 2022 as part of the Consolidated Appropriations Act, 2023. While many provisions impacting both DB and DC plans were included in the legislation, a hard-to-find and often-overlooked provision in SECURE 2.0 extends and enhances plan sponsors’ ability to use assets from overfunded pension plans to…

March 21, 2023

7 Minute Read

Keep Hiking After Something Breaks? The Fed Balances Financial Stability and Price Stability

Veteran Fedwatchers like to quip during tightening cycles that “the Fed will keep hiking until something breaks.” They are only half joking. The path of past tightening cycles is littered with the roadkill of market participants who got caught on the wrong side of a duration and/or convexity bet. Well now something has finally broken, and the FOMC has to…

March 15, 2023

6 Minute Read

Financial Conditions Have Consequences: SVB’s Failure and the Risk of Contagion

For several months now, many of us have been wondering: why hasn’t anything blown up yet? The Powell Fed’s historic tightening campaign has caused relatively few episodes of financial distress (with the notable exception of crypto). The sudden failure of the nation’s 16th largest bank – the 2nd largest bank failure in American history – has put that question to…

November 1, 2022

5 Minute Read

The Boogieman in the Fed’s Closet

A terrifying specter has reappeared in the darkest corners of the Eccles building. For the first time in 40 years, the Federal Reserve faces a material risk that inflation expectations could de-anchor and cause high inflation to become entrenched in the U.S. economy. Like a toddler afraid of the boogieman in the closet, the Fed fears the de-anchoring prospect despite…

October 20, 2022

12 Minute Read

LDI Markets in the US & UK – Four Structural Differences to Know

In just eight days, the U.K.’s bond market became so disrupted that the Bank of England (BoE) stepped in to backstop the gilt market on September 28th. Between September 19th and September 27th, 2022, U.K. 30-year inflation-linked bond yields rose from -5 bps to 189 bps, a net change of 194 bps resulting in a 42% loss. Nominal U.K. 30-year…

August 31, 2022

6 Minute Read

Back to School with Mr. Powell

Like so many K-12 teachers having to remind their students about the lessons they forgot over the summer, Federal Reserve Chairman Jay Powell’s speech in Jackson Hole last week was in many ways a recitation of the message he and his colleagues have delivered all year. There is no denying that Fed communications have gathered an increasing urgency throughout the…

June 15, 2022

3 Minute Read

Jay Powell’s Manic Monday

After two years of pandemic firsts, we thought we’d used the adjective “unprecedented” for the last time in this cycle. Then the Federal Reserve did something on Monday that we’ve never seen them do before: intentionally leak a monetary policy action through the financial press two days prior to a Federal Open Market Committee (FOMC) meeting. We don’t know exactly…

November 19, 2021

2 Minute Read

Goods Prices Rise…For the First Time in 20 Years

Inflation has been a popular topic in recent client conversations, with good reason. Consumer prices are rising at the fastest pace since the early 1980s, raising questions about the path of monetary policy and the low-rate underpinnings of lofty risk asset valuations. As we first discussed last year, the pandemic recession uniquely targeted the services sector. The shift in consumption…

June 3, 2021

3 Minute Read

Constraints on Labor Supply Should Prove Temporary 

Total nonfarm employment in the US remains 8.2 million workers below the pre-pandemic peak reached in February 2020 and yet pockets of labor market tightening are already appearing. As is the case with other resources in the economy, both the supply of and the demand for labor have been extremely volatile throughout the pandemic. In the last few months labor…

April 14, 2021

2 Minute Read

Phantom Jobless Claims Mask the Labor Market Recovery

We’ve written ad nauseum in these pages about the distorted and misleading economic data that have been produced during the unprecedented economic volatility of the pandemic. Despite turning a skeptical eye on hundreds of data releases over the past twelve months, we continue to find novel ways in which the data are inaccurate, often in material ways that undercut the…

March 9, 2021

5 Minute Read

Tantrum Without the Taper: FAQ on Recent Market Volatility

The recent volatility in bond markets has prompted quite a few inquiries from clients. Here we consolidate our thoughts on the most frequently asked questions. What exactly happened in the Treasury market last month? Treasury yields have been rising steadily since last summer but an important shift occurred in mid-February. Between August 1 and February 12, all 64 basis points…

November 19, 2020

2 Minute Read

A Conversation About the October Payrolls Report

Overheard on the NISA trading floor, Friday, November 6, 2020. Jess Yawitz: “Another strong payrolls report this morning, eh?” Stephen Douglass: “Yep, the jobs recovery continues to surprise to the upside. The details were even better than the headline figure too.” JY: “How so?” SD: “Well the headline figure showed a 638,000 gain in nonfarm payrolls in October but the…

October 29, 2020

6 Minute Read

Making Up Is Hard To Do: The Fed Adopts An Average Inflation Target Part II

In a post earlier this week, we explained how the Fed’s new flexible average inflation targeting (AIT) framework is motivated by a desire to prevent the zero lower bound constraint from de-anchoring inflation expectations to the downside. The logic of the new framework is intuitive. If the zero lower bound prevents the Fed from providing as much monetary stimulus as…

October 27, 2020

5 Minute Read

Making Up Is Hard To Do: The Fed Adopts An Average Inflation Target

In a landmark speech at the Jackson Hole conference in late August, Chairman Powell announced the first significant revision to the Fed’s operating framework since 2012. While the transition from a flexible inflation target to a flexible average inflation target might seem to be a subtle one, that may not move asset prices immediately, it does represent an important evolution…

October 20, 2020

3 Minute Read

Initial Jobless Claims Only Tell Half the Story, and it’s Not the Good Half

Regular readers will know we’ve been on somewhat of a campaign against economic disinformation this year, describing how data errors and faulty seasonal adjustments have been sending misleading signals about the true state of the labor market. Alas, we are called into action yet again. Every Thursday brings the release of jobless claims data. Like clockwork, the day also brings…

October 8, 2020

4 Minute Read

Service Required: The Unique Structural Impact of the 2020 Recession

The pandemic caused a recession unlike any other in American history. We’ve previously discussed the unprecedented speed of the shock itself and the policy response. The 2020 recession is also unique in the degree to which it has impacted service sectors of the economy. Financial economists are trained to closely monitor manufacturing and goods consumption because these tend to be…

August 28, 2020

1 Minute Read


As we have been saying, the seasonal adjustment process for initial jobless claims has been wholly inappropriate given the scale of job losses during the pandemic. Because the process is multiplicative rather than additive, the adjustment factor has now inflated the actual claims numbers by over 4.6 million since March, grossly exaggerating the true magnitude of job loss. We’re happy…

August 19, 2020

4 Minute Read

Willing to Concede the S&P at 3750+? Equity Protection Strategies, Enter Stage Left

The combination of near all-time highs for the US large cap stocks and recent pricing of equity options at various strikes provides market participants with an interesting potential payoff profile over the next year. Specifically, investors can retain upside on the S&P 500 through 3,763, or 12.9% higher than its level at time of print, while securing a protection payment…

August 17, 2020

Eureka! A Discovery in Gold That Even Non-Gold Investors May Like

Gold is a hot topic these days. It is not hard to understand why: negative real yields exist on inflation protected U.S. Treasuries (TIPS) all the way out the curve, monetary policy has inflation hawks standing at full attention, and the recent performance of the U.S. dollar has left a lot to be desired. That said, exploring the merits of…

July 30, 2020

2 Minute Read

Seasonally Maladjusted: How Statistical Methods Have Destroyed 3.7 Million Jobs Since March

In this short note we demonstrate, primarily using a few examples and data points, how totally inappropriate it is to seasonally adjust initial unemployment claims during the pandemic and how doing so can lead to very misrepresentative “headline prints.” Why seasonally adjust claims? The purpose of seasonal adjusting is to remove distortions that result from holidays, plant re-toolings, retail sector…

July 9, 2020

3 Minute Read

Labor Market Update: Objects in Mirror are Better than They Appear

The labor market continued its spectacular recovery in June. The jobs report released on Friday reflected a net gain of 4.8 million jobs, almost double the increase from May. The monthly change in nonfarm payrolls has set a record in each of the last four months: two record decreases followed by two record increases. The unemployment rate fell to 11.1%,…

June 15, 2020

3 Minute Read

A 10 Million Job Surprise

The May jobs report produced the biggest surprise we have ever seen from an economic data release. Nonfarm payroll employment increased by 2.5 million in the month, a full 10 million jobs higher than the Bloomberg median forecast for a loss of 7.5 million jobs. Not a single one of the 78 economists surveyed by Bloomberg predicted a positive number….

May 20, 2020

4 Minute Read

The Fed’s Crisis Playbook: Speak Softly and Carry an Unlimited Balance Sheet

COVID-19 has delivered an economic shock of unprecedented speed and severity. The Federal Reserve under Chairman Powell has responded with the most aggressive policy action in the central bank’s 107-year history. As well as cutting the policy rate to essentially zero and offering nearly unlimited repo financing, the Fed commenced on March 13, an asset purchase program of staggering proportions….

April 24, 2020

2 Minute Read

A Recession Unlike any Other

The longest expansion in U.S. economic history ended in February. March ushered in a recession that will be unlike any other we have seen before. In the last five weeks, 26 million workers have filed for unemployment insurance. That’s more than the total number of jobs that were created in the entire decade-long expansion. The unemployment rate looks likely to…

March 12, 2020

3 Minute Read

Treasury Yields: How Low Can They Go?

This has been a frequent question from clients in the past week as the spike in cross-asset volatility sent Treasury yields plunging to record lows. The shortest and most accurate answer is: nobody knows. Just as nobody could have predicted that a novel strain of an otherwise common virus would be the catalyst, or that an ascendant Saudi Arabian prince…

March 6, 2020

2 Minute Read

Coronavirus Fear Shocks Global Markets

Coronavirus has sent shockwaves throughout global financial markets. Since mid-February major global equity indices are down by 10-20%, investment grade US dollar credit spreads have widened by 30-50 basis points, and US Treasury yields have plummeted to all-time lows. The driving force behind this market turmoil is fear of the unknown. Nobody can predict how the virus will spread. Given…

November 18, 2019

3 Minute Read

State of the US Consumer in Four Charts

With no shortage of economic uncertainty in the world, it is natural to ask whether the US consumer can continue as the primary engine driving the expansion. Our answer to that question is yes. You’ve no doubt seen many of the well-known statistics describing today’s exceptionally strong labor market. The unemployment rate is at a 50-year low and there are…

October 9, 2019

6 Minute Read

FAQ: What Happened in the Repo Market Last Month?

A volatile September in the normally placid money markets inspired a number of client inquiries, and a few overzealous headline writers in the financial press. In this note we will review what happened, explain why we think it is more likely a technical disruption rather than an indication of broader stress in the financial system, and discuss steps policymakers may…

September 4, 2019

2 Minute Read

Monetary Policy in the U.S. is Being Determined by European (Japanese) Financial Markets

As we approach the next Fed meeting in September, expect more chatter on 1) whether they should ease and 2) what the inverted Treasury yield curve is saying about recession risk. Currently, the yield curve is shaped like a saucer. The highest rate is the 1-month bill, the lowest is the 5-year note, and the 30-year bond is only a…

August 21, 2019

2 Minute Read

Global Bond Yields Plunge to Record Lows

Bond yields have fallen dramatically around the world this month, driven by the latest escalation of the trade war as well as signals that aggressive monetary stimulus will be forthcoming from central banks. Longer-tenor government bond yields in the US and Europe have fallen by 30-60 basis points this month, reaching record lows for many sovereigns. While trade policy risk…

July 10, 2019

3 Minute Read

The Waiting is the Hardest Part: An Update on the LIBOR Transition

The LIBOR transition continues. As we have outlined in previous notes, we are six years into a global effort to replace LIBOR with more robust reference rates. Though progress has been made, we can’t say at this point whether the transition will be successfully completed before the end of 2021, the deadline after which UK regulators will stop requiring banks…

January 3, 2019

2 Minute Read

Market Bids Farewell to the Fed’s Tightening Cycle

The last seven weeks have seen a dramatic repricing of the expected path of monetary policy. As recently as November 8, the fed funds futures market was pricing the Fed to hike all the way to 3%. Since then, more than two hikes have been removed from the expected path of policy. The fed funds futures yield curve is now…

November 14, 2018

SOFR, So Good

The LIBOR transition continues. A global effort has been underway since 2013 to reduce dependency on LIBOR, the benchmark interest rate discredited by a series of manipulation scandals and long criticized for reflecting bankers’ estimates of their borrowing costs rather than actual transactions. US dollar LIBOR has grown since the 1980s to underpin $200 trillion in financial securities ranging from…

October 16, 2018

China, the Goliath of the Treasury Market

After the latest round of the trade war, China has imposed tariffs on nearly all of the $130 billion in annual goods imports from the U.S. Though China could increase the tariff rate, they have effectively spent all their ammunition in terms of the scope of tariff application. As China-watchers have speculated as to what other tools the Communist Party…

June 19, 2018

Fed’s Technical Adjustment to IOER is a Sign of Things to Come

It was a surprise to no one when the Federal Reserve hiked rates this past Wednesday. The purpose of this note is to describe the “small technical adjustment” the Fed announced it would make to its operating framework for managing overnight interest rates. Since the financial crisis, the Fed has set the policy rate as a 25 bp range –…

December 11, 2017

Anticipating the FIFO Rule

As the effort to reform the U.S. tax code speeds through the legislative process, it is clear that, whatever the specifics of the ultimate bill, it could have a significant impact on investors. Despite the bill’s fluid nature, there is one provision that could have such profound implications for taxable investors that we thought it was worth highlighting before the…

December 5, 2017

The Phillips Curve is Dead, Long Live the Phillips Curve!

The Phillips Curve describes the relationship between unemployment and inflation. First proposed in 1958, the theory holds that a low unemployment rate reflects a tight labor market that requires firms to raise wages to attract scarce labor. The Phillips Curve is therefore supposed to be downward sloping. Economists have since extended the model in a variety of ways: utilizing an…

November 2, 2017

Fed Takes First Step of $2 Trillion Journey

The Federal Reserve took the first step this week of what will be a long journey towards normalizing its balance sheet after buying nearly $4 trillion in securities from 2008 through 2014. The Fed had $8.7 billion in Treasury securities that matured on October 31. When those bonds matured, $2.7 billion was reinvested back into the five Treasury coupon securities…

July 28, 2017

The Beginning of the End for LIBOR

The end is nigh for the London Interbank Offered Rate. The CEO of the British markets regulator, the Financial Conduct Authority, announced yesterday that LIBOR will be phased out by the end of 2021. Though headlines proclaiming the “death of LIBOR” may catch some by surprise, this announcement is merely another step forward in a global process that has been…

May 19, 2017

Go Long!

The Treasury Department is considering issuing an ultra-long bond with a maturity greater than 30 years. The idea was first raised in post-election interviews with then-nominee for Treasury Secretary Steven Mnuchin and formalized last month when Treasury requested a response on the subject from primary dealers and the Treasury Borrowing Advisory Committee (TBAC). Both of these groups advised Treasury against…

March 10, 2017

Taking A Hike (with interest rates)

It is a well-known market truism that the Fed tries to avoid surprising markets with its monetary policy decisions, especially when those decisions result in a rate increase. Indeed, the Fed has not issued a rate hike that was less than 70% priced in since 1994. On the other hand, the central bank has delivered a handful of rate cuts…

January 5, 2017

Trumponomics – Two Scenarios for Fiscal Stimulus

Changes in yields can provide insights into the market’s views on the potential results of anticipated policies of the Trump Administration. One of the more interesting dynamic relationships is that between TIPS and nominal Treasury yields, which offers guidance regarding real growth and inflation expectations. The graph below depicts changes in selected real and breakeven inflation rates (calculated as the…

July 26, 2016

Grading Rates on a Curve

Can rates in the U.S. only go up from here? With Treasury yields reaching historical lows recently, it may be tempting to think of U.S. rates as having hit a floor. Yet before making tactical adjustments, it may be prudent to examine rates not just in absolute but in relative terms. Doing so suggests rates may not be as low…

June 29, 2016

Have Cash – Will Carry: Another Simple Strategy to Help Enhance Cash Yields

As the (seemingly) never-ending search for yield continues in year eight of the “low for long era,” an oldie but a goodie comes to mind. The cash and carry trade, which undoubtedly raises fond memories from your “Intro to Derivatives” course, has caught our eye recently. As a brief reminder, a cash and carry trade is when an investor purchases…

May 11, 2016

Bonds Without Borders

It may pay to be a little more cosmopolitan when it comes to your bond portfolio. Yield differences between comparable maturity instruments in different countries can offer opportunities to enhance returns, particularly for longer-term investors. By buying foreign bonds and using currency forwards to lock in future exchange rates, investors may be able to realize gains over what they could…

December 10, 2015

Fed Liftoff: More Questions than Answers

Markets are currently implying nearly an 80% probability that on December 16th the fed funds target range will be raised by 25 basis points. This expected increase will be the first rate hike since June 2006 – when a share of Lehman Brothers cost more than a share of Apple, and when a lot of today’s Wall Street traders were…

December 3, 2015

Our Take on Negative Swap Spreads

While the topic may not have come up at the Thanksgiving table, it’s one of the most discussed issues in the markets right now: why have swap spreads gone (so) negative? Ask ten people and you’ll get ten different answers—and ten different recommendations for what to do about it. Here’s the eleventh. In a nutshell, the fixed rate on long-dated…

May 8, 2014

Spreading Confusion

Why Yield Spreads Across Currencies Need Translation We have observed (with some bemusement) how the financial media often compares the yields on different countries’ debt without adjustment for the different currencies in which the debt is denominated. By overlooking a currency adjustment, investors may get a distorted risk-return picture when comparing sovereign bond yields. A lot of attention is paid…

August 15, 2012

Corporate Bond Scarcity?

The Case for Separating Interest Rate and Spread Risks U.S. pension plan demand for long duration corporate bonds has been and is expected to remain at a high level. Nonetheless, some sponsors have delayed implementing strategic corporate bond programs because of tactical views on Treasury yields. Given the ease of managing Treasury duration, this need not be the case. Pension…

August 2, 2011

Break-Even Yield Curve

One question frequently arises among investors considering bond strategies: Is this the time to invest in fixed income? Like any market, timing interest rates is challenging. This note will not address the merits (or potential) of timing the interest rate market. Rather, it addresses one key, and often overlooked, aspect of interest rate levels – specifically, rate changes that are…

May 27, 2009

Interest Rate Hedges Remain Effective Despite Volatile Spreads

Like most financial markets, interest rate markets have experienced pronounced volatility over the last 18 months (ending in April of 2009). Many pension liability hedge strategies that relied heavily on derivatives (most notably interest rate swaps) and Treasury bonds significantly outperformed changes in the plan’s reported liability. The question that naturally arises is: Are strategies that utilize interest rate swaps…

December 18, 2008

Considerations Surrounding Corporate Bonds in Pension Portfolios

The recent widening of credit spreads has increased focus on the potential suitability and attractiveness of corporate bonds as pension plan investments. This paper examines one aspect of these issues – reducing funded status volatility by better matching the sensitivity of the liability’s discount rate to credit spreads using corporate bonds. To assess the effectiveness of corporate bonds for this…

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