Tariffs - response...

aroominyork

So the first round of tariffs was not a bluff. How does it affect fixed interest investments? It is not going to dampen inflation, so my first thought is to move money from an aggregate bond fund into cash pretty quickly (something like CSH2).

masonic

Moving from a diversified portfolio of international bonds to tracking SONIA is a pretty big change to your asset allocation. If you really feel the need to act, then there should be ways to reduce duration without shedding the diversification.

I can't really see Trump's actions not having been anticipated. He introduced tariffs during his last term, the effects of those were largely felt by US citizens, and it is not long until they will go to the ballot box again. The action so far looks like the bare minimum he could have done to avoid an embarrassing climb-down. Question is what would he do if inflation does start to pick up and the FOMC wants to respond, but Trump wants them not to.

aroominyork

masonic said:

Moving from a diversified portfolio of international bonds to tracking SONIA is a pretty big change to your asset allocation. If you really feel the need to act, then there should be ways to reduce duration without shedding the diversification.

Except that cash is still competitive. Correct me if I'm wrong, but it feels like a slow process for higher coupon bonds to feed their way into trackers and increase yields. 

masonic said:

I can't really see Trump's actions not having been anticipated. He introduced tariffs during his last term, the effects of those were largely felt by US citizens, and it is not long until they will go to the ballot box again. The action so far looks like the bare minimum he could have done to avoid an embarrassing climb-down. Question is what would he do if inflation does start to pick up and the FOMC wants to respond, but Trump wants them not to.

Anticipated, maybe, but not necessarily responded to. After all, there was a time lag between the inflation of the last few years coming into sight and the response of the bond market (as you knew to your profit!).

Baldytyke88

masonic said:

Moving from a diversified portfolio of international bonds to tracking SONIA is a pretty big change to your asset allocation. If you really feel the need to act, then there should be ways to reduce duration without shedding the diversification.

I can't really see Trump's actions not having been anticipated. He introduced tariffs during his last term, the effects of those were largely felt by US citizens, and it is not long until they will go to the ballot box again. The action so far looks like the bare minimum he could have done to avoid an embarrassing climb-down. Question is what would he do if inflation does start to pick up and the FOMC wants to respond, but Trump wants them not to.

The Dow Jones Industrial Average has increased 7% more than the FTSE over the past 6 months, which has surprised me.

I believe low tariffs can be a good way to raise revenue, better than taxing jobs, but not tariffs that are intended to blackmail countries.

I don't have any American shares, but Trump's actions do worry me, that he will start a global crash, although I have not sold any of my UK shares.

cloud_dog

"...I believe low tariffs can be a good way to raise revenue..."

But tarrifs don't raise revenue, they make products more expensive to the consumer, which with my simple understanding raises the possibility of rising inflation.

masonic

aroominyork said:

masonic said:

Moving from a diversified portfolio of international bonds to tracking SONIA is a pretty big change to your asset allocation. If you really feel the need to act, then there should be ways to reduce duration without shedding the diversification.

Except that cash is still competitive. Correct me if I'm wrong, but it feels like a slow process for higher coupon bonds to feed their way into trackers and increase yields. 

masonic said:

I can't really see Trump's actions not having been anticipated. He introduced tariffs during his last term, the effects of those were largely felt by US citizens, and it is not long until they will go to the ballot box again. The action so far looks like the bare minimum he could have done to avoid an embarrassing climb-down. Question is what would he do if inflation does start to pick up and the FOMC wants to respond, but Trump wants them not to.

Anticipated, maybe, but not necessarily responded to. After all, there was a time lag between the inflation of the last few years coming into sight and the response of the bond market (as you knew to your profit!).

The current yield to maturity of the Bloomberg Global Agg. index is 4.1%. FedWatch tool suggests markets have priced in 3 cuts over the next 2 years, which has been on a downward slide ever since the election. There is still less than a 2% probability, based on the guestimates used in the tool, that the fed rate will be higher in a couple of years than it is today. So if you think that this is a realistic possibility now, you are right that it doesn't seem priced in.

It was much easier for me to predict that bond prices were going to fall significantly when global interest rates were a fraction of a percent and the YTM on an aggregate bond fund was a little above 1%. When inflation started to pick up, it was fairly clear interest rates would have to follow... and bond yields would need to follow interest rates. Looking at the picture today, I haven't a clue whether interest rates will need to rise in the coming months and years, but opinion still seems to be that the trajectory will still be downward. We shall see.

Hoenir

cloud_dog said:

"...I believe low tariffs can be a good way to raise revenue..."

But tarrifs don't raise revenue, they make products more expensive to the consumer, which with my simple understanding raises the possibility of rising inflation.

Import tariffs are a tax that goes to the Federal Government. Trump has to fund his pre-election tax cut promises etc from somewhere. Though there's serious questions over whether the numbers will actually stack up. 

Linton

aroominyork said:

So the first round of tariffs was not a bluff. How does it affect fixed interest investments? It is not going to dampen inflation, so my first thought is to move money from an aggregate bond fund into cash pretty quickly (something like CSH2).

If you are sufficiently diversified does it matter?  If you are a long term investor your first thought should aways be to do nothing.  Why did you buy those fixed rate investments?  Do US tariffs change your objectives? I guess there will be many events like this as the US continues to lose its global dominance.

aroominyork

masonic said:

aroominyork said:

masonic said:

Moving from a diversified portfolio of international bonds to tracking SONIA is a pretty big change to your asset allocation. If you really feel the need to act, then there should be ways to reduce duration without shedding the diversification.

Except that cash is still competitive. Correct me if I'm wrong, but it feels like a slow process for higher coupon bonds to feed their way into trackers and increase yields. 

masonic said:

I can't really see Trump's actions not having been anticipated. He introduced tariffs during his last term, the effects of those were largely felt by US citizens, and it is not long until they will go to the ballot box again. The action so far looks like the bare minimum he could have done to avoid an embarrassing climb-down. Question is what would he do if inflation does start to pick up and the FOMC wants to respond, but Trump wants them not to.

Anticipated, maybe, but not necessarily responded to. After all, there was a time lag between the inflation of the last few years coming into sight and the response of the bond market (as you knew to your profit!).

There is still less than a 2% probability, based on the guestimates used in the tool, that the fed rate will be higher in a couple of years than it is today. So if you think that this is a realistic possibility now, you are right that it doesn't seem priced in.

Yes, though all I'm calling is a slowdown in cuts, not necessarily a reverse. 

Linton said:

aroominyork said:

So the first round of tariffs was not a bluff. How does it affect fixed interest investments? It is not going to dampen inflation, so my first thought is to move money from an aggregate bond fund into cash pretty quickly (something like CSH2).

If you are a long term investor your first thought should aways be to do nothing. 

Wise words!

masonic

aroominyork said:

masonic said:

aroominyork said:

masonic said:

Moving from a diversified portfolio of international bonds to tracking SONIA is a pretty big change to your asset allocation. If you really feel the need to act, then there should be ways to reduce duration without shedding the diversification.

Except that cash is still competitive. Correct me if I'm wrong, but it feels like a slow process for higher coupon bonds to feed their way into trackers and increase yields. 

masonic said:

I can't really see Trump's actions not having been anticipated. He introduced tariffs during his last term, the effects of those were largely felt by US citizens, and it is not long until they will go to the ballot box again. The action so far looks like the bare minimum he could have done to avoid an embarrassing climb-down. Question is what would he do if inflation does start to pick up and the FOMC wants to respond, but Trump wants them not to.

Anticipated, maybe, but not necessarily responded to. After all, there was a time lag between the inflation of the last few years coming into sight and the response of the bond market (as you knew to your profit!).

There is still less than a 2% probability, based on the guestimates used in the tool, that the fed rate will be higher in a couple of years than it is today. So if you think that this is a realistic possibility now, you are right that it doesn't seem priced in.

Yes, though all I'm calling is a slowdown in cuts, not necessarily a reverse.

We've been living through the non-materialisation of predicted rate cuts for a couple of years now. Yet someone holding something like Vanguard Global Aggregate Bond Index has seen 3% returns over both of the last 12 month periods. Here's what's been happening to the yield curve over the past year:

The average maturity of the constituents of the bond index is 8.5 years. The ultra-short rate is now lower than the rate on that part of the curve. Do you think that having just one or two (or zero) cuts over the next couple of years is going to have a very great impact, if your thesis is that this would be the extent of the change?

This is of course before you consider Trump's obsession with driving the stockmarket higher, which could lead him to meddle in interest rate policy if he believes cuts are needed to prop up that market.

Hoenir

masonic said:

This is of course before you consider Trump's obsession with driving the stockmarket higher, which could lead him to meddle in interest rate policy if he believes cuts are needed to prop up that market.

Bond markets would ultimately force Trump's hand.