In post-Memorial Day trading the BONDS had a large selloff as yields on long-term debt rose dramatically. The U.S. DOLLAR followed the rate increase and rose against all major currencies. Let’s reflect: Equities are impervious to rising long-term interest but the DOLLAR attracts foreign investors in search of a little more yield. The fact that the short-end of the curve is anchored by the FED, the result is that the 2/10 U.S. yield curve is steepening and actually made 52-week highs today as it rose to 186 basis points. The STEEPENING YIELD CURVE is aiding financial stocks. The 2/10 has increased to 184 from 145 basis points during the last three weeks, which has helped banks and other financials to pick up 40 EXTRA POINTS in yield by selling the short-end and buying the longer end. This is an interesting situation for usually steepening curves will put pressure on a currency.
Archive for the ‘Debt Market’ Category
Notes From Underground: The Markets Are Reacting to Rising Interst Rates, While Equities Continue to Roll On (And Fed Anticipates a Roll Off)May 28, 2013
Notes From Underground: George Soros Gets It Right; Cyprus Follows Britain Down An Ugly Yellow Brick RoadApril 10, 2013
Over the last few years of writing Notes From Underground, I have taken his eminence, George Soros (aka the palindrome) to task for advocating that the German polity surrender its sovereign authority to a federal EU entity as he pushed for a harmonization of fiscal authority and then an EU-wide EUROBOND. Previously, Mr. Soros has pushed that the Eurocrats not pursue this Eurobond through a nation-by-nation vote but rather just foist it upon the citizens of Euroland. In a paper released yesterday, Mr. Soros is again pushing a Eurobond backed by a union-wide banking structure and a Euroland harmonized tax system, in which all nations surrender some sovereign authority to a centralized power. There will be no BUNDS, OATS, SPANISH or ITALIAN bonds. It will just be a Eurobond backed by the full credit of the EU fiscal authority. This time around though, Soros does advocate the German government should seek the consent of the electorate.
Today we got follow-through in the global equity markets as the EUR/YEN cross rallied to three-year highs since the YEN was, again, the chief recipient of the Bank of Japan’s (BOJ) enhanced efforts to bring forth inflation from a long time deflation-plagued economy. The Japanese investors were busy sending forth YEN in search of yield but also buying NIKKEI stocks in a return for domestic yield. A positive outcome from the sudden desire of Japanese investors into equities may mean an increase in corporate democracy as the demand for dividends is going to increase. The corporate culture in Japan has always been anti-shareholder as the predominant thought is that management owns corporations and the shareholders should be quiet and not make waves. The status quo has been challenged by some foreign activist investors and always rebuffed in a very anti-democratic show of defiance. As the desire for an income stream for investors, look for the ABE government to be supportive of increased democratization of corporate Japan. The flow of corporate money to investors would aid domestic demand, especially as bond returns go negative.
Yes, the U.S. and Canadian unemployment data were well below market expectations. Nonfarm payrolls in the U.S. were half of the consensus number and under the 110,000 NFP that we wanted to see so as to test the resolve of the recent equity market rally. Not only were the jobs created numbers weak–manufacturing actually lost jobs–but the important average hourly earnings were flat (0.2% increase expected) so there is no growth in consumer spending potential. As poor as the data release was, by day’s end the SPOO and DOW rallied well off the lows made early in the day. The impact from poor economic fundamentals was not strong enough to overcome the continued release of central bank liquidity into the global economy.
For the last three years, this blog has made the point that a moral drama playing out on the global financial stage. The U.S. Tea Party was based on a concept of liquidating the assets of large debtors and letting the pain be absorbed by the financial system and those who have saved and played by the rules of capitalism will be rewarded. The moral precepts of the “original” Tea Party supporters may have been correct but the timing of favoring system-wide asset liquidation had long passed and the fallout would have led to economic collapse and possible political upheaval. The U.S. could not handle the massive unemployment from a forced deleveraging. While I am opposed to moral hazard in principle, the enforcement of punishing debtors at the expense of the entire system is absurd.
Notes From Underground: Raising The Specter of Secretary Robert Rubin (Turning Back the Hands of Time)March 18, 2013
It was a very muddled and confusing day in the markets as the news wires carried numerous rumors. The Cypriots were going to approve the lunacy and then they weren’t as the government couldn’t get the needed votes in parliament. Later in the day there was noise about a new compromise with the depositors with more than 100,000 euros bearing the brunt of the “TAX PLAN” and small depositors paying just 3 percent. The markets did not follow through with last night’s initial selloff and the U.S. equities tried to make a move higher late in the day but late selling pushed the markets down on the day by the close. The U.S. is fulfilling its role as a haven, but instead of bonds being the main recipient of global angst, it appears that frightened money is comfortable buying the asset base of U.S. corporations. Gold did perform as a haven but for all the turbulence in the market its rally was tepid. It seems that investors want an asset with some return rather than the mere store of value.
Notes From Underground: The Europeans and Cyprus … The Idea of 10 Billion Euros = Five Hundred Billion EurosMarch 17, 2013
The lunacy of the IMF and German government have pushed the limits of bank bailouts and proceeded to create a need for bank BAIL-INS. The IMF, with German prodding, desired the depositors in Cypriot banks to absorb some of the costs of the long-delayed bailout. It seems at this time that depositor with less than 100,000 Euros will be “taxed” at 6.75 percent while those with holdings MORE THAN 100,000 EUROS will be “taxed” at 9.9 percent. This is wealth confiscation in an effort to maintain the Cypriot financial system. DEPOSITORS WILL BE FORCED TO ABSORB LOSSES WHILE BONDHOLDERS WILL BE MADE WHOLE. There is no consistency in Europe: Greek depositors were left whole while sovereign bondholders were forced to take large haircuts. The efforts by the IMF and Germany and the ECB to sustain the Cypriot system, an amount of money equal to 10 BILLION EUROS is going to cost the global financial system possibly hundreds of BILLIONS of dollars. The immediate fallout from the weekend lunacy of the Eurocrats is causing large selloffs in global financial markets.
Today was a very slow news day and thus little news to slow the steady rise of equities and the sell off in other asset classes. There was a story in the Financial Times about the Brazilian government cutting the tax on ethanol producers. The government is going to cut the tax on sugar-based ethanol producers by 80%–from 120 REALS per cubic meter to 25 REALS. It is an effort “… to support ethanol producers, many of whom are facing bankruptcy because of heavy debts and DIFFICULTIES COMPETING WITH SUBSIDISED PETROL PRICES IN BRAZIL.” There has been a global sugar surplus, which has kept pressure on sugar prices, but this move may help lift sugar prices and allow Brazilian growers to grab some of the agricultural profits that have supported the Brazilian economy. The U.S. economy is a corn-based ethanol producer and this has helped put upward pressure on global grain prices which has benefited Brazil’s farmers.
Friday night Chairman Bernanke delivered a speech on long-term interest rates at the Annual Monetary/Macroeconomics Conference sponsored by the San Francisco Federal Reserve. The basis of his remarks was that the Fed would continue to maintain its robust monetary accommodation because any early extraction may result in the economy slowing and thus the Fed would have to move to extend the period of aggressive Fed action. It is always important to remember that Ben Bernanke is the main ’37er in the realm of preventing an economic relapse to the deflationary impact of deleveraging. When I say that Chairman Bernanke is a ’37, it refers to the pledge the chairman made to Professor Milton Friedman at the esteemed economist’s 90th birthday party. Bernanke said the Fed made a huge mistake by tightening rates and reserve requirements in 1937 while the U.S. Treasury was instituting an austerity budget at the behest of Secretary Andrew Mellon. It has been Bernanke’s belief that the Fed’s actions coupled with a badly flawed fiscal policy sent the U.S. back into a very severe recession.
In reading through the FOMC minutes I ponder the headlines that screamed about the hawkish tone in the minds of the FOMC members. You have to be looking for “negative waves” to find an overly cautious FED. The most striking effort of ending the LSAP (large-scale asset purchase) program is the work of Governor Jeremy Stein who delivered a powerful speech last week about the mal-effects that the FED‘s QE program was having on other financial markets (especially the corporate debt markets where the search for yield was causing the possible removal of risk pricing into the high yield corporate bonds.) The minutes noted: “Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability.” Again, no surprise here as it was detailed out in Jeremy Stein’s speech.