Crazy European Bond Market

Draghi, the President of EU Central Bank, just said "this outlook is getting worse and worse, ... it’s getting worse and worse in those countries where manufacturing is very important.”

They are looking to do more stimulus. More negative interest rates?
 
NW-Bound said:
Draghi, the President of EU Central Bank, just said "this outlook is getting worse and worse, ... it’s getting worse and worse in those countries where manufacturing is very important.”

They are looking to do more stimulus. More negative interest rates?
Click to expand...



I light of this I am delighted my international bond allocation is zero. Yes I could get a bump in return if they lower rates even further below zero, but in the long run this (buying any bond with a negative rate) is a fools errand imho.
 
BeachOrCity said:
I light of this I am delighted my international bond allocation is zero. Yes I could get a bump in return if they lower rates even further below zero, but in the long run this (buying any bond with a negative rate) is a fools errand imho.
Click to expand...

Institutional investors in Europe may not have a choice.

As an American individual, you can synthesize this bond deal yourself and save the transaction cost. Just hold a pile of cash in euro bills. Every month, take out a few bills to match that negative rate, and burn them. :)
 
There is 6 Trillion in European Government Bonds, the Central Bank Under Mario Draghi own 2.6 Trillion of this. In 2015 the Central Bank of Europe owned less than 50 billion.

The buying made for a can't lose buying for capital gains of European Bonds. The best performing bond in Europe in the past year is the 100 year Austrian Bond of 2017.

This runs into the issue in the future of price discovery, since there is no actual price discovery in bond markets, when the day comes when the market must operate under price discovery there is a potential for an instantaneous drop in values, at present all the ETF's and passive funding has been driven by the buy side and government demand. When actual value is needed you will see what you saw in Greece in 2010-2012 when Greek bonds went from 4 percent to 30 percent, to think they are under 2% now because of the absence of market price discovery has created one of the biggest financial bubbles of all time.

Fortunately the Central banks are all aware of this and will merely purchase all needed to soak up demand for the foreseeable future, because the bond discount rate provides the basis for capital gains of stock markets around the world, until of course a government comes into power that forbears such activities, then it will be interesting. But as Japan shows this can continue for DECADES
 
NW-Bound said:
But you have to ask why people are so afraid of deploying their money. Why are they so reluctant to invest in their business, buildings, factories, machinery to improve production, to better their living conditions? Sounds like they have a gloomy outlook on the future. If so, why?
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That is a very important question. The economic situation will be slow to change until that question is answered. Lack of good business opportunities? Too much government regulation? Deflationary effects of technology? It's probably several things.
 
https://finance.yahoo.com/quote/BA/balance-sheet/

Boeing sold 15 year notes at 3.6% yield and they have a negative net worth - there assets less liabilities are negative so their is no company equity for one of the most valuable companies in the world- mostly due to borrowing for the 50 billion in stock buybacks over the past 6 years. Despite a wrecked reputation, potential cancellation of the 737 max and the biggest loss in corporate history, the market hardly cares either in stock or bond prices for Boeing. Countries like Greece and Austria are golden investments compared to this............

So any country or business that does not take advantage of the current market situation made possible in Europe is actually foolish, and the more the actors react to their good fortune the more the Central banks will buy, it is a cycle that is ongoing and never ending - until it does.
 
GrayHare said:
That is a very important question. The economic situation will be slow to change until that question is answered. Lack of good business opportunities? Too much government regulation? Deflationary effects of technology? It's probably several things.
Click to expand...


There's some of that in the US too. Many profitable corporations hoard cash because they do not know how to deploy it.

Lack of demand? Too much supply? I think there's some truth in that.

Do we just keep on building larger and larger homes? How many smartphones can you carry on yourself? How many large LCD TVs you can watch at the same time at home? How much more can we eat?
 
NW-Bound said:
There's some of that in the US too. Many profitable corporations hoard cash because they do not know how to deploy it.

Lack of demand? Too much supply? I think there's some truth in that.

Do we just keep on building larger and larger homes? How many smartphones can you carry on yourself? How many large LCD TVs you can watch at the same time at home? How much more can we eat?
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I think most of the US corporate cash hoard is held overseas in order to avoid paying taxes since they can borrow at minimal rates which is why corporate debt is expanding faster than cash holdings. Since it provides assets for debt issuance it is helpful. Look at Boeing it issued 3.5 Billion in April despite having 7.7 Billion on hand because they need cash in US to purchase stock ( they have purchased 2 Billion so far this year and plan for 9 Billion). The borrowing is minimal at 3.6% interest and a 2.2% dividend avoided on share buybacks and a 35% marginal tax rate for the interest expense there is no real effect on actual cash flow by utilizing the mechanism and shows why corporations would rather do this, only with a stoppage in ability to borrow or an increase in interest rates will there be a reason to repatriate cash and stop the buyback cycle.
 
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Running_Man said:
So any country or business that does not take advantage of the current market situation made possible in Europe is actually foolish, and the more the actors react to their good fortune the more the Central banks will buy, it is a cycle that is ongoing and never ending - until it does.
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So, is this an exploitable bubble?
 
samclem said:
So, is this an exploitable bubble?
Click to expand...

It is exploited every single day. Boeing exploited it last April, along with Tesla.

India is planning it's very first international bond issuance to issue 10 billion in bonds in Euro's or yen in order to get the lowest possible interest rate. If you were a corporation I would issue as much debt as possible to buy stock and get returns on stock averages as possible, which is continuance of the same. Cash them out and continue to rinse and repeat.

If you mean as an individual investor, I think the average investor needs a non-pop. The end of this bond bubble is a sudden and very quick reduction in economic activity and a freezing of funding world wide. I would be surprised if there is any way to plan and estimate it's timing as there is too much money keeping it pumped. If it were to happen the speed of it would be overwhelming. Think of the Iceland crisis of 2008 when suddenly banks of Iceland could not roll over their debt in late September 2008. Iceland suspended foreign currency transactions and closed the stock market on October 9th, when it re-opened on October 14th it opened 77% lower than it closed on October 9th. What happened was one day people believed that Iceland could not repay and would not buy their debt and in a week it was a wipeout. There is no exploiting that situation, only avoiding.

Try to imagine selling a bond fund ETF in international bonds when the yield goes from negative 0.5% to 3-4 percent in a couple weeks followed by a move to 6 percent, a 30 year German Bund going from 0.2 percent to 6% would fall 83% in value, just dropping to 3 percent would be a 50 percent decline. The Austrian 100 year bond would be down in excess of 90 percent if yields jumped to 6 percent. The funds would have no one to sell the bonds to.... There will be no money available to purchase the roll over the debt and the debt maturing will require selling what can be sold. But since in such a scenario the Central Banks will have failed interest rates will not rise to 6 percent they would be far far higher, if you could issue or sell any debt.

The complexity of financial arrangements that have been accomplished by ZIRP means markets cannot under any condition drop because of the interconnected pieces. It is not a co-incidence that we are at an all time length in bull markets and an all time low in interest rates. The reason Greece can sell long term debt at 2 percent is because they have made themselves such an integrated piece with the additional lending that default is no longer an option for Greece even though it is second nature to the culture. If Greece would default everything would fall with them, so on it goes.

The FED showed last December unwinding at even a small scale is an impossible process, so I am assuming until a Central Bank comes along and says we won't play that Central Banks will continue to fund this and we continue our annual pat on the backs for investing done right.
 
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NW-Bound said:
"My bond is worth more than your bond, because my yield is only -1% while you pay -2%" ? :facepalm:



Oh, these poor Europeans.
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On the other hand, my sister, who lives in Switzerland, just told me that there are now mortgage products in the works with negative interest rates too.... yes, that is right, you get paid to borrow money! I assume that there must be certain fees that compensate the banks as well, but in principle, it makes sense that if the bank can collect large enough negative interest on savings/bonds, then they can lend at zero or even negative rates.
It’s an upside down world out there....:facepalm:
 
euro said:
On the other hand, my sister, who lives in Switzerland, just told me that there are now mortgage products in the works with negative interest rates too.... yes, that is right, you get paid to borrow money! I assume that there must be certain fees that compensate the banks as well, but in principle, it makes sense that if the bank can collect large enough negative interest on savings/bonds, then they can lend at zero or even negative rates.
It’s an upside down world out there....:facepalm:
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And as a result, you can be sure the housing market is quite inflated as folks can afford more if their mortgage has a negative interest rate.

Now, if/when rates go negative, instead of getting a tax deduction on the interest you pay, I assume you have to pay tax on the interest you receive. Again, upside down logic goes in to it..
 
So, again, what practical steps could a small investor trying to protect their ER nestegg take to mitigate the impact of a bond market collapse (with knock-on impact on equities, the larger economy, etc)? What would be the cost of these steps?

Running_Man said:
If you mean as an individual investor, I think the average investor needs a non-pop. The end of this bond bubble is a sudden and very quick reduction in economic activity and a freezing of funding world wide. I would be surprised if there is any way to plan and estimate it's timing as there is too much money keeping it pumped. If it were to happen the speed of it would be overwhelming. Think of the Iceland crisis of 2008 when suddenly banks of Iceland could not roll over their debt in late September 2008. Iceland suspended foreign currency transactions and closed the stock market on October 9th, when it re-opened on October 14th it opened 77% lower than it closed on October 9th. What happened was one day people believed that Iceland could not repay and would not buy their debt and in a week it was a wipeout. There is no exploiting that situation, only avoiding.
Click to expand...
If your assets are primarily denominated in USD, and if this remains the world's reserve currency, then it seems to me your situation is simpler/better than it would otherwise be. At least you are in a very big boat.
Bonds: US Treasuries would still have no repayment risk. And if interest rates climb, then shorter-term bonds would be best. TIPS would seem to be attractive if inflation accompanies other problems (if, for example, US money supply is increased faster than economic growth). This wouldn't necessarily be a money-maker, but would be a less-bad alternative to some other fixed-income assets or equities.

Hedging:
- Precious metals (mining stocks, ETFs, or the real thing): Many people will probably think of precious metals at a time like this. It probably doesn't matter if their allure is not explainable using fundamentals, they may be in demand just from force of habit/history.
- Bond options (short selling long bonds)? (Counterparty risk?).
Rice, beans, water . . .
 
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NW-Bound said:
Germany's entire yield curve is now negative! There is now $14 trillion being held in bonds with yield less than zero.



See: https://finance.yahoo.com/news/germanys-whole-yield-curve-dives-105220240.html.
Click to expand...

US Treasury debt is around 2% more than German debt. With a $22T total debt, that is an extra $440,000,000,000 of interest charges each year (gross simplification). As the US dollar has been holding its own against most currencies last few years; it is not terribly risky for a foreigner to invest in US treasuries. Therefore, I truly believe the US is trying to talk down interest rates in order to cut size of budget deficit.

Does this make sense?

Marc
 
I myself have increased my precious metal holdings to 8.25 percent of my portfolio and am trending towards my top allowed to myself of 10 percent. But there could be decades with no bond collapse and interest rates could stay right near zero and the stock market could continue a 4-9 percent annual climb.

The interconnected pieces would be decimated by a bond market collapse. Lets go with 14 trillion of bond at negative yield, if just those rose to a 6 percent yield you are looking at losing somewhere between 7 trillion and 12 trillion dollars, that was considered the safest of the safe in investments. The add on to "risk" asset losses would be in the 30-40 trillion dollars. There would just be an economic reset.

Personally, I am starting to think FED is not convinced there is an issue and they can get the world back to "normal" rates. Soaring inflation as a solution is not an answer as the bond market losses are just too great.
 
Marc said:
US Treasury debt is around 2% more than German debt. With a $22T total debt, that is an extra $440,000,000,000 of interest charges each year (gross simplification). As the US dollar has been holding its own against most currencies last few years; it is not terribly risky for a foreigner to invest in US treasuries. Therefore, I truly believe the US is trying to talk down interest rates in order to cut size of budget deficit.

Does this make sense?

Marc
Click to expand...

Since late 2017 China has sold about 100 billion of US Treasuries and bought Gold. Japan has sold about 200 Billion and bought Japanese stocks and 80% of the Japanese Bond Market, the FED allowed another 500 -750 billion to roll off from their portfolio, the result is we have higher interest rates in order to sell the treasuries. FED has halted their selling, and did not in my opinion cut the interest rate enough this week, we will see how much the market lets them know they don't like that..... Chart is of total debt with negative yield. Interest rates, and therefore borrowing is having almost no negative economic impact on government financing as the growth in interest is far slower than growth in debt, indeed in many countries it drops as they refinance. As they issue more in the future they actually begin to take in revenue.

EAVJYIEXYAAPzKu

German 30 year bond over recent months

EA9hY33XYAAbVVY
 
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EA--1PYWwAA0Z-E


And the interesting fact is that the leading negative yield country, Switzerland has increased the ownings of ETF's in the US stock market to 92 billion dollars up from 20 billion in 2016. Swiss one year Swiss Treasury is negative 1.1% per annum
 
The $14 trillion in sub-zero bonds grew very quickly from just $6 trillion in October 2018.

An article in the Washington Post answers the following questions:

1. How can a bond have a negative yield?
2. Why invest in a bond that will lose you money?
3. How much is being bought?
4. Why is this reason for worry?
5. Who benefits from negative rates?
6. Who gets hurt?
7. How did we get here?
8. Why have negative rates lasted so long?
9. Where’s all this heading?
Click to expand...


See: The Black Hole Engulfing the World’s Bond Markets
 
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Assuming this negative interest rate contagion will spread to the USA markets. What is actionable that one can do?
1. Buy original purchase TIPS (so you at least get your principal)?
2. By really long CD's or BONDS now?
3. Lower Bond allocation (hate to change based on "timing the market")?

What is actionable?
 
BeachOrCity said:
Assuming this negative interest rate contagion will spread to the USA markets. What is actionable that one can do?
1. Buy original purchase TIPS (so you at least get your principal)?
2. By really long CD's or BONDS now?
3. Lower Bond allocation (hate to change based on "timing the market")?

What is actionable?
Click to expand...
Just for the record, negative interest rates will not affect TIPS' inflation protection. The point of the negative rates is to forestall deflation, which would have an effect. Personally, I think we will see helicopter drops (https://www.investopedia.com/terms/h/helicopter-drop.asp) before we see deflation in the US.
 
I think its all going to come down to we (the world) blame this all on China....

In their quest to beat out everyone with manufacturing they are slowly but surely putting every body else out of business...

when countries can't manufacture goods they can't make money and they go further in debt..

To get out of bad debt they issue 100 year bonds that don't cost them in interest payments...
when the majority of the world countries are in contraction mode and they seem to think 100 years of it to come our way. ( or the politicians/bankers know they won't be around in 100 years to explain what is really coming our way )

It won't take long and the only countries left fighting will be in trade talks with China in an attempt at saving the few left with some manufacturing capability.

Will the US go to negative rates... I don't think we will go that far but I bet it gets close... going to be some interesting times coming soon...
 
I don’t think it’s quite that simple. Robots can, and increasingly do, manufacture stuff here just as cheaply as in China. And there are lots of benefits to having it done here where there are property rights and IP laws vs. China, which is a communist kleptocracy.
 
Here's a good article on negative yielding debt worldwide:


Every day brings new indications that the financial world is going from already nuts to even nuttier. According to Bloomberg, the total amount of bonds outstanding globally that are trading with a negative yield exceed for the first time $15 trillion. This includes government and corporate debt, and also some euro junk bonds that have joined the elite group
Click to expand...

https://wolfstreet.com/2019/08/06/financial-world-gone-nuts-15-trillion-negative-yielding-debt/
 
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