In The Headlines
Foreign Selling of US Treasuries Could Pressure Rates Further
The biggest foreign buyers of U.S. government bonds are quickly retreating after years of absorbing record amounts of the securities. This is an important dynamic to understand when looking at the potential fate of the $13.6 trillion Treasury market in 2017. It is hard to see how these bonds can significantly rally given the exodus of foreign central banks from the U.S. government-debt market.
Major foreign holders of U.S. Treasuries have been reducing their inventories at an accelerating clip. Big foreign holders sold Treasuries in October at the fastest pace for a month since 2000. China has cut its holdings to the lowest since 2010, while Japan and Brazil have also steadily liquidated their stockpiles.
China has been selling its holdings of Treasuries at an accelerating clip as it supports its economy. And it is not just the big governments that are selling. Private foreign investors have been net sellers recently, too, as Wells Fargo Securities rates strategist Boris Rjavinski pointed out in a recent report.
All this has helped fuel the biggest selloff in the notes since 2009. While many analysts have attributed the bond rout to the unexpected election of Donald Trump as U.S. president and subsequently higher growth and inflation expectations, the foreign flows complicate the picture.
For years, many countries were huge buyers of Treasuries as they built up their foreign-currency reserves. Many now need the money and are cashing out. China, for example, is using substantial amounts of cash to support its depreciating yuan and bolster its financial system, which is showing signs of stress as the government seeks to curb risky lending practices. Brazil’s economy is in shambles, meaning that nation needs all the free cash it can get to plug its budget gaps.
These foreign withdrawals will most likely continue for the foreseeable future, Rjavinski said. That does not mean the dip in Treasury values will accelerate drastically in the coming months. In fact, there is evidence that the latest selloff has gone too far and will correct soon enough. However, some market observers warn investors may be overestimating the new administration’s ability to quickly enact policies that will fuel just the right amount of inflation and growth to knock the economy out of its slow-growth rut.
Given this backdrop of foreign selling, yields on 10-year Treasuries are not likely to revisit the lows of 1.36% seen in July. The days of ultra-low U.S. yields would seem to be over, regardless of what economic policies the new president pursues in the coming year.
Citations
1. http://bloom.bg/2hFnCeU – Bloomberg
2. http://bit.ly/2fXhGZG – ZeroHedge.com
Will Brands Be Able to Predict What We Want in 2017?
In 2017, advertisers are going to focus not just on where you are, but where you are going and—more importantly—what you are going to want. “Communicating to people based on who they are and location, that’s going to become passé,” said Jonathan Adams, chief digital officer, Americas, at Maxus Global. “Where people are going to be is going to be more valuable than where they are.”
Mobile advertising is likely to surpass desktop advertising for the first time next year. Media agency Zenith projects that brands will spend $99.3 billion on mobile advertising worldwide in 2017, versus $97.4 billion for desktop advertising. The great advantage of mobile advertising is that it not only reaches people at any time, it adds a layer of location-based data that can find people wherever they are. Since our devices also know other personal information—like calendar appointments or our recurring grocery orders—brands will use that data to anticipate where we will be and suggest items or services to us before we know we need them, Adams explained. “It’s marketing to people based on where their journey will take them in a given day, versus where people are in a given moment,” Adams added.
This puts digital advertising leaders like Google and Facebook at an enormous advantage since they already have much of this kind of data about consumers. It also creates opportunities for apps like Uber, which knows your daily travel patterns. (Uber has not announced any plans to get into advertising.) Stores like Starbucks could theoretically offer app users specific coupons for drinks it knows they will like when they are near a location. “Mobile has become such an important channel for media consumption for consumers that advertisers need to be there in a way that works and meets their objectives,” said Graham Mudd, director of product marketing for Facebook Ads.
While Mudd did not address predictive advertising specifically, he said 2017 would be a year where more brands would take advantage of “direct response” ads. These ads would let consumers react and shop based on what is around them, moving away from the desktop experience which assumes people are sitting down to make a list of purchases. It also means brands have to personalize their ads specifically for each person instead of relying on blanket advertising, Mudd said.
“In the history of advertising, ads were placed in fairly linear environments,” he explained. “You needed to watch the ad to consume the TV content, or flip past it in the newspaper to get to the next story. What I think we are starting to see is a decoupling of reach and attention. Advertisers increasingly need to earn the attention of consumers instead of take it for granted that you are buying a 15-second or 30-second spot that they need to consume.”
However, predictive advertising will not be effective for all companies, points out Matt Goddard, chief executive officer of technology marketing firm R2Integrated. Brands need to have enough data to have a “complete” view of their customer. While some companies are moving toward that direction, not everyone is there yet. In addition, these ads are best for selling goods, but service-based industries will have a harder time using online data to figure out their customers’ next moves.
“It’s common sense that if somebody exhibits a certain pattern on a daily or weekly basis, I could use that data to provide advertisements,” Goddard said. “Those tend to be companies that are business to consumer. Manufacturing and health-care companies will never be able to offer that form of advertisement.”
Citations
1. http://cnb.cx/2hEzttE – CNBC
2. http://bit.ly/2hX5xoU – Forbes
The Good News Is . . .
• Consumer optimism about the economy increased to the highest level since August 2001. The Consumer Confidence Index hit 113.7 in December, The Conference Board said. Economists polled by Reuters expected the Consumer Confidence Index to hit 109 for the month. The survey, a closely followed barometer of consumer attitudes, measures confidence toward business conditions, short-term outlook, personal finances and jobs. “Consumer Confidence improved further in December, due solely to increasing expectations which hit a 13-year high,” Lynn Franco, director of economic indicators at The Conference Board, said in a press release.
• Carnival Corp., a global leisure travel company, reported earnings of $0.67 per share, an increase of 15.5% over year-earlier earnings of $0.58 per share. The firm’s earnings topped the consensus estimate of analysts by $0.09. The company reported revenues of $16.4 billion, an increase of 4.5%. Management attributed the results to continued strong consumer demand in excess of its available capacity.
• Linde of Germany said it had reached an agreement on a “merger of equals” with Praxair, an American rival, in a deal that would bring together two of the world’s largest suppliers of industrial-gas products. The combined companies would have more than $30 billion in annual revenue and a market capitalization of more than $60 billion. Praxair’s main products include oxygen, carbon dioxide and helium. It also manufactures equipment to produce other gases used in industry. Linde has three divisions focused on industrial gases, engineering and supply chain services. Its gas division concentrates on industrial and medical gases, including oxygen, nitrogen and argon.
Citations
1. http://bit.ly/1eu7yyH – The Conference Board
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/2hArqta – Carnival Corp.
4. http://nyti.ms/2itDwJa – NY Times Dealbook
Planning Tips
Guide to CD Ladders
Certificates of deposit, or CDs, typically have the highest interest rates among government-insured savings products. That makes them ideal for people who want to bolster their nest egg without assuming much risk. But a “set-it-and-forget-it” approach is not the only way to use a CD. Building a CD ladder can be a useful tactic to further personalize your savings strategy. Below is a brief look at how CD ladders work. Be sure to consult with your financial advisor to determine if this is an appropriate strategy for your situation and investment goals.
How CD ladders work – The price for getting higher interest rates using CDs is that you agree to lock in your money for a set time period, sometimes up to five years. The longer a CD’s term—and the larger your deposit—the higher your rates. While your money is locked away, interest rates could increase, and you would not be able to take advantage of them. Or an emergency might leave you in desperate need of that cash. But withdrawing funds before the maturity date typically triggers steep penalties. CD laddering addresses these concerns. It involves buying smaller CDs that mature at staggered dates, rather than a single long-term CD.
Benefits of CD ladders – The CD laddering strategy provides several benefits:
-Liquidity – Your cash will be available to you at frequent intervals.
-Flexibility – You can decide how you want to split up your investments.
-Better interest rates – You will be able to choose longer-term CDs with higher rates and still have certificates maturing on a regular basis.
-Peace of mind – If interest rates go up, you will have cash to invest in new CDs. And if rates fall, you still have money invested in long- term CDs that come with higher rates.
Traditional CD ladder – The traditional CD ladder model divides your investment evenly over five CDs, with one CD maturing each year. If you had $10,000 to invest, your funds could be spread out like this:
- – $2,000 in a 12-month CD
– $2,000 in a 24-month CD
– $2,000 in a 36-month CD
– $2,000 in a 48-month CD
– $2,000 in a 60-month CD
You begin seeing the payoff at the end of the first year. After your 12-month CD matures, you can reinvest that money in a new 60-month CD. When the second year ends, you can continue this pattern by reinvesting the money from your original 24-month CD in another 60-month CD. You will eventually reach a point where your ladder is made up entirely of long-term CDs, which earn the most interest. One CD will mature each year, meaning you can either continue investing in 60-month certificates or move the proceeds to your checking account.
Alternative CD ladder structures – Dividing your investment equally among certificates is not the only option. Some people like to build their ladders based on economic projections. When the direction of interest rates is fairly clear, you may want to approach your CD ladder a little differently. For example, when interest rates are rising, consider investing a higher percentage of your funds in shorter-term CDs. When rates are going down, aim to lock a higher percentage of your investment in the longest-term CDs you can afford. Keep in mind that a ladder with equally divided investments offers the widest safety net for your portfolio growth.
Purchasing CDs – There are two ways to purchase CDs. The first way is directly through a bank, which does not carry commissions. Generally speaking, banks offer different rates of return depending on their respective need to draw customer deposits. Moreover, FDIC insurance only protects a finite amount of money per bank. So you may need to shop around to get the best rate and fully protect your assets. Alternatively, you may use a brokerage house rather than searching from bank to bank in order to save time. Any CD purchased through a broker is subject to a commission. You should consider how commissions will affect your yield to maturity (YTM). Although a CD may pay a stated amount of interest, your actual YTM could be materially lower depending on commissions.
Citations
1. http://bit.ly/2hEwU9D – Investopedia
2. http://bit.ly/2iBo5vz – The Balance.com
3. http://bit.ly/2iQyqTA – AARP
4. https://nerd.me/2gEurYR – Nerd Wallet
5. http://read.bi/2hEno66 – Business Insider
