Rates Rose Slightly In August – Fixed Income Update

Interest rates rose slightly in mid-August, following a weaker-than-expected auction for U.S. government bonds. The yield on the 10-year treasury rose from 0.55 in early August to 0.71 in mid-August, representing nearly a 30% jump within two weeks. The rapid rise in rates lifted mortgage rates and other consumer lending rates, which fell substantially beginning in late March. 

The Federal Reserve indicated an extended period of near zero short-term rates over the next five years as it expects inflation to be mild. The announcement sent long-term bond yields higher relative to short-term bond maturities.

Over $1 trillion of mortgage bonds have been purchased by the Federal Reserve since March of this year. The ambitious buying spree is intended to help sustain the housing market as jobs and incomes falter during the pandemic. Lower mortgage rates are expected to remain relatively steady, encouraging homeowners to refinance and buyers to purchase. (Sources: Federal Reserve, U.S. Treasury)

Equity Markets Driven Higher In August – Domestic Market Overview

U.S. stocks experienced an unprecedented recovery from the depths of the market turmoil in March, when the World Health Organization declared that COVID-19 was officially a pandemic. In August, equity values as measured by major indices returned to where they stood before the pandemic. The rebound in equity indices has been one of the strongest in nearly 90 years, propelling stocks to new highs in the past month.

Technology stocks led other sectors, with the widest price performance gap in 30 years. Substantial monetary and fiscal stimulus over the past five months helped elevate stocks, in addition to better-than-expected earnings for various sectors and industries. Some analysts believe that the market has been driven by policy, rather than by economic fundamentals, meaning that interest rate policy and tax legislation are becoming increasingly consequential. (Sources: Bloomberg, Reuters)

Pandemic-Driven Spending May Not Be Consistent – Pandemic Effects

Consumer spending soared in July to a record 8.2%, reported by the Commerce Department, accompanied by an increase in personal income which rose 10.5% in April.

Many analysts and economists believe that spending among U.S. consumers following the onset of the stimulus payments may be misleading, with any increase in spending merely temporary, as the benefits of the stimulus fade. Income figures may also be skewed as stimulus payments and generous unemployment benefits artificially increased incomes for some lower-income families.

Source: U.S. Commerce Department

Fewer Choices Are Here To Stay – Consumer Behavior

In response to the COVID-19 pandemic, choices available to the American consumer choices changed in the realm of diet, food preparation, and lifestyle habits. The transition into at-home cooking as a means of financial saving and risk reduction has expanded through American society and is projected to impart both short-term and long-term effects on consumer choices.

In addition to consumer impact, retailers are also experiencing drastic changes in food choices as a result of the pandemic; grocery stores have reduced food options while large corporate retailers have also transitioned into limited offerings. Consumer option reductions by American retailers have stemmed largely from over-stressed supply chains.

The short-term effects of the pandemic on consumer choices across industries are projected to shift long-term as some companies plan to commit to fewer choices in a post-pandemic world.  Restaurants are reducing menu options to mitigate expensive labor and supply costs that are often required to compete in the food industry. The automotive industry is also feeling the effects of the pandemic, and many automakers have begun the transition to limited supply and variety in hopes to alleviate extraneous costs within the supply chain and to offset decreased sales.

Uncertainty regarding the long-term effects of consumer choices remains, though some retailers are approaching the transition with a view toward permanence and little desire to return to broader product choices. (Sources: U.S. Department of Agriculture; Economic Research Service)

COVID-19 Is Making It Difficult For The IRS To Audit & Collect Taxes Owed – Fiscal Policy

As the pandemic took a toll on income for some companies and families across the country, it also took a toll on U.S. government income. The IRS discloses annually the sources of income collected from taxes. Part of the revenue generated by the IRS is the enforcement of tax collections via audits. The IRS report revealed that the number of audits in 2019 ranked among the lowest in decades for individual returns, the single largest source of income for the IRS.

Fewer audits means less revenue for the U.S. government, which has this year already issued over $3 trillion in debt since March of this year. The IRS collected approximately $28 billion in 2010 from audits, compared with $11 billion collected in 2019.

This year became challenging as IRS employees and agents were removed from the field due to pandemic restrictions. The inability to perform face-to-face audits has introduced significant difficulty for the IRS as it attempts to collect on taxes owed.

Sources: IRS Annual Disclosure Report, IRS Data Book 2019 Release