As if JPM knew what was coming and positioned itself accordingly.
Rising interest rates do not seem to hurt everyone
Rising interest rates are good for conservative investors who buy higher interest CDs and bonds to hold for income. The Federal Reserve is widely expected to cut yields next year.
This isn’t really true in many cases. #pun
2020 - 1.0% interest, 2% inflation, 33% marginal tax rate … net real yield is 0.67 - 2 = -1.33%
2023 - 5% interest, 5% inflation, 33% marginal tax rate … net real yield is 3.35 - 5 = -1.65%
So people in this situation are slightly worse off in real terms with the recent higher interest rates.
Normally, I would expect an organization that makes it’s loot by borrowing short and lending long would get upside down on it’s portfolio in a rising rate environment, like the S&Ls did in the 70s. Clearly, JPM positioned itself well for this environment. Maybe Dimon stepped up his game after the blowback from the $50M bump in pay he got last year, for performance that trailed the industry average?
Wells had a good quarter too, but it’s shareholders didn’t get the payday JPM holders did.
That is where the boomers are going to face things do not work that way. Meaning this is no longer a supply side econ outlook of disinflation.
We are looking at keeping rates higher to ward off ever encroaching inflationary forces. Until the second half of 2024 and beyond global manufacturing wont hold enough sway to tamp down inflation. Rates will be maintained a bit above what is needed to curb inflation. This allows more fiscal policy to beef up industrial output.
But when interest rates are high you can buy bonds or CDs that pay for many years. And if (maybe big “IF”) inflation is reduced then your net yield over several years can be higher. No?
@mschmit, yes. Also, the value of bonds will rise if interest rates fall, which could yield a capital gain if sold before maturity.
But if inflation stays high for the long term, yields will eventually creep up. That’s what happened in the 1970s.
Yes. But “everyone” (“the market”) knows this and sets those rates appropriately. For example, right now, I buy a few short-term treasury bills every week, and most of them have been at or near 5% recently. I could buy a 7-year note or a 10-year bond, but those will only yield about 3.5% recently. Let’s say someone buys a 7-year note at 3.55%, if the first year inflation is 5.5%, second year is 4.5%, and third year is 3%, and remaining years are about 2%, then annual real yields are -2%, -1%, 0.5%, 1.5%, 1.5% 1.5%, 1.5%, the real yield over the 7 years is rather paltry. In fact, if the market is efficient (and it mostly is, especially the bond market), you could have bought TIPS with 7 years remaining and get roughly the same yield (about CPI + 1.2%), but with sudden higher inflation protection embedded in it.
On the other hand, if rates become really high, it is almost a no-brainer to buy the longest possible duration you can get. Perhaps the best, certainly best risk-adjusted, investment over the last 4 decades were longest term treasury bonds in the early 80s at double digit rates. Can you imagine getting 13+% a year for 30 years guaranteed with nearly zero risk?