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War Room. Fixed Income. Broken Dreams. 28 August 2013. HiddenLevers War Room. CE Credit. Macro Coaching. Idea Generation. Archived webinars. Open Q + A. P resentation deck. Product Updates. Scenario Updates. War Room. Market Volatility Update - Middle East Troubles

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War Room

Fixed Income. Broken Dreams.

28 August 2013

HiddenLevers War Room

CE Credit

Macro Coaching

Idea Generation

Archived webinars

Open Q + A

Presentation deck

Product Updates

Scenario Updates

War Room

  • Market Volatility Update

    • - Middle East Troubles

    • - Debt Ceiling + Obamacare

  • Macro Overview – Taper Coming?

  • Fixed Income Broken

  • IV. Winners + Losers in Rising Rates

Market volatility update


Market Volatility Update

Middle East Troubles




Oil = 110

sources: HiddenLevers, Washington Post

Oil near

2 year highs

Syria conflict hurts Iran progress

US attack = risk off

source: HiddenLevers, US Energy Information AdministrationInitial Reaction = 3 month time frame

Oil rally temporary

Middle East Troubles

Arab Spring


source: HiddenLevers

Remember the good old days Bob?

Oil = 113

Debt Ceiling + Obamacare

GOP divided on idea of using Government shutdown to defund Obamacare

But House Majority Leader has suggested using Debt Ceiling negotiations to defund Obamacare– does this put default back on the table?

Default is much bigger than Shutdown

Watch out for biased research on Obamacare

Market Volatility – Recap

Syria = NOT priced in

Egypt = priced in

govt shutdown = sick

debt ceiling breach = dead

Macro overview taper coming


MAcro Overview – taper coming?

Macro Overview – Housing + Mortgage Rates

Housing starts and home prices both rising since early 2012

source: HiddenLevers

100bp rise in mortgage rates – impact on home sales just beginning

Macro Overview – Employment + CPI

Housing starts and home prices both rising since early 2012

source: HiddenLevers

100bp rise in mortgage rates – impact on home sales just beginning

Macro Overview – From the Horse’s Mouth

Fed Speak


No rate hikes anytime soon

…as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal…

“And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had evolved along the lines we anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective.”

- Ben Bernanke, 7/17/2013

If economy holds up, start taper in Sep ’13, and finish by mid-2014

I’m pretty sure

he means it Wilbur.

The Long View – where are we on rates?

Long-term (30yr) US interest rates have varied from 2% to 14%.

Even with 10yr at 4% we will be below long-term average interest rates.

This provides significant room for tapering as economy recovers.

~6% long term average for 30 year treasury

Fixed income broken crisis looming


Fixed Income broken – crisis looming?

Muni Bond Crisis – Scary Anecdotes

Detroit files for bankruptcy,

$18b owed

Harrisburg PA insolvent,

selling assets

Illinois pensions completely underfunded

Puerto Rico is close to needing a bailout

Cook County, IL debt downgraded

Muni bond sell off looks like Lehman

source: Bloomberg, Marketwatch, WSJ

Muni Bond Crisis – Reassuring Data



US municipal bond market



Total defaults for first half 2013, including Detroit

$6.4 billion of this is Detroit. 280 million of defaults otherwise.


Marketshare of muni bonds held by Individual Investors



Amount of bonds cities + states have sold in 2013

only 10 percent off last year’s pace



California’s last debt sale

Bond market no longer views CA as distressed credit.

Credit rating has been raised twice in 2013.

source: Journal Gazette, WSJ, Forbes, Reuters

Muni Bond Crisis – Comparisons

“Lehman moment”

US 10y yields

up 70% since 01/May

Muni bond yields up 30% since 01/May

source: HiddenLevers, Marketwatch

Fall in Munis tied to treasuries

Maybe I should have dropped a

Lehman bomb?

Munisindex -5%

US Treasury Funds

Dreyfus -15%

T. Rowe Price -15%

Munis held ground better than US Treasuries

Meredith Whitney

Lehman comparisons


Moving together since July

Muni Bond Crisis – Scenarios

  • Bad

  • Normal

  • Interest Rate risk

  • Ugly

  • Dramatic rise in defaults

1994 Bond Exodus – Massacre


50% rise


- $1.5 Trillion global bond market losses

- yields spiked 275 basis points in 6 months

- long term treasuries lost over 10% in 1994

- current lower rates = losses would be greater

1994 Bond Exodus – Historical Scenario

  • 1994 bond crash was mainly an interest rate and bond market phenomenon, did not have negative economic impacts

  • Stock market impacts were very mild, though volatility rose

  • Unemployment dropped, GDP growth increased, and CPI was stable during this period

1994 Bond Exodus – Precipitated by Fed?

Greenspan’s Fed hiked the Federal Funds Rate 6 consecutive times – from 3.5% to 6% in a one year timespan. He then reversed course and cut rates for the most of the next 2 years.

1994 Bond Exodus – No Stock Exodus

1965: S&P -12.2%

1972: S&P 4.8%

1987: S&P -6.2%

What happens to stocks after the Fed begins to tighten policy?

Average 1Y S&P Return



1994: S&P -4.6%

New Bond Exodus? – Bond + Equity Outflows

(dollar figures in millions)

Regular bond inflows until mid-2013

June 2013

the reckoning

Bond outflows haven’t stopped

source: ICI Trends in Mutual Fund Investing

More likely Fed Taper than great rotation

At MI6 we call that a smoking


Winners losers in rising rates


Winners + losers in rising rates

How to control duration?

Shorten maturities

Increase yield

Hold to maturity

Floating rate issues

Higher yield considerations

Increased credit risk

Higher correlation to stocks

Rising Rates: Duration and Rate Risk

Rising Rates: Impact by Bond Maturity

What’s the impact of 150bp rise in 10y yields?

  • -2.7% for short duration funds

  • -20% for 20+ year maturities

  • Average impact of -10% across maturities

Rising Rates: Equities







Rising Rates – Try Correlations Screener








Life Insurance




Product Update

  • New Headers + Style

  • Disclosures – available to all subscribers

  • Risk Profile – improved layout

  • Trainings – new format

  • Coming soon:

    • Asset Allocation: multiple categories on funds

    • Disclosure – auto-load in settings