Fixed Income Update – Global Bond Markets

The Fed is ready for a rate increase this summer as comments made by Fed officials in May validated their confidence in the economy’s growth and rising inflationary pressures.

Some similarities between Greece and Puerto Rico emerged in May, as Puerto Rico received a form of debt relief for about $120 billion of bonds coming due this month. The House and Senate reached a deal that would give the U.S. Territory of Puerto Rico the ability to forgo paying on some of its debt as well as not impose U.S. minimum wage rates for residents under 25. Puerto Rico has already defaulted on several of its bond payments due in May. A declining economy and migration of citizens out of the country have led to the current circumstances.

Low to negative bond yields in Europe and Japan are costing bond investors billions. Fitch, a bond rating agency, released a statement in May detailing how negative yields impact investors. It estimates that there is roughly $10 trillion of negative yielding debt worldwide, in turn costing investors about $24 billion annually. With the average negative yield being -0.24% on $10 trillion, it costs bond investors $24 billion annually. Conversely, the average yield on the same bonds five years ago were 1.23%, producing $123 billion annually. The ultra low yields are primarily impacting pension funds holding negative yielding debt because the returns earned help pay down any pension liabilities. Lower yields are also influencing investors to shift to higher yielding and more volatile bonds.

Sources: Fitch, Eurostat, Bloomberg

More American’s Working Past 65 – Labor Market Dynamics

According to data recompiled by the U.S. Bureau of Labor Statistics, almost 20% of American’s age 65 years and older are currently working. This statistic is reported as the U.S. Employment Population Ratio 65 Years Of Age & Older. It indicates the percentage of the total US working-age population aged 65 or greater that are employed. There are various reasons behind older people working longer, all of which tend to be of demographical nature.

The financial crisis of 2008/2009 and the technology bubble bursting in 2000 devastated many retirement plans for employees, as their 401k and retirement savings lost enough to postpone retirement for many workers. A recent report by the Government Accounting Office showed that nearly 60% of U.S. households have no 401k or retirement plan assets.

Various studies have found that employees with higher education such as college degrees, tend to work longer than those with less education. With the unemployment rate currently at 5%, employers have an incentive to keep qualified workers no matter what their age. Older workers today tend to have skills that younger workers may not, thus making it desirable for companies to keep older employees employed. Among other reasons for working past 65 include the rise in life expectancy, financial burdens, and the need to have benefits.

Sources: U.S. Bureau of Labor Statistics, GAO

Oil Prices Hit 7 Month High – Commodities Update

 U.S. crude oil prices, as measured by the West Texas Intermediate (WTI) benchmark reached a 7-month high in May, as prices traded over $50 per barrel, the highest levels since October 2015. The price rise came after the U.S. Energy Department released data showing that crude oil inventories had dropped in the U.S.. Inventories tend to drop as the economy uses more oil and gasoline going into the summer months.

WTI prices have almost doubled from a year ago as supply of and demand for oil worldwide have started to rebalance. Oil analysts believe that if prices move above $50 per barrel, it will spur additional production by U.S. drillers, as their profit margins increase with higher prices. As long as the extra production is consumed by an increase in demand, then prices should stay about the same if not elevate further.

Sources: U.S. Dept. of Energy

Greece Debt Crisis Re-Emerges – International Fiscal Crisis

 The debt woes of Greece of have been ongoing since 2009, when a severe recession led the country into a debt crisis. In late May, Greece was able to once again secure debt relief from its European creditors by providing short and long term relief on debt coming due. The European Union members agreed on measures that will be phased in progressively with the continued support of the IMF. The IMF had announced in early May that it was considering halting its support for Greece, which was adamantly rejected by Greece and other countries. Greece will receive a 10.3 billion euro aid disbursement in order to avoid defaulting on debt it owes this summer.

Since the initial bailout of Greece in 2010, Germany has been the architect in reforming Greece’s expenses, instituting austerity measures that reduce pension payments, increase taxes, and reduce public service pay. All of these measures have been and continue to be extremely unpopular with Greek citizens, prompting public protests and labor disputes.

Sources: EuroStat, Bloomberg, IMF

Equity Markets Overview – Domestic Stocks

U.S. equity indices were essentially flat for the month of May, as the S&P 500 and the Dow Jones Industrial Average both were up moderately for May. Analysts are starting to question earnings growth and profitability among some sectors as the term “profits recession” has been widely used. Many analysts believe that the beginning of the year turmoil that followed the Fed’s rate hike in December may not be replicated, as the equity markets may have already priced in a rate increase. Energy sector earnings have hindered equity indices for months as profits dropped, but are expected to rebound as oil prices have risen.

 Sources: Bloomberg, S&P, Dow Jones, Federal Reserve