Business Insider suggested the ascent of US real yields was possibly the most important development in the market right now. We don’t disagree.
As we noted, it represents the market’s reconnection with disinflationary reality. The smoke and mirrors are fading. What is worrying, however, is that a move of this size has been prompted by simple talk of tapering. If that’s what tapering does, what will the first hint of a proper QE exit inspire?
As a result, it’s unlikely that an outright QE exit is viable at this stage. The deflationary consequences (which include the chances of a major market-sell off) would arguably be too large. Given that let’s analyse what the move in real yields really signifies. Read more
Bond yields in the eurozone are hitting new lows not seen since 2010…
H/T to Martin Malone of Mint Partners for this vivid illustration of how the differential between “core” and periphery sovereign yields has tightened. Read more
Plenty of analysts and pundits have gone to the trouble of explaining the challenge confronting savers in the current low-yield environment…
But how many of them go to the trouble of putting on a barbecue to illustrate various credit strategies one may respond with? Read more
That’s the title of a Barclays note predicting that yields on the US 10-year will hit 1.25 per cent in Q3. (At pixel time they’re at 1.45 per cent.)
The rationale given in the note (emphasis ours): Read more
Spanish prime minister Mariano Rajoy on Wednesday:
We can’t finance at current prices for too long. There are many institutions and financial entities that have no market access. It’s happening in Spain, it’s happening in Italy and in other countries, that’s why this is a crucial issue. Read more
No, really there is.
Via Reuters on Thursday. Read more
Oh dear, oh dear. Read more
Were we wrong to say on Tuesday that the performance of US investment grade bonds this year was only “impressive” because they were just following Treasuries down the yield rabbit hole?
SocGen’s big Q4 preview would seem to suggest as much — or at least it would suggest that although we might have been right until very recently, things have changed. Read more
The yield on benchmark US Treasury 10-year notes approached the lowest level for six decades as bond traders grew increasingly confident that slumping equities and the eurozone debt crisis would compel the Federal Reserve to enact a new programme of bond purchases later this month, the FT reports. The yield on 10-year notes touched 1.91 per cent on Tuesday, just above the low of 1.9 per cent set in 1950 according to Barclays’ Equity Gilt study. Mounting concerns about the outlook for the US economy, particularly on the jobs front, have heightened expectations that the central bank will sell short-term Treasuries, or allow them to mature, and use the proceeds to buy long-term paper – a policy dubbed “Operation Twist” as it narrows the difference between short- and long- dated yields. Strategists and traders have for some weeks debated the merits of the Fed implementing a version of the original Operation Twist, which was tried back in the 1960s during the Kennedy administration. The 10-year Treasury yield determines US mortgage and corporate borrowing rates and a sustained period of low interest rates is seen as helping to boost the economy. In recent weeks, the difference between two- and 10-year yields has moved to its flattest level since March 2009. The yield curve now stands at 1.77 percentage points, in from 2.36 percentage points at the start of August.
Benchmark US borrowing costs fell below 2 per cent for the first time in at least 60 years as markets took fright at increasing signs of global economic weakness and equities worldwide, the FT reports. US 10-year Treasury bonds, the linchpin of the global financial system used to price many assets around the world, yielded as little as 1.97 per cent on Thursday, their lowest since April 1950, according to Global Financial Data. There were also savage falls for German and British borrowing costs, which hit record lows. “It is a moment. Why can’t Treasury yields have a 1 per cent handle given where growth is?” said Steven Major, global head of fixed income research at HSBC. The catalyst for the latest bout of risk aversion – which saw stock markets plunge globally and gold hit another record high – was weaker-than-expected US manufacturing and unemployment data. That came on top of a slew of bad growth numbers from Europe as well as rising fears about the funding of European banks. For more on how US Treasuries and high powered money may be becoming a Giffen good, see FT Alphaville.
We already know what the markets made of Thursday’s moves by the ECB to try and halt the contagion in the eurozone from spreading.
Here’s the verdict from the sell side. Think moving with the handbrake on. Read more
This sounds a bit disconcerting from Charlie Diebel at Lloyds TSB on Wednesday:
One of our key comparative metrics is flashing Red this morning and that is in the 10yr Bund/T-Note spread. Our models have for some time suggested that 10yr yields in the US were too high relative to their European counterpart due primarily to the recovery in confidence in the eurozone while in the US consumer confidence remains subdued. Read more
Greece’s cost of borrowing hit the highest levels since emergency international intervention helped stabilise eurozone bond markets in May last year, reports the FT. Greek yields leapt higher amid growing fears that the country will be forced to default on its bonds after a multi-notch downgrade by Moody’s this week. The yields on Greek 10-year benchmark bonds jumped to 12.82%, the highest level since Friday May 7 last year, after which the international community launched a €750bn rescue package for Greece. The jump in yields, also on three-year and five-year debt, which rose to their highest levels since May, came despite a positive short-term bill auction that priced at yields just slightly higher than the last sale for similar debt.
The first full trading day of the new year in Tokyo and London saw investors swooping up shares, though Wall Street has given back some of the gains made on its return to trading on Monday, the FT reports. Interest rates continued to rise, however, following the Federal Reserve’s release of the minutes of its December meeting. Yields on 10-year Treasuries rose near session highs, at 3.34 per cent, after the Fed outlined a still-pessimistic, but not more dire, economic outlook. “The information reviewed at the December 14 meeting indicated that economic activity was increasing at a moderate rate, but that the unemployment rate remained elevated,” according to the Fed’s minutes. “Members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program,” the minutes said. Yet anxiety about growth elsewhere held back risky assets. A relapse for the euro suggests that fears for the eurozone linger. A swift sell-off in a swathe of commodities also has got the market chattering about a large fund executing a strategy switch that entails a reduction in exposure to the erstwhile buoyant asset class.
Have US bondholders gone on holiday already?
10-year Treasuries reached a high of 3.39 per cent on Monday before falling sharply. Read more
US Treasury yields on Tuesday rose to their highest level in months, reports the FT. Ten-year yields jumped 25 basis points at one point to 3.17%, their highest since June, before settling at 3.12%. An auction for 3-year notes saw yields at 0.862% nearly 30bp above the previous auction a month ago. While Moody’s and Fitch, the ratings agencies, warned that the US budgetary outlook would suffer for adding some $1,000bn to the US deficit through President Barack Obama’s just-agreed extension of tax cuts, economists at Deutsche Bank estimated that the cut in Social Security taxes would add 0.7% to the US GDP over two years. Both had the effect of pumping up yields. The jump attracted funds into dollars, which in turn sparked profit taking in commodities such as silver and gold.
Is nothing immune from the sovereign debt woes of the European periphery?
Apparently not. Read more
So what’s really behind the spike in Spanish government bond yields on Monday?
How about this: because of Angela Merkel’s European Stability Mechanism the market is finally being being forced to price in default risk for eurozone countries. Read more
Companies from UPS to Time Warner Cable have rushed to lock in the low interest rates still available in the US bond markets, using the money to plug pension fund gaps, buy back shares or build up contingency cash piles, reports the FT. with government bond yields at near-record lows, the amount of money borrowed in the corporate bond markets so far this month has exceeded that of any previous November, according to data provider Dealogic, which said that blue-chip companies with investment grade ratings sold more than $41bn of new bonds in the past two weeks.
This is a chart from the latest edition of the European Mortgage Federation’s monthly newsletter showing the yield differential between unsecured senior bank debt and covered bonds:
The world has become full of risk-averse investors, and stocks will suffer, says FT Alphaville. Wait — let’s edit that. The world has become full of yield preservers, and they will suffer stocks. Or — as is current fashion — stock dividends. However, there’s something of a temptation to equate dividends to buying stocks outright. But according to Lombard Odier, even though dividend yields are now reaching 10 year bond yield levels in the US, it’s a dangerous temptation. Read more
The Federal Reserve didn’t mean for its recent QEII announcement – that it would be reinvesting proceeds from its maturing securities portfolio — to so greatly affect investors. Read more
China cut its holdings of US Treasury notes and bonds in June by the most ever, suggesting that the plunge in US yields that sent two-year rates to a record low has made government securities too expensive for some investors, reports Bloomberg. Beijing’s holdings of long-term Treasuries fell in June for the first time in 15 months, dropping by $21.2bn to $839.7bn, US figures showed on Monday. For more see FT Alphaville.
The risks of a slowing global economy and potential deflation remain at the centre of traders’ attention, as government bond yields see fresh lows, reports the FT. The selling began when Japan said gross domestic product grew at an annualised rate of just 0.4 per cent in the second quarter, much less than the 2.3 per cent growth forecast by economists. Japanese 10-year bonds fell to their lowest yield since 2003. US 10-year bonds are at their lowest yield since March 2009, with their yield falling 10 basis points to 2.57 per cent. European benchmark German Bunds are down 6 basis points to yield 2.32 per cent, a fresh all-time low.
Goldman Sachs and Morgan Stanley led $14.2bn worth of US corporate bond sales on Wednesday as yields in company debt hit six-year lows. According to Bloomberg it was was their busiest day in almost four months. The deals included Goldman Sachs raising $3bn in a two-part bond offering, its biggest since January 2009, and Morgan Stanley issuing $3bn of debt after it reported second-quarter earnings that surpassed analyst estimates.
The results of the first of this week’s three auctions of US government debt are in, FT Alphaville writes — and it may be that we are witnessing some genuine good feeling about the suppy of US debt, focusing on the bid-to-cover ratio. But for how long? Read more
As the market waits with bated breath for an update on British Airways’ triennial review of its pension scheme, we note some parallels with another leviathan of UK corporate pension deficits — BT.
The telephone company released its second-quarter earnings last month, which showed its post tax pension deficit had increased from £2.9bn at the end of March 2009 to £6.8bn at the end of September. The post tax deficit now accounts for a whopping circa 60 per cent of BT’s market cap. Eek. Read more
European insurers are having trouble adjusting to life in the land of Zirp.
While 2008 insurance results were all about impairments, the latest round of Euro insurer figures show a growing preoccupation with yield. Read more
While rising government bond yields have been making headlines of late, especially in relation to the possibility that they could derail an economic recovery, corporate bonds — which were a bull story in early 2009 — have languished in the background.
Now, Dresdner/Commerzbank European credit analyst Willem Sels is warning that corporate bonds may also be in something of a sticky spot — potentially on the verge of a precipitous slide in demand and prices. Read more