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The Central Banks Are Losing Control Of The Financial Markets
The Central Banks Are Losing Control Of The Financial Markets
Every great con game eventually comes to an end. For years, global central banks have been manipulating the financial marketplace with their monetary voodoo. Somehow, they have convinced investors around the world to invest tens of trillions of dollars into bonds that provide a return that is way under the real rate of inflation. For quite a long time I have been insisting that this is highly irrational. Why would any rational investor want to put money into investments that will make them poorer on a purchasing power basis in the long run? And when any central bank initiates a policy of “quantitative easing”, any rational investor should immediately start demanding a higher rate of return on the bonds of that nation. Creating money out of thin air and pumping into the financial system devalues all existing money and creates inflation. Therefore, rational investors should respond by driving interest rates up. Instead, central banks told everyone that interest rates would be forced down, and that is precisely what happened. But now things have shifted. Investors are starting to behave more rationally and the central banks are starting to lose control of the financial markets, and that is a very bad sign for the rest of 2015.
And of course it isn’t just bond yields that are out of control. No matter how hard they try, financial authorities in Europe can’t seem to fix the problems in Greece, and the problems in Italy, Spain, Portugal and France just continue to escalate as well. This week, Greece became the very first nation to miss a payment to the IMF since the 1980s. We’ll discuss that some more in a moment.
…click on the above link to read the rest of the article…
Investors Start To Panic As A Global Bond Market Crash Begins
Investors Start To Panic As A Global Bond Market Crash Begins
Is the financial collapse that so many are expecting in the second half of 2015 already starting? Many have believed that we would see bonds crash before the stock market crashes, and that is precisely what is happening right now. Since mid-April, the yield on 10 year German bonds has shot up from 0.05 percent to 0.89 percent. But much of that jump has come this week. Just a couple of days ago, the yield on 10 year German bonds was sitting at just 0.54 percent. And it isn’t just Germany – bond yields are going crazy all over Europe. So far, it is being estimated that global investors have lost more than half a trillion dollars, and there is much more room for these bonds to fall. In the end, the overall losses could be well into the trillionseven before the stock market collapses.
I know that for most average Americans, talk about “bond yields” is rather boring. But it is important to understand these things, because we could very well be looking at the beginning of the next great financial crisis. The following is an excerpt from an article by Wolf Richter in which he details the unprecedented carnage that we have witnessed over the past few days…
On Tuesday, ahead of the ECB’s policy announcement today, German Bunds sagged, and the 10-year yield soared from 0.54% to 0.72%, drawing a squiggly diagonal line across the chart. In just one day, yield increased by one-third!
Makes you wonder to which well-connected hedge funds the ECB had once again leaked its policy statement and the all-important speech by ECB President Mario Draghi that the rest of us got see today.
…click on the above link to read the rest of the article…
Bond Crash Continues – Aussie & Japan Yields Burst Higher
Bond Crash Continues – Aussie & Japan Yields Burst Higher
The carnage in Europe and US bonds is echoing on around the world as Aussie 10Y yields jump 15bps at the open (to 3.04% – the highest in 6 months) and the biggest 2-day spike in 2 years. JGBs are also jumping, breaking to new 6-month highs above 50bps once again raising the spectre of VAR-Shock-driven vicious cycles…
The spectre of a self-feeding dynamic is something we’ve discussed at length before, most notably in 2013 when volatility-induced selling — reminiscent of the 2003 JGB experience — hit the Japanese bond market again, prompting us to ask the following rhetorical question:
What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations?
The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan’s banks.
What we described is known as a VaR shock and simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.
Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly.
Here’s more from JPM on the similarities between the Bund sell-off and the JGB rout that unfolded two years ago:
…click on the above link to read the rest of the article…
Central Banks Are Pointing A Weapon Of Financial Mass Destruction—–Right At The Global Bond Markets
Central Banks Are Pointing A Weapon Of Financial Mass Destruction—–Right At The Global Bond Markets
For the first time in its country’s history, Portugal sold 6 month T-bills at a negative yield. The 300 million euros ($333 million) worth of bills due in November 2015 sold at an average yield of minus 0.002%. A negative yield means investors buying these securities will get back less money from the government than they paid when the debt matures.
To put this in perspective, the 10 year note in Portugal now yields just 2.38%, down from 18% a mere three years ago. Back in 2012, creditors grew wary of the countries referred to as PIIG’s (Portugal, Ireland, Italy and Greece) and their ability to pay back the massive amounts of outstanding debt. Consequently, creditors drove interest rates dramatically higher to reflect the added risk of potential defaults.
If a person had fallen into a deep slumber in the midst of the 2012 Eurozone debt crisis and awoke a week ago, they may make some reasonable assumptions as to why there was a collapse of Portuguese bond yields on the long end of the yield curve; and even displayed negative yields on the short end.
Perhaps Portugal had finally balanced their budget? Or even is now enjoying a budget surplus? To the contrary, that is not even close to the truth. Portugal has not balanced its budget…its budget deficit now sits at over 3% of GDP.
Or perhaps there was a massive restructuring of outstanding debt? Upon joining the Euro, Portuguese national debt was below the 60% limit set by the Maastricht Treaty criteria. By the start of the debt crisis in 2009, that level of public sector debt had edged up to 70% of GDP. However, the recession of 2009-12, saw a rapid increase in the level of debt. Despite recent efforts to reduce public spending and austerity measures pursued by the government, Portugal still has an immense and growing debt load, with a current National Debt to GDP ratio of over 130%.
…click on the above link to read the rest of the article…
The potential bond crisis most people have never heard of
While 007 goes from strength to strength, his financial namesake may be heading for a fall
“The name’s Bond,” goes the famous line. But in this case, it’s not James Bond. While nearly everyone knows every detail about the 007 super spy, his lesser-known financial namesake is many times more important.
The James Bond franchise is expected to continue strongly with the autumn arrival of Daniel Craig speeding through the streets of Rome inSPECTRE, but those in the financial know worry about the spectre of the other kind of bond heading for a crash.
Four out of five bond traders worry the market could collapse in a disorderly sell-off.
- Bank of America forecasts another rate cut for Canada
- Impact of low dollar and oil has yet to feed into Canadian economy: Poloz
And while Bond villains jump right out at you, bond villains are hard to finger.
At their most basic level, bonds are anything but complicated. They are simply a legal arrangement where one person agrees to lend money to someone else for a fixed length of time at a fixed rate of interest.
Popping the bond bubble
In the public imagination, if we think of them at all, bonds are the epitome of safety. Which is why it is strange to read in one of the world’s most reliable business publications, the London Financial Times, that experts are terrified of an imminent crash in bonds that could destabilize the global economy.
The interest rates on Canadian bonds have been falling for decades, meaning existing bonds have risen in value. That could be about to change. (Pete Evans/CBC)
“This market could pop,” leading bond trader Brad Crombietold the FT. “There is more tension and anxiety over valuations than for a long while.”
…click on the above link to read the rest of the article…
Steen’s Chronicle: The best of times, the worst of times
- Significant changes to our JABA model’s long-term outlook
- Inopportune rise in gold and energy prices expected
- Commodities will outperform and yields will add another 100 bps
- Europe will suffer downturn and the US will flirt with recession in 2016
- US, German and EU core government bonds will be 100 bps higher by and in Q4 before making its final new low in H1 2016. US 10-year yield will trade above 3.0% and Bunds above 1.25%
- Energy: WTI crude will hit US $70-80/barrel, setting up excellent energy returns.
- US dollar will weaken to EUR1.18/1.20 before retest of lows and then start multi-year weakness.
- Gold will be the best performer in commodity-led rally. We see 1425/35 by year-end.
…click on the above link to read the rest of the article…
Putin Pans Ukraine’s Debt Moratorium As “De Facto Default”, Threatens Court
Putin Pans Ukraine’s Debt Moratorium As “De Facto Default”, Threatens Court
In exactly a month, Ukraine will owe Russia a $75 million debt coupon payment. Finance Minister Anton Siluanov told reporters in Moscow today that “if they miss the payment, we will use our right to go to court.” Then it got serious, as Vladimir Putin instructed Russian Prime Minister Dmitry Medvedev to assume control of Ukraine’s repayment of its $3-billion debt in Eurobonds that Russia bought in 2013, slamming Ukraine’s bill allowing them to impose a moratorium on foreign debt repayments as a de facto announcement of default. As one market participant warned, “I would wait until after June 20 to go forward with” any moratorium, as “if Russia takes Ukraine to court, that might be an incentive for other creditors to go down the same route.”
As we previously noted, on Tuesday, Ukraine’s parliament adopted a bill allowing Ukraine to freeze repayments of its foreign debt. As RT notes,
Experts agree that Tuesday vote meant a technical default for the country and would impede Ukraine’s ability to raise private investment from the EU and the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB), a European source told TASS on Wednesday.“Suspension of debt payments not coordinated with creditors results in a technical default, and in the case of Ukraine, it threatens to undermine Kiev’s ability to attract private investment through EU programs,“ the source said.As part of the underpinning of Kiev’s bailout plan, the International Monetary Fund said in March that Russia would not receive the $3 billion bond repayment from Ukraine this year.
IMF is looking for cooperation from creditors to accept a restructuring on Kiev’s debt. That includes Russia.
It’s Official: The BoJ Has Broken The Japanese Stock Market
It’s Official: The BoJ Has Broken The Japanese Stock Market
As those who follow such things are no doubt aware, The Bank of Japan often says some very funny things about inflation expectations and monetary policy. Essentially, the bank is forced to constantly defend its QE program because as it turns out, monetizing the entirety of gross JGB issuance and amassing an equity portfolio worth just shy of $100 billion on the way to cornering the ETF market comes across as insanely irresponsible even in a world that is now defined by insanely irresponsible central banks.
Perhaps the best example of the BoJ’s absurd rhetoric came in late March when Governor Haruhiko Kuroda said the following about the bank’s 10 trillion yen equity portfolio:
- KURODA: BOJ’S ETF PURCHASES AREN’T LARGE
As we noted at the time, either we don’t know what large means, or Kuroda is simply making things up as he goes along. Meanwhile, the BoJ continues to provide Nikkei plunge protection on an almost daily basis. Here’s what we said in March:
The world has now officially given up any pretensions that Japan’s elephantine QE program isn’t underwriting the rally in Japanese stocks. Not only is the Bank of Japan buying ETFs, they’re targeting their purchases to (literally) ensure that stocks can’t fall by stepping in when things look weak at the open. Unfortunately, Kuroda looks set to run up against the extremely inconvenient fact that while, in his lunacy, he can print a theoretically unlimited amount of money, the universe of purchasable ETFs is limited and so eventually, the BoJ will own the entire market.
…click on the above link to read the rest of the article…
Experts Are Warning That The 76 Trillion Dollar Global Bond Bubble Is About To Explode
Experts Are Warning That The 76 Trillion Dollar Global Bond Bubble Is About To Explode
Warren Buffett believes “that bonds are very overvalued“, and a recent survey of fund managers found that 80 percent of them are convinced that bonds have become “badly overvalued“. The most famous bond expert on the planet, Bill Gross, recently confessed that he has a sense that the 35 year bull market in bonds is “ending” and he admitted that he is feeling “great unrest”. Nobel Prize–winning economist Robert Shiller has added a new chapter to his bestselling book in which he argues that bond prices are “irrationally high”. The global bond bubble has ballooned to more than 76 trillion dollars, and interest rates have never been lower in modern history. In fact, 25 percent of all government bonds in Europe actually have a negative rate of return at this point. There is literally nowhere for the bond market to go except for the other direction, and when this bull market turns into a bear it will create chaos and financial devastation all over the planet.
In a recent piece entitled “A Sense Of Ending“, bond guru Bill Gross admitted that the 35 year bull market in bonds that has made him and those that have invested with him so wealthy is now coming to an end…
Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date.
…click on the above link to read the rest of the article…
Central Banks Warn: Liquidity May Evaporate When Investors Finally Remove Blindfolds
Central Banks Warn: Liquidity May Evaporate When Investors Finally Remove Blindfolds
Companies are selling bonds like madmen. This year through Tuesday, investment-grade and junk-rated companies have sold $438 billion in new bonds, up 14% from the prior record for this time of the year, set in 2013, according to Dealogic. This quarter is already in second place, nudging up against the all-time quarterly record of $455 billion of Q2 2014.
About $87 billion of these bonds funded takeovers, a record for this time of the year, the Wall Street Journal reported. The four biggest bond sales in that batch were for healthcare takeovers, including the Actavis deal whose $21 billion bond sale was the second largest in history, behind Verizon’s $49 billion bond sale in 2013.
Actavis had received orders for more than four times the bonds available, according to CFO Tessa Hilado. “You don’t really know what the demand is until people start placing their orders,” she said. “I would say we were pleasantly surprised.”
Brandon Swensen, co-head of U.S. fixed income at RBC Global Asset Management, couldn’t “see anything on the radar that’s going to slow things down materially,” he told the Wall Street Journal. His firm expects rates to “remain low.”
All of the investors chasing after these bonds expect rates to remain low. Or else they wouldn’t chase after these bonds. If rates rise, as the Fed is promising in its convoluted cacophonous manner, these bonds that asset managers are devouring at super-high prices and minuscule yields are going to be bad deals. And their bond funds are going to take a bath.
…click on the above link to read the rest of the article…
Kiev, Moscow, Bonds and Haircuts
Kiev, Moscow, Bonds and Haircuts
When money managers talk outside their narrow field, nonsense is guaranteed to ensue. No better example than this Bloomberg piece on Ukraine’s ‘debt restructuring’ plans, which are as much a political tool as they are anything else at all. Ukraine’s American Finance Minister has announced a broad restructuring plan with a wide range of severe haircuts for creditors, and she – well, obviously – wishes to include Russia in the group of creditors who are about to get their heads shaved.
And despite all obvious angles to the issue that are not purely economical, Bloomberg presents a whole array of finance professionals who are free to spout their entirely irrelevant opinions on the topic. If you didn’t know any better, you’d be inclined to think that perhaps Russia is indeed just another creditor to Kiev.
Putin Plays Wildcard as Ukraine Bond Restructuring Talks Begin
As Ukraine begins bond-restructuring talks, it finds itself face-to-face with a familiar foe: Russia. President Vladimir Putin bought $3 billion of Ukrainian bonds in late 2013. The cash was meant to support an ally, then-President Yanukovych.
That is, for starters, a far too narrow way of putting it. Russia simply wanted to make sure Ukraine would remain a stable nation, both politically and economically, because A) it didn’t want a failed state on its borders and B) it wanted to ensure a smooth transfer of its gas sales to Europe through the Ukraine pipeline systems. Whether that would be achieved through Yanukovych or someone else was a secondary issue. Putin was never a big fan of the former president, but at least he kept the gas flowing.
…click on the above link to read the rest of the article…
Short Term Gains And Long Term Disaster
Short Term Gains And Long Term Disaster
About a month ago, Japan’s giant GPIF pension fund announced it had started doing in Q4 2014, what PM Abe had long asked it to: shift a large(r) portion of its investment portfolio from bonds to stocks. No more safe assets for the world’s largest pension fund, or a lot less at least, but risky ones. For Abe this promises the advantage of an economy that looks healthier than it actually is, while for the fund it means that the returns on its investments could be higher than if it stuck to safe assets. Not a word about the dangers, not a word about why pensions funds were, for about as long as they’ve been in existence, obliged by law to only hold AAA assets. This is from February 27:
Japan’s GPIF Buys More Stocks Than Expected In Q4; Slashes JGBs
Japan’s trillion-dollar public pension fund bought nearly $15 billion worth of domestic shares in the fourth quarter, more than expected, while slashing its Japanese government bond holdings as Prime Minister Shinzo Abe prods the nation to take more risks to spur economic growth. The bullishness toward Japanese equities by the Government Pension Investment Fund, the world’s biggest pension fund, boosted hopes in the Tokyo market that stocks have momentum to add to their 15-year highs.
GPIF said on Friday its holdings of domestic shares rose to 19.8% of its portfolio by the end of December from 17.79% at the end of September. Yen bonds fell to 43.13% from 48.39%. Adjusting for factors such as the Tokyo stock market’s rise of roughly 8% during the quarter, GPIF bought a net 1.7 trillion yen ($14 billion) of stocks in the period, reckons strategist Shingo Kumazawa at Daiwa Securities. GPIF’s investment changes are closely watched by markets, as a 1 percentage-point shift in the 137 trillion yen ($1.15 trillion) fund means a transfer of about $10 billion.
…click on the above link to read the rest of the article…
Dumping American Junk in Europe, Draghi Asked for it
Dumping American Junk in Europe, Draghi Asked for it
This is just the beginning, a new trend that may well turn into the next craze. ECB President Mario Draghi, in his infinite wisdom, asked for it: he’d driven the ECB deposit rate deeper into the negative, to -0.2%, and has promised to buy €60 billion of assets a month, including Eurozone government debt, other debt, and even, as German politician Frank Schäffler had predicted so poignantly in July 2012, “old bicycles.”
The ECB would buy this debt from its favorite banks, driving up the price so high that the yield would drop to -0.2%, same as the deposit rate. These banks are going to make a killing on the deal. And yields of Eurozone government debt have been plunging, with the German 10-year yield now at 0.15% on its way to -0.2%.
The goal: Make investors pay for the privilege of funding all governments across the Eurozone, just like depositors are being made to pay for the privilege of lending their hard-earned money to shaky banks.
Insurance companies, but also other financial institutions, hold high-grade bonds to create predicable income streams into the future with which to pay the promises they made to holders of their life insurance policies and annuities – a big part of the private pension system. But as yields are turning negative, future income streams fizzle. It’s undermining an entire retirement system.
…click on the above link to read the rest of the article…
Thanks For The Corporate Bond Bubble, Fed
Thanks For The Corporate Bond Bubble, Fed
Once upon a time businesses borrowed long term money—-if they borrowed at all—-in order to fund plant, equipment and other long-lived productive assets. That kind of debt was self-liquidating in the sense that it usually generated a stream of income and cash flow that was sufficient to service and repay the debt, and to kick some earned surplus into the pot as well.
Today American businesses are borrowing like never before—-but the only thing being liquidated is there own equity capital.That’s because trillions of debt is being issued to fund financial engineering maneuvers such as stock buybacks, M&A and LBOs, not the acquisition of productive assets that can actually fuel future output and productivity.
So it amounts to a great financial shuffle conducted entirely within the canyons of Wall Street. Financial engineering deals invariably shrink the float of outstanding stock among the companies visiting underwriters. Likewise, they invariably leave with the mid-section of their balance sheets bloated with fixed obligations, while the bottom tier of shareholder equity has been strip-mined and hollowed out.
At the same time, none of this vast flow of capital leaves a trace on the actual operations—-such as production, marketing and payrolls—of the businesses involved. Instead, prodigious sums of debt capital are being sold to yield-hungry bond managers and homegamers via mutual funds and then recycled back into windfall gains for stock market gamblers who chase momo plays and the stock price rips that usually accompany M&A, LBO or stock buyback announcements.
…click on the above link to read the rest of the article…
Shale Company Defaults On $175 MM In Bonds Without Making A Single Interest Payment
Shale Company Defaults On $175 MM In Bonds Without Making A Single Interest Payment
Update: And just to prove that people are indeed, idiots, moments ago this hits:
- ENERGY XXI GULF COAST, INC. PRICES UPSIZED PRIVATE OFFERING OF $1.45
BILLION OF 11.000% SENIOR SECURED SECOND LIEN NOTES DUE 2020
We set the odds at 75% that not even odd coupon payment will be made in this case either.
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It was just this past June when a report on Seeking Alpha quizzically asked, “Can American Eagle Energy Corporation Fly High Like An Eagle Over The Next Months?”
The answer, it turns out, is no.
According to a Bloomberg report, the Colorado oil producer, whose stock is now trading at a very sub-eagle $0.20, or about $6MM in market cap (the stock was at $6.00 when the Seeking Alpha report came out) has announced it will not make even one coupon payment on its bonds issued less than seven months ago.
Bloomberg reports that after raising $175 million in a junk-bond offering, American Eagle Energy Corp. said Monday thatit wouldn’t make its first interest payment on the debt. And instead of fulfilling its naive bondholders dreams that they will collect an 11% annual coupon for the next 5 years and then get repaid in full, the company hired bankruptcy advisers, Canaccord Genuity and Seaport, to negotiate a restructuring plan with the bondholders. Said bondholders now have two options: give the company more time to try to become profitable (i.e., hope that oil somehow soars from here) or push it into default, and become the new equity holders following a debt for equity.
…click on the above link to read the rest of the article…
