Crazy European Bond Market

[GrayHare]

You're missing the point that the goal of the negative rates is get the money spent. Central bank panjandrums are not going to help hoarding by trying to make it easier.

Yes, but at what cost? It might be wiser to let the money go unspent than to distort the economy further into uncharted waters with increasingly negative rates.

 

[Running_Man]

You're missing the point that the goal of the negative rates is get the money spent. Central bank panjandrums are not going to help hoarding by trying to make it easier.

Available data would lead the the conclusion the creation of negative rates leads to the creation of additional debt not the spending of money, the purpose of negative rates is to uphold the valuation of the stock market and minimize corporate interest expense so that debt downgrades do not occur and maintain the viability of banks. There is over 20 years of empirical evidence to show that negative rates cause individuals to increase their saving not decrease.

JAPAN PRIVATE CONSUMPTION PER YEAR TRILLIONS OF YEN
1990 226.46
1991 231.45
1992 236.31
1993 238.91
1994 244.4
1995 250.5
1996 255.73
1997 257.5
1998 255.99
1999 258.96
2000 263.04
2001 268.03
2002 271.2
2003 272.99
2004 276.56
2005 279.98
2006 282.88
2007 285.52
2008 282.62
2009 280.63
2010 287.37
2011 286.25
2012 292.06
2013 298.98
2014 296.42
2015 295.72
2016 295.36
2017 298.71
2018 299.9

So 28 years of near zero rates increased debt 400% for Japan and increased spending by 30%. After 10 years of decreasing rates in the United States the pattern is pretty clearly the same for the United States. However, allowing interest rates to increase would result in downgrades in the issuers of debt and lock up the credit markets, so the cycle of lower rates, increased debt (to merely maintain status quo it will not improve situation) will continue. this is why it was imperative in my opinion for the FED to cut interest rates, they cannot allow the market to get ahead of them by having long term rates beneath short term rates (a negative for banks)

 

[OldShooter]

... the purpose of negative rates is to uphold the valuation of the stock market and minimize corporate interest expense so that debt downgrades do not occur and maintain the viability of banks. ...

Another conspiracy! Who knew?

 

[MichaelB]

Well, I am completely unhampered by facts but my guess is that the original issue was purchased by yield-hungry pension fund managers who were betting that a default would come after they had moved on. This despite the fact IIRC that Argentina has already defaulted on its sovereign debt many times*. I doubt that it was the professional traders that took the offering. Initial offerings are usually sold, not bought.

Also, circumstances would have been somewhat different. IIRC that offering was a couple of years ago.

*"Argentina has defaulted on its sovereign debt eight times since independence in 1816 ... " https://www.ft.com/content/5ac33abc-551b-11e7-9fed-c19e2700005f

For sure pension funds and investors reaching for yield were the original buyers, but don’t forget all those EM fixed income mutual funds and ETFs. Fidelity, BlackRock’s, etc. Many of those also invested in Venezuelan debt, because it was in the index. Even passive investing is only as good as the index it follows.

Nonetheless, when it came out the bond had a “B” rating from S&P, and now, two years later, it’s lost 1/2 it’s value. So, the bond rating folks have some ‘splainin” to do.

 

[Running_Man]

The biggest purchasers of the bonds were passive index funds which were forced to buy them as a result of being included in the Emerging Market Index. 3% of the Emerging Market Bond Index is Argentina bonds. Fidelity, I shares and the EMB fund of JP Morgan were the top purchasers of the bonds, and it was oversubscribed as an issue as index funds competed over being able to add to their portfolio and not wanting to be under-weighted a hot issue along with managed funds. At the time it was a hot area and continues to be a focus of investors looking to add another non correlating asset to their portfolios

 

[NW-Bound]

... At the time it was a hot area and continues to be a focus of investors looking to add another non correlating asset to their portfolios

There are a lot of assets in this world that vary randomly and do not correlate to anything that I own. I do not see that I need to diversify into them.


Some people say, but somebody is buying them and he must have reasons to. Good. They can have it all.

 

[Running_Man]

Another conspiracy! Who knew?

Jerome Powell January 4th, 2019@ American Economic Association: "We’re listening carefully with – sensitivity to the message that the markets are sending and we’ll be taking those downside risks into account as we make policy going forward"

 

[Markola]

There are a lot of assets in this world that vary randomly and do not correlate to anything that I own. I do not see that I need to diversify into them.


Some people say, but somebody is buying them and he must have reasons to. Good. They can have it all.

+1. Seriously. “They” can have ALL the emerging market bonds. I take my risk on the equity side.

 

[NW-Bound]

Just saw this headline on Bloomberg: "Greenspan Sees No Barriers to Prevent Negative Treasury Yields".

A subscription is needed to read the article, but here's the first sentence below the above headline.

Former Federal Reserve Chairman Alan Greenspan says he wouldn’t be surprised if U.S. bond yields turn negative. And if they do, it’s not that big of a deal.

 

[Dtail]

Just saw this headline on Bloomberg: "Greenspan Sees No Barriers to Prevent Negative Treasury Yields".

A subscription is needed to read the article, but here's the first sentence below the above headline.

Did he also say (again) that we could always print more money.

 

[NW-Bound]

There's no need to print money anymore.

The government will just withdraw some money from bond holders every month. It's negative rate, remember? Just beautiful.

 

[Running_Man]

Greenspan quoted last night as saying no reason US should not go to negative rates as investors have a more long term outlook and therefore want negative rates. Germany 10 year Bund getting closer to one percent negative. I can’t wait for the next decline in the stock market for former Central Bankers claiming declining stock markets are due to investors taking a longer view and getting the negative returns a long term outlook allows, and that a negative return is neither a problem nor an indication of any difficulties.

Greenspan said he agreed with one theory espoused by Fels, which says that investors are more willing to hold on to negative-yielding debt because they have much longer time horizons.

“Why people continue to buy long-term Treasuries at such low yields may be also due to forces having altered people’s time preferences,” Greenspan told Bloomberg.

Greenspan was responding to this quote by PIMCO bloggerJoachim Fels

However, it can be argued that in affluent societies where people can expect to live ever longer and thus spend a significant amount of their lifetimes in retirement, more and more people demonstrate negative time preference, meaning they value future consumption during their retirement more than today’s consumption. To transfer purchasing power to the future via saving today, they are thus willing to accept a negative interest rate and bring it about through their saving behavior.

This arguement is being advanced, even when the largest purchaser of long term bonds is CENTRAL BANKS! In the last 10 years Central Banks have purchased net, 100% of the incease in natural debt. The idea that Japan would have negative debt even if the Central Bank of Japan did not hold 5 trillion of the bonds (80% of all total issuance).

And as this Barrons article describes most of the purchasing of European Bonds the last 3 years is Central Banks themselves, because investors are sensing rates are too low!, that is my opinion. And then the sellers of the bonds then take the funds and place in normal banks deposits (not negative yet) and Greenspan and Fels describe this as a long term outlook preference! Let Central Banks worldwide sell all their bonds and see what interest rates do, the “natural” response would be a collapse of the present economy no doubt, so this loop of continued Central Bank buying as first developed in Japan is going to continue worldwide. I would expect the Fed to announce new QE sometime within the next year.

https://www.barrons.com/articles/what-did-the-european-central-banks-bond-buying-accomplish-51551897385

 

[Spock]

David Stockman (OMB director under Reagan) blows some holes in a "savings glut" being the reason for negative rates.

It's almost starting to sound like a Baghdad Bob version of 1984-style propaganda. We're stacking debt on top of debt and the head of the ECB is claiming there is a "global excess of savings"?


https://davidstockmanscontracorner....avings-glut-and-the-lunacy-of-subzero-yields/

 

[audreyh1]

The biggest purchasers of the bonds were passive index funds which were forced to buy them as a result of being included in the Emerging Market Index. 3% of the Emerging Market Bond Index is Argentina bonds. Fidelity, I shares and the EMB fund of JP Morgan were the top purchasers of the bonds, and it was oversubscribed as an issue as index funds competed over being able to add to their portfolio and not wanting to be under-weighted a hot issue along with managed funds. At the time it was a hot area and continues to be a focus of investors looking to add another non correlating asset to their portfolios

The biggest bond index funds are US debt only. I scratch my head at an emerging market bond index fund, but I suppose they have plenty of investors?

 

[Running_Man]

David Stockman (OMB director under Reagan) blows some holes in a "savings glut" being the reason for negative rates.

It's almost starting to sound like a Baghdad Bob version of 1984-style propaganda. We're stacking debt on top of debt and the head of the ECB is claiming there is a "global excess of savings"?


https://davidstockmanscontracorner....avings-glut-and-the-lunacy-of-subzero-yields/

From the article:

For instance, if the central banks of the world manage to drive average global yields another 50 basis points lower by next August, the bond's price will rise to about 244%. And just easy peasy, a speculator who bought the original issue in September 2017 would have booked a 150% profit (including interest). On a bond!

I have disagreed with Mr Stockman's analysis quite a bit over the past years, however in general I agree with his detached view of the bond market:

Instead of a venue for long-horizon investors to find safety and modest yield, the central banks have turned the bond pits into gambling forums where yields are irrelevant and short-term capital appreciation is the name of the game.

Except. Except. If you insist on buying Beyond Meat Inc at 125X sales or even a high flyer like Chipotle at 56X earnings, you can dream that much of the known world will soon become Vegan or go bonkers for an over-priced Burrito Bowl, but not so with these high-flying premium bonds.

Everywhere and always bonds will return to par at redemption, and collectively the traders and speculators who today are pleased to call themselves investors are going to loose their shirts.

That much is guaranteed. The only thing at issue is how soon the bloodbath comes, and how violently the financial terror spreads from the bond markets to the rest of the financial system

This is simply one of the biggest bubble in the history of financial markets, the single biggest and history will be shaking their heads the day Central Banks lose control, but they can maintain control for a long time if they can maintain belief.... At this point if you wanted to play this fun game along with the speculators you'd buy the longest yielding bonds and sell when the 10 year yield gets to zero or rises above 2.0%. However it is possible to have an Argentina moment and lose 60% in the bond market and 50% in the stock market in a day if global belief falls off at one time. If you are a conservative investor you'd want to take your profits on your long term bonds, buy high quality short term bonds and let this settle out for a few years to see what to invest in..............

 

[Running_Man]

The biggest bond index funds are US debt only. I scratch my head at an emerging market bond index fund, but I suppose they have plenty of investors?

Well in terms of size the US bond market is twice the size of the US stock market, and about 40% of the world bond market. The global bond market is 100 trillion and about three times the size of the world's stock markets. SO the gains in the world bond market is three times the effect of wealth creation of the stock market dollar for dollar, and it has been churning money for years now, since 2008.

Likewise a reversal has three times the impact, which is why Banks have extreme difficulty in having this end, and when it ends there is no escaping unless you are in very short maturities.

 

[RAE]

I would expect the Fed to announce new QE sometime within the next year.

Yeah, I'm expecting the same thing (possibly within 6 months). But I don't think it is going to work very well this next time. The Fed just does not have many good options anymore to try to control a major collapse.

 

[NW-Bound]

From the article:

I have disagreed with Mr Stockman's analysis quite a bit over the past years, however in general I agree with his detached view of the bond market...

The above price of the Austrian bond is totally insane, perhaps worse than the tulip bubble and the dot coms.

It is not going to end well, and I am still trying to figure out how it would affect me. In the subprime mortgage and the CDS/CDO shenanigan I watched in disbelief people who flipped houses and made money in a matter of minutes. Yes, minutes. I knew it was not going to end well, but if I was not part of it I would be safe. Right?

Well, we knew how that worked out. How is this going work out this time with the bond bubble?

 

[Running_Man]

Ironic thing is the bond went up 15 more points yesterday and is now trading over 200. If the bond bubble ends, it will be in a matter of days of market action as the value of the bonds dwarfs the value of the economy and it will not matter what you do at that point. The Central Banks are aware of this problem and their efforts to maintain calm have led directly to the Argentina and Austrian situations. The Harry Browne portfolio is probably the best portfolio to take advantage of the Bond Bubble not bursting or if the bond bubble does burst, it was designed to handle all the situations. but limits the total upside.

 

[NW-Bound]

Paying double par value for a bond that pays 2.1% over the next 100 years. Who would do that?

Again, some people will maintain that the market is efficient and players are rational, so whatever alternative investments out there must be equally bad.

Maybe everything else is really just as bad, and we are just too dumb to know it.

I think I will go buy some Bitcoins now.

 

[samclem]

Paying double par value for a bond that pays 2.1% over the next 100 years. Who would do that?

Again, some people will maintain that the market is efficient and players are rational, so whatever alternative investments out there must be equally bad.

Hey, the buyer just needs one greater fool later on to make it work out.

Often there are factors/distortions on the buyer's end that cause things that appear to be whacky to folks who aren't affected by those same things. Maybe some of these bonds are in indexes that a MF is forced to buy, or there are institutional buyers (insurance companies, etc) that are mandated to use particular securities to back their book.

That sure doesn't mean I have to follow them down that drain.

I'm looking at the 30 year TIPS auction this month, those bonds will probably have a real (inflation-adjusted) yield of less than 0.5%. That's a bitter pill. As OldShooter wrote before--some purchases have to be viewed as insurance rather than an investment.

 

[MichaelB]

Again, some people will maintain that the market is efficient and players are rational, so whatever alternative investments out there must be equally bad.

Yes, the market is efficient, especially for sovereign bond issues. Rational? Not sure. Not smart? That's pretty clear.

Banks are forced to buy much of this stuff. That's one reason why European banks have such low equity value compared with US banks. Look back over time to count how often this ends well.

 

[Running_Man]

Another big buyer could actually be pension funds that were short gamma on their bond positions, hoping to collect the premiums to juice the yield of their pension funds due to low interest rates. Instead you have a bunch of pensions that need to buy the bonds to to stop losing on their short gamma trades. It would explain the ferocity and 3 standard deviation nature of interest rates the last couple weeks. If this interest rate move continues we will start hearing something, the bond market is just too big for a move of this size to not impact someone major.

 

[DCdave]

David Stockman (OMB director under Reagan) blows some holes in a "savings glut" being the reason for negative rates.

It's almost starting to sound like a Baghdad Bob version of 1984-style propaganda. We're stacking debt on top of debt and the head of the ECB is claiming there is a "global excess of savings"?


https://davidstockmanscontracorner....avings-glut-and-the-lunacy-of-subzero-yields/

I will say that the debt levels across the globe (and our 27% YTD increase so far this fiscal year) are worrisome but that being said I always find it surprising that David Stockman continues to get attention. If you google his articles you will see that he is a perma-bear that has been predicting 50% corrections year after year after year. As an example he suggested getting out of the market in 2011 as he forecasted a 50% decline from S&P 1,200. What a GREAT time to get out.....LOL.
At some point he will make a prediction that will come true but following his advice for the last decade would have been tragically ruinous to his followers net worth.

 

[Running_Man]

I will say that the debt levels across the globe (and our 27% YTD increase so far this fiscal year) are worrisome but that being said I always find it surprising that David Stockman continues to get attention. If you google his articles you will see that he is a perma-bear that has been predicting 50% corrections year after year after year. As an example he suggested getting out of the market in 2011 as he forecasted a 50% decline from S&P 1,200. What a GREAT time to get out.....LOL.
At some point he will make a prediction that will come true but following his advice for the last decade would have been tragically ruinous to his followers net worth.

I think many people underestimate the power of Central Banks to control bond markets and the profits they put out, and most stock investors do not realize the power the bond market provides their equities. Stockman’s positions and ideas can be technically accurate but Central Banks have a firm grip on the control of money which pays for everything. Every now and then they slip up…..