Tag Archives: Bonds

Notice How Quickly Market Psychology Changed? by John Rubino

Two financial market truisms: markets can change on a dime, and they go down quicker than they go up. From John Rubino at dollarcollapse.com:

“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises

On the surface, nothing much changed last week. The Fed, as expected, raised short-term interest rates very modestly, the US, Canada and Mexico cut a new NAFTA deal (kind of a pleasant surprise), unemployment fell again, Trump continued to tweet while Democrats and Republicans continued to express their mutual disdain via dirty tricks and contrived insults. Business as usual, in other words, in our dysfunctional new normal.

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As Musk Goes Nuts Publicly, Tesla Bondholders Get Antsy, by Wolf Richter

Bondholders usually get nervous about failing companies before stockholders. That looks to be the case with Tesla. From Wolf Richter at wolfstreet.com:

In terms of Tesla’s survival, this poses a problem.

Tesla shares fell 2.8% to $280.74 on Wednesday. They’re now down about $100 from the closing price of August 7 ($379.57) and down $107 from the high that day ($387.46). This was the moment when CEO Elon Musk had pulled another rabbit out of the hat during trading hours in order to brazenly manipulate up the share price by announcing a blatant lie – that he’d take the company private at $420 a share, “funding secured.” Today, shares closed $140 below the buyout-lie number.

The ludicrousness of his lie that had instantly spread all over the world had an unintended consequence for eons to come: The term “funding secured” can never again be pronounced with a straight face.

As a consequence, Tesla is now steeped in legal issues. It’s not like it doesn’t have enough issues already, with its “manufacturing hell,” as Musk himself called it, that refuses to abate.

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Will The Real Bond King Stand Up? by The Global Macro Monitor

Jeff Gundlach, the best bond fund manager in America, is short-term bullish, long-term bearish on bonds. From The Global Macro monitor at macromon.wordpress.com:

We get it.

Jeff Gundlach (we are some of his biggest fans) is a trader at heart, as are we, and is very cognizant of short-term market technicals.

He recently tweeted,

However, it was only June he stated

So it’s eye-catching, then, that Gundlach reiterated in a webcast on Tuesday his call that the 10-year Treasury yield would rise to 6 percent by 2020 or 2021. “We’re right on track” for that, he said. As a reminder, that would be the highest yield since 2000.

His reasoning is fairly straightforward. The combination of rising U.S. interest rates and fiscal deficits is like a “suicide mission,” he said in the webcast, escalating the intensity from last month when he referred to the trend as a “pretty dangerous cocktail.” Ultimately, the debt burden will rise to such a level that borrowing costs will surge, in his estimation. That hasn’t happened yet because ultra-low German yields are capping how much Treasuries can sell off.   Bloomberg

Wow,  6 frickin’ percent!

Two Views Are Consistent

We are with Jeff.

In the near term, the bond shorts may be scorched (or may not) with their record off-side position but given time long-term interest rates are going much higher than the markets believe.  Deteriorating flow technicals will bring term premia back with a vengeance.

European Bond Bubble

The trigger will most likely be the bursting of the European bond bubble.

The Portuguese 10-year trading at half the yield of the 10-year U.S. Treasury?   Come on, man,   Are you serious?

When Super Mario takes his foot off the pedal, turn out the lights on those holding the Spanish 2-year at -0.327 percent, or the 10-year bund at 0.34 percent.

To continue reading: Will The Real Bond King Stand Up?

We Are All Lab Rats In The Largest-Ever Monetary Experiment In Human History, by Chris Martenson

Never before has so much fiat central bank debt been exchanged for so much fiat government debt, among other assets, and all on a global scale. Central bank balance sheets have expanded mightily. Stay tuned for how it all works out. From Chris Martenson at peakprosperity.com:

And how do things usually work out for the rat?

There are ample warning signs that another serious financial crisis is on the way.

These warning signs are being soundly ignored by the majority, though. Perhaps understandably so.

After 10 years of near-constant central bank interventions to prop up markets and make stocks, bonds and real estate rise in price — while also simultaneously hammering commodities to mask the inflationary impact of their money printing from the masses — it’s difficult to imagine that “they” will allow markets to ever fall again.

This is known as the “central bank put”: whenever the markets begin to teeter, the central banks will step in to prop/nudge/cajole the markets back towards the “correct” direction, which is always: Up!

It’s easy in retrospect to see how the central banks have become caught in this trap of their own making, where they’re now responsible for supporting all the markets all the time.

The 2008 crisis really spooked them. Hence their massive money printing spree to “rescue” the system.

But instead of admitting that Great Financial Crisis was the logical result of flawed policies implemented after the 2000 Dot-Com crash (which, in turn, was the result of flawed policies pursued in the 1990’s), the central banks decided after 2008 to double down on their bets — implementing even worse policies.

The Largest-Ever Monetary Experiment In Human History

It’s not hyperbole to say that the monetary experiment conducted over the past ten years by the world’s leading central banks (and its resulting social and political ramifications) is the largest-ever in human history:

(Source)

This global flood of freshly-printed ‘thin air’ money has no parallel in the historical records. All around the world, each of us is part of a grand experiment being conducted without the benefits of either prior experience or controls. Its outcome will be binary: either super-great or spectacularly awful.

If the former, then no worries. We’ll just continue to borrow and spend in ever-greater amounts — forever. Perpetual prosperity for everyone!

But if things hit a breaking point, then you had better be prepared for some truly bad times.

To continue reading: We Are All Lab Rats In The Largest-Ever Monetary Experiment In Human History

US Treasury 10-Year Yield Breaks Out, Mortgage Rates Jump to Highest in 7 Years, by Wolf Richter

The yield on the 10-year treasury note has been trending irregularly upwards since July 2016. Today it set a new high for the move. From Wolf Richter at wolfstreet.com:

But no blood in the streets. Just a rate-hike cycle at work.

Today the US Treasury 10-year yield broke out of its recent range and surged 8 basis points to 3.08% at the close, the highest since July 2011. The price of a bond falls when its yield rises.

The odds have been stacked against the bond market for a while: the Fed’s rate-hike cycle, the Fed’s QE Unwind, a surge in government spending, the tax cuts, and the ensuing onslaught of debt issuance that is looking for buyers.

In addition, and with impeccable timing, the biggest US corporations with the most “cash” parked “overseas” are now “repatriating” this “cash” and are using it to buy back their own shares. What this really means for the bond market is this: This “cash” isn’t cash but is invested in securities, mostly US Treasury securities, corporate bonds, and the like. Companies are now selling those securities in order to use the proceeds to buy back their own shares at a record pace. So these huge bond buyers have turned into net sellers.

In other words, to entice enough new investors into the market, yields have to rise to make those bonds more attractive.

While short-term Treasury yields have been rising for a couple of years in a fairly consistent manner, longer-term yields are not so well-behaved and, despite the Fed’s efforts to push them up, are subject to messy market forces and speculative positions, including large short positions. And so the 10-year yield has moved in leaps followed by some backtracking until the next break-out and leap. Note that the most recent back-track only lasted a couple of months and barely shows up on this chart:

The two year yield ticked up to 2.58%, the highest since July 2008:

The difference (spread) between the two-year yield and the 10-year yield widened from 45 basis point to 50 basis points (0.5 percentage points), as the 10-year yield rose faster today (by 8 basis points) than the two-year yield (3 basis points).

To continue reading: US Treasury 10-Year Yield Breaks Out, Mortgage Rates Jump to Highest in 7 Years

Rating agencies warn, Illinois flirts with junk, by Ted Dabrowki and John Klingner

The mystery is why anyone still considers Illinois bonds investment grade. They’ll be junk soon enough. From Ted Dabrowki and John Klingner at wirepoints.com:

llinois’ brutal political campaigns may have distracted attention from the reality of the state’s crumbling finances, but an upcoming $500 million bond borrowing by the state will remind investors and Illinoisans alike how little has improved.

Both Moody’s and S&P recently affirmed Illinois’ one-notch-above-junk rating in preparation for the state’s upcoming bond.

And Moody’s continues to maintain a negative outlook on Illinois’ rating. That means a downgrade by the agency is more likely than an upgrade in the next year.

The reasons for the rating agencies’ pessimism are obvious. It’s not just what lawmakers have failed to do, it’s what lawmakers continue to do that’s dragging the state down.

The state continues to operate at a deficit despite nearly $5 billion in new taxes in 2018. And the shortfalls aren’t being compensated with spending reforms. Instead, the state continues to primarily use interfund sweeps to make the general budget balance. And the agencies don’t expect any big reforms this year – not with a stalemate that might ensue during this campaign season.

Bond investors are demanding a heavy price from Illinois for the increased risk they are being asked to take.

According to Municipal Market Data, Illinois will pay yearly interest rates that are 2.1 percentage points higher than the states with the best credit ratings – states that include Indiana, Iowa and Missouri. By comparison, states like Connecticut and New Jersey, states with severe pension crises, only pay about 0.85 percentage points more than the best-rated states. Illinois and its taxpayers are being heavily penalized for the state’s fiscal and governance mess.

To continue reading: Rating agencies warn, Illinois flirts with junk

So What Do I Think about the “Crash” in Stocks? by Wolf Richter

So far, despite the pyrotechnics, markets have not crashed. From Wolf Richter at wolfstreet.com:

A lot more will have to happen before this turns into a crash; and markets are not there yet.

With all this wailing in the media about stocks, you’d think there’s at least some blood in the streets. But no. Not a drop.

The Dow fell 4.6% today to 24,345. This 1,175-point drop, as it was endlessly repeated, was the biggest point-drop in history – but irrelevant given how relentlessly inflated the industrial average had become. The percentage drop today, combined with the drops of last week, took the Dow down just 8.5% from its all-time high on January 26.

For the year, the Dow is down merely 1.5%. I mean, what horror. The last time this sort of debacle happened was way back in ancient history of January and early February 2016.

The Dow is not even in a correction (defined as -10% from its recent high). But that messy Friday and Monday, following a record 410-day streak without a 5% decline, did break the recently pandemic illusion that you cannot lose money in stocks.

When the Dow gained 1,000 points in the shortest time ever, after having already booked the fastest-ever 1,000-point gains in prior months and years, no one was complaining about it. These rapid-fire 1,000-point-gains had become the new normal. So today, one of those 1,000-point gains has been unwound.

The S&P 500 dropped 113 points, or 4.1%, to 2,648. This took the index back to December 8, 2017. The past six trading days were the worst decline since … well, since the weeks leading up to February 7, 2016, at which point the S&P 500 was off 19%, not quite enough for a dip into an official bear market.

The Nasdaq fell 272 points today, or 3.8%, to 6,967, below 7,000 for the first time since the end of December, but remains, if barely, in positive territory for the year.

What’ll happen next? Dip buyers will come in, maybe at this very moment, or maybe later, and some of them will likely get plowed under, but there is way too much cash lined up in hedge funds specifically set up to profit from sell-offs. And dip-buyers have been rewarded relentlessly over the past eight years, and it’s not until the dip buyers get massively destroyed and stop dip-buying that the market is in real trouble.

Because nothing goes to heck in a straight line.

To continue reading; So What Do I Think about the “Crash” in Stocks?