Tag Archives: Negative yields

David Stockman on the Return of Negative Yields… And What Comes Next

When you’re losing money after inflation with the highest yields available in the bond market—junk bond yields—you know the bond market is seriously distorted by central banks. From David Stockman at internationalman.com:

Negative Yields

Among all the financial market distortions and misallocations that result from the Fed’s money-pumping policies, we are hard pressed to think of something stupider and more counterproductive than negative real yields on junk bonds.

The historic yield spread over inflation of riskiest US company securities has ranged between 500 and 1,000 basis points (5–10%) or more. And for the good reason that in combination, inflation and defaults always eat deeply into the coupons so as to remind investors why it is called “junk.”

As it happened, the junk bond yield on the eve of the dotcom crash in the spring of 2000 was 12.48%, reflecting an 875 basis point spread over the CPI of 3.73%.

By the eve of the Great Recession in November 2007, the junk yield had fallen to 9.15% but that still represented a healthy spread of 478 basis points over the CPI, which had increased to 4.37% during the prior 12 months.

But those spreads self-evidently were not enough when the economy plunged into the tank during 2008–2009.

The reason the spread went nearly parabolic during the Great Recession is that the price of junk bonds collapsed by 26% as investors and speculators dumped them in the face of soaring losses and issuer bankruptcies that topped all previous cyclical highs (dotted line).

Needless to say, the Fed was not about to let Mr. Market have its way, nor honest price discovery to win out in the bond pits.

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Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”, by Wolf Richter

The two parties that have formed a coalition government in Italy have a program that could well blow up Italian debt, and take the ECB and EU with it. From Wolf Richter at wolfstreet.com:

The ECB’s Negative Interest Rate Policy has been the funniest monetary joke ever.

The distortions in the European bond markets are actually quite hilarious, when you think about them, and it’s hard to keep a straight face.

“Italian assets were pummeled again on mounting concern over the populist coalition’s fiscal plans, with the moves rippling across European debt markets,” Bloomberg wrote this morning, also trying hard to keep a straight face. As Italian bonds took a hit, “bond yields climbed to the highest levels in almost three years, while the premium to cover a default in the nation’s debt was the stiffest since October,” it said. “Investors fret the anti-establishment parties’ proposal to issue short-term credit notes – so-called ‘mini-BOTs’ – will lead to increased borrowing in what is already one of Europe’s most indebted economies.”

This comes on top of a proposal by the new coalition last week that the ECB should forgive and forget €250 billion in Italian bonds that it had foolishly bought.

The proposals by a government for a debt write-off, and the issuance of short-term credit notes as a sort of alternate currency are hallmarks of a looming default and should cause Italian yields to spike into the stratosphere, or at least into the double digits.

And so Italian government bonds fell, and the yield spiked today, adding to the prior four days of spiking. But wait…

Five trading days ago, the Italian two-year yield was still negative -0.12%. In other words, investors were still payingthe Italian government – whose new players are contemplating a form of default – for the privilege of lending it money. And now, the two-year yield has spiked to a positive but still minuscule 0.247% at the moment. By comparison, the US Treasury two-year yield is 2.57% over 10 times higher!

Here is the hilarious chart of the spiking Italian yield from the negative into the positive:

To continue reading: Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

Chart Of The Day: Global Bond Yields Reach All-Time Low, by David Stockman

A third of the world’s developed-market sovereign debt now has negative yields, based on Bloomberg bond indexes.


The Biggest Short, by Robert Gore

Some reversals of financial trends prove so momentous they define the generation in which they occur. The stock market crash in 1929 kicked off the Great Depression, which ushered in the welfare and then the warfare state and redefined the relationship between government and citizens.

Bonds and stocks began their bull market runs in the early 1980s. Now, those markets are fonts of optimism increasingly unhinged from reality. The US has come full circle. The New Deal and World War II marked a massive shift of resources and power to the federal government. Conversely, financial reversal will fuel a virulent backlash against the government and its central bank.

Such epochal reversals are usually foreseeable. However, they are long in the making and involve such a confluence of powerful forces that usually only a handful get the timing right. Calling the end of the current bull markets has been difficult because governments and central banks are desperate to keep them alive. Central bankers prattle on about the wealth effects of elevated stock markets and how low interest rates promote debt and consumption, supposedly the fountainhead of economic progress. Those emissions are noxious nonsense. Central banks promote rising markets because they are under the thumbs of their governments; independent central banker is an oxymoron. High stock prices are a popular barometer of social mood, while high bond prices keep interest rates low, benefitting the largest borrowers, governments.

Consider the absurdity of loaning money to any of today’s welfare state governments, including the most indebted of them all, the US government. Most of them haven’t run an honest, GAAP budget surplus in decades. They have compiled staggering amounts of debt relative to their economies’ GDPs. Unfunded pension and medical liabilities are many times the amount of the stated, on-the-books debts. Those programs could be cut, but a compilation of such cuts the last thirty years would fill a book slightly thicker than Hillary Clinton’s Integrity. The debt cavalcade will stop only when creditors say “Enough!” or start charging usurious interest rates.

Yet, that is the opposite of what creditors are doing now: they are paying governments for the privilege of lending them money! Governments are assumed to have a call on every last dollar, euro, yen, and yuan their economies generate, but there are flaws in that assumption. To the limited extent today’s economies function, they do so because vestigial capitalism still offers incentives, markets, and the price mechanism. The foundation of production is brains and brains are quite sensitive to incentives and the political and legal framework in which they operate. Nobody designs the newest generation semiconductor, app, or robot when virtually everything they produce is expropriated by the state. Tax rates have probably gone as high as they can go in terms of extracting revenue, and even if they haven’t, any revenue increase from higher rates will be nowhere near enough to repay governments’ debts and unfunded liabilities.

So rational investors must question governments’ ability to pay their debts, which leaves irrational investors—central banks—as the buyers. The Bank of Japan is the market for Japanese government debt. While the situation is not quite as bad in Europe and the US, the ECB and the Federal Reserve have amassed huge portfolios of their own sovereigns’ debt, purchased from private banks in exchange for central bank reserves that they conjure at will in unlimited amounts. Speculators buy debt with negative yields from governments that are poor credit risks because central banks will pay them an even higher price at an even more negative yield. The stated goal of the central banks is to increase economic activity and inflation rates, which would increase interest rates and reduce bond prices, inflicting losses on bondholders, including, perversely, central banks.

This is the very definition of a market awaiting a crash: a long running bull trend that has pushed prices to absurd prices (you can get no more absurd bond pricing than that which yields, so to speak, negative yields); an extreme divergence between the government bonds prices and their underlying value as a claim against issuers that are de facto bankrupt; a commitment by governments and central banks to inflict losses on those who buy government debt; a long historical dishonor roll of instances where governments and central banks have done just that; a class of dumb money, short-term, price insensitive buyers (speculators and central banks), and a degree of complacency and obtuseness so extreme that market participants make a mad dash for these putrid instruments at every appearance of financial and economic turmoil. So why not rush right out and short sovereign debt markets, either directly or indirectly through any number of exchange traded funds?

Markets often take seemingly forever to do what rational people think they should have done long ago. They can, as John Maynard Keynes noted, stay irrational far longer than those who bet against them can stay solvent. Japanese finances are in far worse shape than the US government’s or most European government’s, and its aging population is a demographic and actuarial nightmare. Roughly half the government’s deficit is monetized by the sole buyer, the Bank of Japan, and if it stepped out of the way yields would skyrocket. Yet, speculators have been shorting Japanese government bonds and losing money for decades. The Japanese government’s 10-year bond trades at an all-time high price and with a negative yield.

In the US, the majority of Wall Street sharpies have recommended shorting bonds for several years running, based on an imminent, central-bank inspired economic lift off that has never arrived. Anyone who has taken their advice has suffered the same fate as those shorting Japanese debt. Nobody ever suggests shorting sovereign debt because of deteriorating credit quality. Long before their longest maturity bonds mature, sovereigns will have insufficient revenues to pay all their obligations. In the US by 2025, Social Security, Medicare, Medicaid, and interest on the government’s debt will consume all tax revenues and taxes would have to double to pay for the rest of the budget. That’s if doubling the top rate to 80-plus percent actually doubled tax revenues, which it won’t; revenues would undoubtedly shrink.

Shorting sovereign debt has been a widow maker, although on fundamentals sovereign debt is the biggest short of them all. Bonds now trading at high premiums with negative yields will go to zero as governments go bankrupt. Sovereign debt is the foundation for the $225 trillion global pyramid of debt. When it goes so will the rest of the pyramid, and so too will debt-supported equity, commodity, and derivatives markets. The time to catch those trades will be when government bond yields persistently climb in the face of clear, impossible-to-deny economic weakness and financial turmoil: market recognition that governments are not safe havens, they’re insolvent. The economic production that supposedly supported their debt holdings gone, all creditors will have is a promise from governments to redeem unsupported debt with more unsupported debt. It will be the worst of times and the best of times. The financial system will crater. However, that may usher in a replacement based on sanity rather than political promises, flimsy pieces of paper, quack economics, and debt, conjured with a computer keystroke, masquerading as money.


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