We were going to write about JGB yields jumping after the BoJ disappointed the market and made some (Nomura) think that even if the BOJ hasn’t reached the point where it can no longer deepen its use of current policy tools, “continued use of those tools could hasten the point at which it becomes difficult for the BOJ to act, with the exception of foul play*”
We were then going to compare that jump in yields to a similar jump in May 2013, when 10-year yields spiking “above 1% for the first time in 14 months… fed into an astonishing 7.3% slide in the Nikkei 225″, according to BoNYMellon’s Simon Derrick, and note that all we can really learn from that move is that it led to market turmoil.
But then we saw this work of chart, from Nomura’s credit team, and all of that good work was undone: Read more
Competitive federalism in India has had some weird effects. For one it has led to slogans like this becoming apparently acceptable:
Happening Haryana? Really? Not that the drive to get India’s states to compete with each other to attract business is a bad thing and not that Haryana isn’t a nice place but, again, “Happening Haryana”? We’d like to see what focus group got that one over the line. Read more
Your latest instalment in the perilous search for interest bearing investments: dividend Exchange Traded Funds.
Markit draws our attention to a section of the ETF world which has pulled in $125bn in assets since launching in 2003. In the last three years Europeans started to pay attention to easily tradedable funds up of high dividend stocks as well, with assets tripling to $13bn.
However they do so only to issue a warning. Past performance is definitely no guide when it consists of trailing dividend payouts. Read more
Rhetorical question, just to share this chart from Dominik Winnicki and team at Barclays (click to enlarge)…
“Safe” dividend stocks, to be precise.
It’s a straightforward argument: as yields on high-grade government debt increasingly turn negative, so the search for income amongst investors will channel money into quality equities. Read more
From Citi’s Steven Englander:
That’s the average of G3 10 year yields falling below 1 per cent for the first time on record. Suck it other times. Read more
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.
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