Monday, August 28, 2017

The SBA and kaput

kaput or kaputt
kuh-PUT, -POOT, kah-) 
Broken; ruined; finished.
From German kaputt (broken, ruined),


LIBOR is kaput.

Libor, the nearly 50-year-old global borrowing benchmark that became a byword for corruption, is headed for the trash heap of history. 

The U.K. Financial Conduct Authority will phase out the key interest-rate indicator by the end of 2021 after it became clear there wasn’t enough meaningful data to sustain the benchmark that underpins more than $350 trillion in securities.  The benchmark was set up by the British Bankers Association in 1986 as a way to price syndicated loans and interest-rate swaps, but its use soon ballooned. Submitted by a panel of lenders each morning, Libor is the average rate a group of 20 banks estimate they’d be able to borrow funds from each other in five different currencies across seven time periods.


SBA LIBOR Base Rate August 2017 =4.23%
SBA Fixed Base Rate August 2017 = 6.39%
SBA 504 Loan Debenture Rate for August  
The debenture rate is only 2.75% but note rate is 2.797% and the effective yield is 4.537%.

Is the Phillip’s curve kaput?

Recently released minutes from the last Federal Reserve meeting on monetary policy showed central bank officials saw some likelihood that inflation might remain below 2 percent for longer than they expected.   That explains the change in their policy statement wording saying inflation was "running below 2%" instead of "running somewhat below 2%."

This lack of inflationary expectations is enervating the cerebration on the Phillips Curve to the point it might be considered pabulum.  

The Phillips curve, an economic concept named for the late economist A.W. Phillips, states that as unemployment falls inflation will ultimately rise as workers see wage increases.   Fed officials have justified its recent tightening stance on the Phillips curve.   But inflation is falling below the Fed’s 2% target range despite unemployment falling.

The second half of the year opened on a strong note as nonfarm payrolls rose 209,000 in July.  Keep your eyes and ears open for this Friday’s report on jobs for the month of August.  

The momentum should continue as data showed second-quarter gross domestic product grew at a 2.6% annual pace more than double the revised 1.2% pace seen in the first quarter.  Yet despite that, signals of inflation rearing its ugly head are quiescent.  One of the Fed’s leading indicators on inflation is capacity utilization.   Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred. Capacity utilization was unchanged in July at 76.7 percent

The 30 year Treasury bond which is very sensitive to inflation saw strong demand at its last auction.  The 2.818 percent high yield for the $15 billion issue was 11.8 basis points below the rate awarded the month before and 35.2 basis points below the March rate - the highest yield since September 2014.

So where are interest rates headed?

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past 10 years.

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

DEC17- 1.43
DEC18- 1.66
DEC19- 1.84
DEC22- 2.36
DEC23- 2.51

What does all this mean?

I don’t know.

Eurodollar futures imply a quiescent Federal Reserve will estivate.

A lot of people think summer is kaput once Labor Day rolls around.

According to the Federal Reserve, here are our remaining holidays for 2017:
Labor Day September 4
Columbus Day October 9
Veterans Day November 11
Thanksgiving Day November 23
Christmas Day December 25