Tag Archives: Bonds

It’s Really Crazy What This ECB Has Wrought, by Wolf Richter

Europe is a borrower’s paradise and a saver’s hell. From Wolf Richter at wolfstreet.com:

In the land of NIRP refugees and “Reverse Yankees,” who will get crushed?

At the end of the week, something special happened, something totally absurd but part of the new normal: the average yield of euro-denominated junk bonds – the riskiest, non-investment-grade corporate bonds – dropped to the lowest level ever: 2.77%.

April 26 had marked another propitious date in the annals of the ECB’s negative yield absurdity: the average euro-denominated junk bond yield had dropped below 3% for the first time ever.

By comparison, what is considered the most liquid and save debt, the 10-year US Treasury, carries a yield of 2.33%; the 30-year Treasury yield hovers at 3%.

This chart of the BofA Merrill Lynch Euro High Yield Index (data via FRED, St. Louis Fed), shows just how crazy this has gotten in the Eurozone:

It’s not like there’s deflation in the Eurozone, despite rampant scaremongering about it. The official inflation rate in April was 1.9% for the 12-month period. As this chart shows, it’s not likely to go away any time soon (via Trading Economics):

In other words, the average “real” junk bond yield (after inflation) according to the above two indices is now 0.87%. That’s the return bond-buyers get as compensation for handing their money for years to come to non-investment grade corporations – as per an average of the ratings by Moody’s, S&P, and Fitch – with an appreciable risks of default looming on the horizon.

Issuing junk bonds in euros is not just the prerogative of European companies. It includes issuance of junk-rated US companies that seek out this cheap money. “Reverse Yankees,” as these bonds are called, have become a large factor in euro-bond issuance.

And investors that accept a “real” compensation of only 0.87% per year to deal with these risks – have they gone nuts? You bet.

To continue reading: It’s Really Crazy What This ECB Has Wrought


Biggest EU Banks Embark on the Mother of All Debt Binges, by Don Quijones

European banks need to raise capital, so they are issuing a brand new type of debt: senior non-preferred bonds. They are considered capital, have “senior” in the name so they pay a lower interest, but can be “bailed in.” In other words, if the bank runs into trouble, this class of creditors will have made an involuntary and probably unrecoverable contribution to the bank. This will not end well. From Don Quijones at wolfstreet.com:

Spain’s three biggest banks, Banco Santander, BBVA and Caixa Bank, have got off to a flying start this year having issued €8.6 billion in new debt, seven times the amount they sold during the same period of last year. The last time they rolled out so much debt so quickly was in 2007, the year that Spain’s spectacular real estate bubble reached its climactic peak.

Santander accounts for well over half of the new debt issued, with €5.12 billion of senior bonds, subordinate bonds, and a newfangled class of bail-in-able debt with the name of “senior non-preferred bonds” (A.K.A. senior junior, senior subordinated or Tier 3) that we covered in some detail just before Christmas.

Investors beware…

This newfangled class of bail-in-able debt was cooked up last year by French-based financial engineers in order to help France’s four global systemically important banks (BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale) out of a serious quandary: how to satisfy pending European and global regulations demanding much larger capital and debt buffers without having to pay investors costly returns on the billions of euros of funds they lend them to do so.

That’s what makes senior non-preferred debt so ingenious: it pretends to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bail-in-able. What it amounts to is a perfect scam for big banks to bamboozle bondholders – usually institutional investors like our beaten-down pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking.

To continue reading: Biggest EU Banks Embark on the Mother of All Debt Binges


Markets Smell a Rat as Central Banks Dither, by Wolf Richter

There are a lot of good reasons not to allocate much money to bonds as an asset class right now. For one, as Wolf Richter points out, central banks are probably not going to be as strong a bid for them as they have been. From Richter at wolfstreet.com:

Markets are suspecting that central banks are in the process of exiting this fabulous multi-year party quietly, and that on the way out they won’t refill the booze and dope, leaving the besotted revelers to their own devices. That thought isn’t sitting very well with these revelers.

In markets where central banks have pushed government bond prices into the stratosphere and yields, even 10-year yields, below zero, there has been a sea change.

The 10-year yield of the Japanese Government Bond (JGB) jumped 2.5 basis points to 0.115% on Thursday, the highest since January 2016, after an auction for ¥2.4 trillion of 10-year JGBs flopped, as investors were losing interest in this paper at this yield, and as the Bank of Japan, rather than gobbling up every JGB in sight to help the auction along, sat on its hands and let it happen.

And on Friday morning, the 10-year yield jumped another 3 basis points to 0.145%!

In September last year, the BOJ started the now apparently troubled experiment of trying to control not just short-term interest rates but also the entire yield curve. It targeted a 10-year yield of about 0% (it was negative at the time). Analysts believed that this would mean a range between -0.1% and +0.1%, and that if the yield rose to +0.1%, the BOJ would throw its weight around and buy.

But the fact that the BOJ allowed the yield to go above that imaginary line signaled to the markets that it no longer has the intention of capping the yield at +0.1%, that in fact the BOJ has stepped back.

To continue reading; Markets Smell a Rat as Central Banks Dither


Doug Casey: “Sell All Your Bonds”

The bond market is oversold so you might want to wait for a rally before you sell your bonds. That being said, selling bonds is a good long-term strategy, because interest rates have probably seen their generational lows (interest rates and bond prices move inversely to each other). From Doug Casey at caseyresearch.com:

So, Trump has won the election. Of course anything can happen between now and his presumed inauguration on January 20. Maybe the Swamp Creatures will succeed in causing a recount in so-called Purple States that could change the number of electors in Hillary’s favor. Maybe they’ll somehow influence Trump electors to vote for Hillary. None of this would have been an issue if Baby Bush II, Jeb, had been the Republican nominee, as was supposed to have happened. It all just shows what a transparent (a word these people love to use) fraud “democracy” has become.

Let the hoi polloi cast a meaningless vote, so they have the illusion of being in control. Instead of seeing themselves as subjects, they’ll think they’re “we the people,” who actually have some say in what happens. That way they’ll pay their taxes willingly, enthusiastically sign on to aggressive wars on the other side of the world against people they know nothing about, and generally do as they’re told. Because it’s supposed to be patriotic. “Democracy” is a much more effective scam for controlling the plebs than kingship or dictatorship.

That said, the Establishment, the Deep State, was genuinely shocked and appalled by Trump’s victory. As Baby Bush the First would have said, they misunderestimated how angry the average voter was. That’s because the Coastal Democratic Elite are totally out of touch with the common man. But they needn’t fret too much. They’ll be re-installed, with a vengeance, in four years.

To continue reading: Doug Casey: “Sell All Your Bonds”

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy, by Guy Manno

Surging bond yields reflect the prospect of surging bond supply, and perhaps a notching up of the market’s estimation of US default risk. From Guy Manno at crushthemarket.com:

The US election results are in and the US stock market is enjoying a sharp rally over the shock news of Donald Trump winning the election and becoming the new President elect.

On the back of the big rally in US stocks there has also been another big shift occurring in another very important asset class, US Government bonds.

US Government Bond Yields Surging

Since the news of the results of the US election were released US Government bonds have experienced a huge sell off in prices causing the yields to surge on Government bonds ranging from the 2 year bond all the way to the long end with 30 year Government bonds. (Note: Bond yields move inversely to bond prices.)

Specifically the US 10 yr Govt bond has seen the yield jump from around 1.80% before the election results to the current price of around 2.13%. (See chart below)

In the chart below you can see the magnitude of the rise in US 10 yr bond yield reaching the same level of the S&P 500 dividend yield.

Traditionally bond yields help to price the relative value of stocks. If bond yields rise the dividend yield on stocks would also have to rise. Usually stock dividend yields are above bond yields to entice investors to own riskier stocks over more conservative bonds. For the yield to rise on stocks either dividends would need to rise and or stocks would have to fall in price to lift the dividend yields.

So the fact that the 10 year bond yield has reached the same level of the S&P 500 dividend yield means that a bond investor can receive the same yield as stocks without the perceived risk.

Normally when Government bond yields rises considerably it indicates that either inflation is also rising and / or the economy is accelerating it’s growth prospects. When the economy start to accelerate its growth prospects investors traditionally buy stocks in anticipation of higher profits and dividends from a stronger economy and sell bonds which are considered defensive assets.

Many analysts and financial commenters have already come out and suggested that growth is now back on the agenda for the US economy since the electing of Trump as the new president. Because of the Trump factor these commentators have suggested this is the reason why bond yields are rising and suggest it’s a positive.

Why Surging Bond Yields Signals Pain Ahead

However we are not in normal times and there is a very big reason why the FED has spend the majority its balance sheet trying to keep US Government bond yields low, by buying them through the various QE programs and artificially forcing the bond prices higher lowering the yield.

It’s also the same reason why the FED has only increased the interest rates once back in December 2015 and has been terrified to rise them further since then. The reason is because the US has a major debt problem from a Government , corporate America and consumer level.

So if the FED has tried all this time to keep rates lows, how is it all of a sudden a good thing for the Government, corporate America, the consumer and the economy that interest rates are now rising. Especially when the debt levels in the US are higher now than before the 2008 GFC event that shook the US and Global economy.

To continue reading: Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy


Will the “Rout” in Government Bonds Turn into Carnage? by Wolf Richter

For all the conniptions in the stock market this week, the real story has been in the much bigger, much more important, and much less publicized, bond market. From Wolf Richter at wolfstreet.com:

“Inflation Trade” Heats Up, “Greater-Fool” Trade Falls Apart

The Government “bond rout” didn’t start with Trump’s election victory. It started in July. And it didn’t just hit US Treasuries. It hit government bonds around the world. It’s predicated on the idea that inflation was raising its ugly head again. That idea has now become further entrenched.

The threat of inflation puts holders of low-yielding or zero-yielding long-term bonds in a very foul mood because the purchasing power of their capital gets destroyed without compensation.

It hit US Treasuries particularly hard. Central banks can push down long-term rates by buying bonds. The ECB and the Bank of Japan are doing that. But the Fed has been flip-flopping about raising rates. There is a good chance it will raise them another notch in December, from nearly nothing, by almost nothing, to next to nothing. So it isn’t going to revolutionize short-term rates. But it does point out that long-term rates in the US are on their own.

Then Trump won. He’d campaigned on a big deficit-funded stimulus program that includes a military buildup and – by golly, much needed – infrastructure work, funded, so to speak, by corporate and individual tax cuts….

The US bond markets reacted with a vengeance. They figured that these plans, once they sail through the Republican Congress, would create much larger deficits which would have to be funded by an onslaught of new bonds that somebody would have to buy, and that somebody wouldn’t be the Fed.

Dreading this supply, bond traders went out and cut great-big holes into the most magnificent bond bubble in history, and what we’ve been hearing since this act of Fed-defying vandalism is the deafening sound of hot air hissing out of it.

Today, Veterans Day, the US bond markets are closed, which may be a good thing. It gives them an extra day to take a breath. Because over the last three trading days, the US 10-year yield has skyrocketed 35 basis points, from 1.8% to 2.15%. That’s a huge move (chart via StockCharts.com):

Since early July, the 10-year yield has jumped by 77 basis points. So what does this mean for bondholders, in dollars and cents? Bond prices fall when yields rise. This chart (via StockCharts.com) shows the CBOT Price Index for the 10-year note. It’s down 4.5% since July.

It gets outright ugly with 30-year Treasury bonds. Over the last three trading days, the 30-year yield has soared by 38 basis points and since early July by 83 basis points (via StockCharts.com):

To continue reading: Will the “Rout” in Government Bonds Turn into Carnage? 

Gundlach’s Bond-Market Inflection Point, by Lisa Abramowicz

The long bull market in bonds (since 1982) may be over. From Lisa Abramowicz at blomberg.com:

DoubleLine’s Jeffrey Gundlach indicated in a webcast on Thursday that financial markets are on the brink of turmoil, saying “this is a big, big moment.” He’s right. It is.

The mood has shifted suddenly. Investors are losing faith in the efficacy of monetary stimulus, and it appears that perhaps central bankers may be, too. The Bank of Japan and European Central Bank have refrained from committing to additional rounds of stimulus and are quickly running out of bonds to buy under their existing programs. The BOJ may run out of bonds within the next 18 months, while the ECB may run into a wall sooner than that, according to analysts cited by the Wall Street Journal and the Financial Times.

The Federal Reserve, meanwhile, is still planning to raise benchmark interest rates despite underwhelming economic data. This is in large part because policy makers are increasingly concerned about the threats to longer-term financial stability by keeping rates so low. Meanwhile, inflation expectations are rising on bets that government officials will embark on spending plans to stimulate growth.

This multifaceted dynamic is a game changer, and markets have taken note. Traders have started dumping government bonds, leading to the biggest rout in Japanese debt in 13 years.

On the Rise

Japanese bond yields have risen in the past few months as the BOJ studied its stimulus effort.

[For interactive graph, see original story, link below.]

Yields on 10-year German bonds just turned positive for the first time since July.


German 10-year bond yields turned positive for the first time since July

[For interactive graph, see original story, link below]

U.S. government bonds are poised for a second consecutive month of losses for the first time this year.

Going Down

U.S. government bonds are set for their second consecutive month of losses for the first time this year

[For interactive graph, see original story, link below.]

Futures traders are predicting a greater chance of the Fed raising rates this month than they were just a day ago, with every new speech or piece of data moving the needle. It’s clear that many are struggling to understand what the Fed members’ main considerations will be when deciding whether to take action.“Interest rates have bottomed,” Gundlach said in the webcast. “They may not rise in the near term as I’ve talked about for years. But I think it’s the beginning of something, and you’re supposed to be defensive.”

The big question now is, how far will this selloff go? If it stops here, it will be another blip soon forgotten. So far, the moves have not been drastic. Japanese government debt, for example, has been losing value steadily, but the losses since June amount to 2.3 percent, which isn’t the end of the world.

But this does feel like part of a bigger trend. Jitters are spreading.

If European and Japanese central bankers are approaching the end of their bond-buying programs, then investors will have little reason to buy debt at a premium that pays no interest. Developed-market sovereign bonds would certainly suffer some significant losses, sending ripple effects through stocks, currencies and riskier bonds.

No one really knows how damaging a bond-market tantrum would be for the worldwide economy. Indeed, it seems as though it would be healthy for bond yields to rise and some equity valuations to fall a bit. But it’s worrisome that global markets are moving together as much as they have been, leaving investors with few hiding spots.

The next few months will most likely be more turbulent than what traders have become accustomed to. And it probably won’t be much fun for many bond investors.