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What’s happened so far with the return on safe and liquid assets?

Today, we use an assortment of FRED data to consider a straightforward question: What has happened to the returns on safe assets (in this case, Treasury securities) since the pandemic hit? We look especially at the possible contributions of inflation expectations and demand for liquidity.

The FRED graph above shows

  • nominal rates for the 1-year Treasury (dark blue) and the 5-year Treasury (red)
  • the difference between the “instantaneous” 5-year-ahead Treasury rate and the 5-year, 5-year forward expected inflation rate (green)
  • the difference between corporate bond yields and the 5-year Treasury yield (light blue)

The 1- and 5-year Treasuries are among the safest and most liquid assets in the market, and both rates have dropped considerably since the start of the pandemic. From January 2 to July 31, the 1-year rate fell 145 basis points from 1.56% to 0.11% and the 5-year rate fell 144 basis points from 1.67% to 0.23%. Also, the slope of the yield curve (the difference between the 5- and the 1-year rates) in July is quite similar to what it was in January: about 10 basis points.

Because these are shorter-term nominal rates, we also look at forward rates implied by the Treasury yield and long-term inflation expectations. Specifically, we graph the difference between the instantaneous Treasury rate 5 years forward and the 5-year, 5-year forward inflation expectation rate to calculate the change in long-term real rates. The green line in the graph shows a decline of about 108 basis points, smaller than the decline in short-term nominal rates.

Finally, we can look at what happened with safe but illiquid assets. The light blue line tracks the change in the credit spread for AAA corporate bonds (ie, the difference between ICE BofA AAA US Corporate Index Effective Yield and the 5-year Treasury). These securities carry very little default risk, but aren’t as liquid as Treasuries. So, the yield spread on these bonds relative to Treasuries is often viewed as a proxy for the liquidity premium. (See papers by Krishnamurthy and Vissing-Jorgensen and del Negro et al.) In recent months, this spread has risen by 32 basis points, consistent with the increased scarcity of liquid assets.

Hence, the drop in nominal rates for safe and liquid assets was driven by a combination of an overall drop in real and safe rates (at both short and long horizons) and an increase in the liquidity premium. A paper by Kozlowski, Veldkamp, and Venkateswaran provides a model consistent with these observations.

How this graph was created: Search FRED for “1 year Treasury” and select the constant maturity rate. From the “Edit Graph” panel, open the “Add Line” tab: Search for and add the 5-year rate. Then, add another line by searching for and selecting the “instantaneous rate” series (take the 5-years hence series); then add a series by searching for and selecting the forward inflation rate; fianlly, apply formula a-b. For the last line, repeat the previous steps by searching for “AAA yield” and “5 year Treasury.” Finally, start the sample period on 2020-01-01.

Suggested by Julian Kozlowski.

View on FRED, series used in this post: BAMLC0A1CAAAEY, DGS1, DGS5, T5YIFR, THREEFF5

Seasonality in food prices: A bountiful harvest of FRED data

The FRED Blog has discussed shocks to meat and fish prices related to the COVID-19 pandemic. Shocks are unexpected changes in the supply or demand of a product or commodity that results in a sudden change in its price. Today, we discuss how the timing of harvesting seasons results in predictable changes in the prices of fresh fruit.

The FRED graph above uses data from the U.S. Bureau of Labor Statistics Consumer Price Index, Average Price Data release: It shows the quarterly dollar prices of a pound of Thompson seedless grapes (green circles) and a dry pint of strawberries (red circles).

When grapes are harvested at the end of the summer (the third quarter of the year) and strawberries are picked in the spring (the second quarter of the year), the abundant supply pushes down their prices to their annual lows. Notice how strawberry prices remain low—or even fall farther—during the third quarter of the year. This report from the Economic Research Service of the U.S. Department of Agriculture reviews these seasonal patterns and highlights the extended growing season for strawberries in the U.S.

For contrast, we also plot the quarterly dollar price of a pound of bananas. Because this fruit grows only in the tropics and tropical weather has little seasonal variation, bananas are picked year-round. There are almost no periodic and/or regular changes to banana prices.

To learn more about fruit price volatility, read this report from the Bureau of Labor Statistics. Like FRED, it is rich in nutrients.

How there graphs were created: For the first graph, search for “Grapes, Thompson Seedless, Per Lb. (453.6 Gm) in U.S. City Average.” Next, use the “Edit Graph” menu’s “Add Line” tab to add the series “Strawberries, Dry Pint, Per 12 Oz. (340.2 Gm) in U.S. City Average.” Next, edit Line 1: Click on “Modify frequency” and select “Quarterly.” Click on “Copy to All” to apply the same change to Line 2. Next, use the “Format” tabe and select “Mark type: Circle.” Last, select colors to taste. For the second graph, search for “Bananas, Per Lb. (453.6 Gm) in U.S. City Average” and repeat the above steps for unit frequency and graph format.

Suggested by Diego Mendez-Carbajo.

View on FRED, series used in this post: APU0000711211, APU0000711415, APU0000711417

Retail sales in a pandemic recession

Diverse tales by sectors

The FRED graph above shows retail sales for the last year and a half. Of course, the pandemic has had a huge impact, with a severe drop and a quick recovery. But the retail sector is large and diverse. So let’s look at various layers of it.

This graph is one of the strangest looking ones we’ve ever shown on this blog. And it tells very different stories. Let’s go through them one by one. (Hover over the legend in the graph to better see the respective lines.)

Grocery store sales actually surged with the pandemic. This is likely linked to the substitution from eating out to eating at home, which we discussed earlier on this blog.
Alcohol sales increased as well, as discussed in another post.
Pharmacies and drug stores are also doing well, likely due to a higher demand for prevention goods.
Men’s clothing has been a disaster, bottoming out in April 2020 at 12% of its January 2020 sales (after adjusting for seasonal variations).
Sporting goods sales fell by half but are now higher than before. Whether this rise was caused by simply catching up on postponed sales remains to be seen.
Warehouse clubs and superstores did well initially and are now back to normal.
Online and mail-order shopping… It’s no surprise this area is doing well, but it hasn’t been exploding as much as some may think.

The sectors we highlighted here are special in some ways, but there’s much more to explore from the Monthly Retail Sales release table.

How these graphs were created: For both graphs, start from the release table. For the first graph, simply click on the retail sales excluding food services and restrict the sample to 2019-01-01 to 2020-06-01. For the second graph, check the relevant series, click on “Add to Graph”; from the “Edit Graph” panel, change units to 100 for 2020-01-01, click “Apply to all,” and restrict the sample period to 2019-01-01 to 2020-06-01.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: MRTSSM44000USS, MRTSSM4451USS, MRTSSM4453USS, MRTSSM44611USS, MRTSSM44811USS, MRTSSM451USS, MRTSSM45291USS, MRTSSM4541USS

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