Home » Posts tagged 'bond market'

Tag Archives: bond market

Speculation is mounting that the Bank of Japan is losing control of the bond market. Jim Grant, editor of «Grant’s Interest Rate Observer», believes this could trigger a shock to the global financial system. He also explains why he expects further surges in inflation and why gold should be part of your portfolio.

The news caught markets off guard: On December 20th, the Bank of Japan surprisingly extended the target range for the yield on ten-year government bonds to plus/minus 0.5%. A move that not a single economist had expected.

This week, the Bank of Japan could announce a major policy shift amid rising government bond yields and a strengthening yen. Although barely a month has passed since the BoJ’s last meeting, the bond market is already testing the new upper limit of the yield curve control regime.

«To us, Japanese interest rate policy resembles the Berlin Wall of the late Cold War era, a stale anachronism that must sooner or later fall,» says Jim Grant. For the editor of the iconic investment bulletin «Grants’ Interest Rate Observer,» recent developments in Japan pose an underestimated risk to global financial markets. Not least because virtually no one is talking about it.

In an in-depth interview with The Market NZZ, which has been slightly edited for clarity, Mr. Grant explains what it means for financial markets if the Bank of Japan is forced to scrap its yield curve control policy. But first, he says why he doesn’t believe inflation will end soon, why bonds may be at the start of a long bear market, and why he believes gold is the best choice as a store of value.

«If the past is prologue and if the great bond bull market is over, then on form, we are looking at what could be a very prolonged and perhaps gradual move higher in interest rates»: Jim Grant.

…click on the above link to read the rest…

Bank of England intervenes in bond markets again, warns of ‘material risk’ to UK financial stability

October 11, 2022

Bank of England intervenes in bond markets again, warns of ‘material risk’ to UK financial stability

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the Bank of England warned.
The move marks the second expansion of the central bank’s extraordinary rescue package in as many days, after it increased the limit for its daily gilt purchases on Monday ahead of the planned end of the purchase scheme.

The Bank of England raised rates by 0.5 percentage points Thursday.

Vuk Valcic | SOPA Images | LightRocket | Getty Images

LONDON — The Bank of England on Tuesday announced an expansion of its emergency bond-buying operation as it looks to restore order to the country’s chaotic bond market.

The central bank said it will widen its purchases of U.K. government bonds — known as gilts — to include index-linked gilts from Oct. 11 until Oct. 14. Index-linked gilts are bonds where payouts to bondholders are benchmarked in line with the U.K. retail price index.

The move marks the second expansion of the Bank’s extraordinary rescue package in as many days, after it increased the limit for its daily gilt purchases on Monday ahead of the planned end of the purchase scheme on Friday.

The Bank launched its emergency intervention on Sep. 28 after an unprecedented sell-off in long-dated U.K. government bonds threatened to collapse multiple liability driven investment (LDI) funds, widely held by U.K. pension schemes.

“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the bank said in a statement Tuesday.

…click on the above link to read the rest of the article…

BoE’s New Support Plan Fails As UK Gilt Yields Explode Higher

October 10, 2022

BoE’s New Support Plan Fails As UK Gilt Yields Explode Higher

Update (1030ET): Despite The BoE promises to do almost ‘whatever it takes’, long-dated gilt prices are collapsing today. 30Y gilt yields are up a stunning 34bps now, soaring towards crisis highs…

What next for BoE?

The pain in the UK is spreading to US yields (remember US bond market holiday today but futures trading)…

10Y UST yields are implied around 6bps higher for now.

* * *

Over the weekend, Band of England (BoE) Deputy Governor Dave Ramsden indicated that the bank intends to charge forward on interest rate hikes, suggesting that this is the only way to tame the ongoing inflation crisis.

“However difficult the consequences might be for the economy, the MPC must stay the course and set monetary policy to return inflation to achieve the 2% target sustainably in the medium term, consistent with the remit given to us.”

Just two days after that statement, BoE on Monday announced further measures to ensure financial stability in the U.K., building on its intervention in the long-dated bond market.

Specifically, The BOE said it will:

Double the size of its auctions to purchase long-dated UK government bonds to £10 billion a day until Oct. 14, when the BOE plans to close that program as previously announced
Launch a Temporary Expanded Collateral Repo Facility, or TECRF, that will run beyond the end of this week until Nov. 10. Its purpose is to enable banks to ease pressures in LDI funds through liquidity insurance operations.
Temporary expansion of collateral it accepts under its existing Sterling Monetary Framework to include corporate bonds.

Additionally, regular repo-related operations also remain available to help.

So far, investors haven’t taken up as much of the support as the BOE has offered. In the eight auctions to date, the BOE bought just £4.6 billion of bonds, about 12% of the £40 billion capacity of the program.

…click on the above link to read the rest of the article…

A historic global bond-market crash threatens liquidation of the world’s most crowded trades, says BofA

September 26, 2022

A historic global bond-market crash threatens liquidation of the world’s most crowded trades, says BofA

‘If the bond market does not function, then no other market functions, really,’ say Ben Emons of Medley Global Advisors

A newspaper headline is shown after the Treaty of Versailles was signed in 1919. Global bonds are in one of their worst bear markets since the treaty went into effect in 1920, establishing the terms for peace at the end of World War I.

SOURCE: UNIVERSITY OF DENVER

Global government-bond markets are stuck in what BofA Securities analysts are calling one of the greatest bear markets ever and this is in turn threatening the ease with which investors will be able to exit from the world’s most-crowded trades, if needed.

Those trades include positions in the dollar, U.S. technology companies and private equity, said BofA strategists Michael Hartnett, Elyas Galou, and Myung-Jee Jung. Bonds are generally regarded as one of the most liquid asset classes available to investors. If liquidity dries up in that market, it’s bad news for just about every other form of investment, other analysts said.

Financial markets have yet to price in the worst-case outcomes for inflation, interest rates, and the economy around the world, despite tumbling global equities along with a selloff of bonds in the U.S. and the U.K. On Friday, the Dow industrials DJIA, -1.62% sank almost 500 points and flirted with a fall into bear-market territory, while the S&P 500 index SPX, -1.72% stopped short of ending the New York session below its June closing low.

U.S. bond yields are at or near multiyear highs. Meanwhile, government-bond yields in the U.K., Germany, and France have risen at the fastest clip since the 1990s, according to BofA Securities.

…click on the above link to read the rest of the article…

“Potential For Extreme Havoc”: $50 Trillion Question Is What If Yields Spike Higher

December 22, 2021

“Potential For Extreme Havoc”: $50 Trillion Question Is What If Yields Spike Higher

The size of the global government bond market surged by $10 trillion in the space of two years to reach about $50 trillion. Those outstanding borrowings are at least one gorilla in the room as investors gear up for a year in which yields are expected to climb as central banks step back and economies extend their recovery.

At the very least the weight of all that debt acts to enhance the role that “price-insensitive” investors play in repressing yields.

The savings glut is a big part of that pool. Across Asia and beyond there’s a generation or two who grew wealthy from the postwar booms and are now more concerned about preserving capital than about adding to it.

Their presence helps to explain the waves of buying that contributed to capping yields at about 1.7% for 10-year Treasuries this year, as does demand from pension funds and insurers — remember the U.S. defined-benefit funds who switched into bonds.

Then there are the essentially forced investments from banks that have to hold sovereign securities to meet rules introduced after the collapse of Lehman Brothers.

And we have the trillions of dollars that central banks hold, both via QE programs and in their foreign-exchange reserves.

…click on the above link to read the rest of the article…

Weekly Commentary: Regime Change

March 4, 2021

Weekly Commentary: Regime Change

Ten-year Treasury yields closed out a tumultuous week at 1.41% bps, pulling back after Thursday’s spike to a one-year high 1.61%. Ten-year Treasury yields are now up 49 bps from the start of the year and almost 100 bps (1 percentage point) off August 2020 lows. More dramatic, five-year yields jumped 16 bps this week to 0.73%.

Surging yields are a global phenomenon. Ten-year yields were up 12 bps in Canada (to 1.35%), 30 bps in Australia (1.90%), 28 bps in New Zealand (1.89%), five bps in Germany (-0.26%), and five bps in Japan (0.16%) – with Japanese JGB yields hitting a five-year-high.

“Periphery” bond markets were under intense pressure, Europe’s and EM. Greek yields surged 22 bps to 1.11%, while Italian yields rose 14 bps to 0.76%. EM dollar bonds were bloodied. Yields were up 31 bps in Turkey (5.90%), 28 bps in the Philippines (5.90%), 25 bps in Peru (2.39%), 23 bps in Indonesia (2.57%), 16 bps in Qatar (2.14), 16 bps in Ukraine (6.95%), and 16 bps in Mexico (2.92%). Local currency bonds were walloped. Yields were up 125 bps in Lebanon, 31 bps in Brazil, 29 bps in Colombia, 27 bps in Romania, 19 bps in Poland, and 17 bps in Hungary.

Global bond markets have an inflation problem. The international central bank community has an inflation problem. Perhaps Treasuries and the Fed face the biggest challenge in managing around mounting inflationary risks.

The U.S., after all, is running unprecedented peacetime deficits, with a new $1.9 TN stimulus package scooting through Congress. This legislation will be followed by what is sure to be a major infrastructure program. There is literally colossal deficits and Treasury issuance as far as the eye can see.

February 23 – Bloomberg (Gerson Freitas Jr.): “Commodities rose to their highest in almost eight years amid booming investor appetite for everything from oil to corn…
…click on the above link to read the rest of the article…

The Fed Wrecked the World’s Most Important Market

December 19, 2020

The Fed Wrecked the World’s Most Important Market

Do you wish to know where the economy is heading? The bond market holds the answer, say the veterans.

The birds of the moment, the flighty birds, flock to the stock market. But the owls nest in the bond market.

The owls are the wiseacres.

The Federal Reserve’s hocus-pocus fails to trick them. They know the card is up the sleeve. And they enjoy exposing the fraud.

New York Times economics reporter Neil Irwin:

Savvy economic analysts have always known the bond market is the place to look for a real sense of where the economy is going, or at least where the smart money thinks it is going.

For example: Is inflation ahead? The bond market will tell you — Treasury bonds in particular.

Bonds and Inflation

Longer-dated Treasury notes will telegraph the signal. If they wire an inflationary message, their prices will fall. And their yields will rise.

(Bonds operate as seesaws operate. When prices go up, yields go down. When yields go up, prices go down).

Yields would rise because inflation would eat into the bond’s value… as the termite eats into wood. Under inflation a bond is a sawdust asset.

Bond purchasers would demand a higher yield to compensate them for inflation’s ravages.

That is, they would demand insurance against the termite’s evils.

The Message of the Bond Market

Does today’s bond market indicate inflation is ahead?

It does not. 10-year Treasury notes presently yield under 1% — 0.923%.

These are historic lows. 10-year yields average 4.40% across time.

In brief… the bond market indicates no inflationary menace. Inflation is as tame as a tabby.

…click on the above link to read the rest of the article…

Broke Bond Markets Mounting: Italy Surpasses Greece As Europe’s Riskiest Sovereign

November 10, 2019

Broke Bond Markets Mounting: Italy Surpasses Greece As Europe’s Riskiest Sovereign

As yields soar optimistically around the world, pushing negative-yielding debt below $12 trillion – the lowest since June, but hey, it’s still $12,000,000,000,000 of insanity, central-planners’ incessant meddling with global markets has sparked another WTF-moment in capital market history.

A mere twelve trillion dollars worth of nonsense debt remains…

China Corporate Bond Defaults Nearing a Record

And, as The FT reports, for the first time since 2008, Greece has lost the dubious distinction of being the riskiest government borrower in the eurozone after its bond yields dipped below Italy’s…

Greek bonds have soared this year as investors hungry for yields have snapped up debt from former euro area crisis spots — a trend that gained further momentum after S&P’s upgraded Athens’ credit rating to BB- late last month.

As FT notes, the small size of Greece’s bond market – much of its enormous debt load is in the form of low interest loans to the EU and IMF following a series of bailouts – means there is less immediate pressure on government finances compared with Italy, which relies solely on markets to refinance its own huge debt pile.

“We still hold some Greek bonds based on our view that the economy has bottomed,” said Chris Jeffery, a fixed-income strategist at Legal & General Investment Management.
“But much more important is the debt structure. There are very few cash flow requirements for the next five years. With Italy, you always have the rollover risk.”

5Y Greek bond yields topped 60% in early 2012, they are now below 0.50%!!

Finally, as the chart above shows, Italian debt has also performed strongly during the summer’s global bond rally, but some investors remain wary due to the effects of last year’s political tensions.

…click on the above link to read the rest of the article…

Market Commentary: China Watch

October 23, 2019

Market Commentary: China Watch

I’ve held the view that Chinese finance has been at the epicenter of international market unease. The U.S./China trade war was not the predominant global risk. However, it has had the potential to become a catalyst for Chinese financial instability. And there remains a high probability for an eruption of Chinese disorder to quickly reverberate through global markets and economies. To be sure, rapidly deteriorating U.S./China relations were a major contributor to this summer’s global yield collapse and bond market dislocation.

At this point, I’ll assume some “phase 1” deal gets drafted and then signed by Presidents Trump and Xi next month in Chile. In the grand scheme of things, little will have been resolved. It appears many of the most critical issues between the world’s two rival superpowers have been excluded from the initial compromise, I’ll assume tabled for some time to come. Short-term focused markets are content with a “truce,” welcoming a period of reduced risk of a rapid escalation of tensions.

Perhaps near-term financial risks have subsided in China. A counter argument would point out that Beijing’s push to improve its negotiating position forced officials to once again hit the Credit accelerator. Did Beijing push its luck too far? I would point to the $1 TN of additional household (chiefly mortgage) debt accumulated over the past year. China’s Household borrowings were up 15.9% in one year, 37% in two, 69% in three and 138% in five years. Importantly, Beijing’s stimulus efforts stoked China’s historic mortgage finance and apartment Bubbles already well into “Terminal Phase” excess. How deeply have fraud and shenanigans permeated Chinese housing finance? Similar to P2P and corporate finance?

…click on the above link to read the rest of the article…

Japanese Bond Crash, Margin Call Sends Shockwaves Around The Globe

October 1, 2019

Japanese Bond Crash, Margin Call Sends Shockwaves Around The Globe

For a dramatic preview of what will happen in a flash to all those record low interest rates without the backstop of central banks and ravenous pension fund, look no further than what happened in Japan overnight, where bond futures suffered the biggest one-day crash since August 2, 2016, sliding as much as 0.97 yen to 154.05, and triggering margin calls for investors after the worst 10-year debt auction in three years.

More ominously, once the rout started it quickly spread outside of Japan, because as yields jumped, the sell-off spilled into US Treasuries and European debt.

There were three things behind the swift collapse: the first catalyst was the Bank of Japan’s Monday decision to slash bond purchases in October for the four major maturity buckets in order to steepen the curve and avoid further flattening which Kuroda has repeatedly expressed concern about in the past; the BOJ had indicated it may even stop buying debt of more than 25 years. It also sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October.

“The BOJ is showing its clear intention to correct distortions in the curve through flexible adjustments in market operations,” said Mari Iwashita, chief market economist at Daiwa. “While cutting the lower end of purchases in bonds maturing over 25 years to zero looks shocking, the BOJ will probably cut buying in this zone slowly.”

“The BOJ’s operation change had a huge psychological impact,” said Eiji Dohke, chief bond strategist at SBI Securities in Tokyo. “Investors are reluctant to buy given the risk of the BOJ skipping a purchase.”

…click on the above link to read the rest of the article…

The Global Debt Bubble Enters Its Blow-Off Stage

September 11, 2019

The Global Debt Bubble Enters Its Blow-Off Stage

People have been talking about a “debt bubble” for some years now. They’ve been right, of course, based on the combination of surging borrowing and plunging rates. But the bubble hasn’t stopped inflating, and recently it entered what certainsly looks like a terminal blow-off stage. Some highlights:

Though July, China’s total debt rose by $2 trillion, a year-over-year increase of 26%. And this month the Chinese government cut bank reserve requirements in an attempt to further rev up lending.

In Japan, the junk bond market is being constrained by banks so desperate for yield that they’re lending directly to companies previously considered too risky. See Japan Junk Bond Market Hopes Crushed by Banks Hungry to Lend.

A recent week of corporate bond issuance was “the biggest weekly volume to hit global markets on record,” according to Dealogic. US investment-grade companies raised $72 billion across 45 deals, equaling the total issued in all of August.

Numerous companies issued 30-year bonds with yields below 3%, which used to be the province of safe haven governments. Even Apple, which is sitting on an epic pile of cash, borrowed money.

At the other end of the spectrum, junk bond issuer Restaurant Brands, which owns the Popeyes and Burger King chains, sold 8.5-year bonds with a coupon under 4%, a record low yield for a US junk issuer.

In Europe sales of new bonds hit $1 trillion earlier than in any previous year. Fully a third of European investment-grade bonds (and some junk bonds) now trade with negative yields. And the ECB is expected to cut rates further at its upcoming meeting.

Why is all this happening? Three reasons:

…click on the above link to read the rest of the article…

Here’s What I’m Worried About. And It’s Not a Recession

September 8, 2019

Here’s What I’m Worried About. And It’s Not a Recession

A rout in the hyper-inflated bond market can blow up everything at this point.

The locker room at my swim club has become the litmus test. When a complex topic, after years of being absent or ignored, suddenly crops up in conversation, and not just sporadically but all the time, it means that there is some kind of peaking going on. This suddenly hot topic now is a “coming recession.”

Just about everyone is talking about it. This means that fears of a recession or thoughts of a recession have now penetrated into the core of the previously recession-free zone: the swim-club locker room. It means that these recession fears might be peaking.

It makes sense. Recession-fear headlines are popping up everywhere. You cannot escape the drama. It’s not that there is a recession in the United States – far from it. It’s all about a coming recession.

And another term has penetrated into the musty locker room at my swim club, perhaps for the first time ever in its illustrious 100-plus-year history: “Inverted yield curve.”

People who didn’t care about it, who never cared about it, and who don’t know what it is, who don’t even really understand what a bond yield is, and who don’t really want to know what it is – in other words, perfectly sane people that have other things to worry about – are suddenly fretting about the inverted yield curve.

They’re fretting about it because everyone else is fretting about it. And every time the inverted yield curve comes up, recession talk is attached to it. But there’s a lot more to it than meets the eye.

In a survey released this week by the National Association of Realtors, 36% of active homebuyers – so people actively trying to buy a home – said they expect a recession starting next year, up from 30% a few months ago.

…click on the above link to read the rest of the article…

“A Big Wake Up Call”: Chinese Bond Market Roiled By First Ever Bank Failure

May 27, 2019

“A Big Wake Up Call”: Chinese Bond Market Roiled By First Ever Bank Failure

Late last Friday, we reported that several hours after the market close, China’s financial regulator and central bank made a shocking announcement: for the first time in nearly 30 year, China would take control of a bank, in this case the troubled inner Mongolia-based Baoshang Bank, due to the serious credit risks it poses.

The news which highlights the potential for increased stress at regional lenders that piled into off-book financing in recent years, was strategically timed to hit ahead of the weekend, and with the market closed, it avoided an immediate panic selling waterfall. However, the fact that in China banks are now fair game for failure, and will soon join the record surge in Chinese corporate defaults…

… slammed the country’s financial sector on Monday, sending funding costs sharply higher and underscoring the potential for increased stress at regional lenders that piled into off-book financing in recent years.

Unfortunately for Beijing, Bloomberg writes overnight that despite the strategically timed news, it wasn’t enough to prevent turmoil from sweep across the nation’s bond market, where funding costs for lenders surged and yields on government debt jumped. The seven-day repurchase rate jumped 30 basis points to 2.85%, the highest in a month, as of late Monday in Shanghai, while the yield on 10Y sovereign bonds climbed 5 bps to 3.35%.

“Baoshang’s case is a big wake-up call,” said Becky Liu, head of China macro strategy at Standard Chartered. “Participants in the interbank market, who didn’t differentiate credit when lending to banks on the belief that they will never go bankrupt, have now become more cautious. That has helped drive up funding costs and thus sovereign yields.”

…click on the above link to read the rest of the article…

The Arrival of the Credit Crisis

January 18, 2019

THE ARRIVAL OF THE CREDIT CRISIS

Those of us who closely follow the credit cycle should not be surprised by the current slide in equity markets. It was going to happen anyway. The timing had recently become apparent as well, and in early August I was able to write the following:

“The timing for the onset of the credit crisis looks like being any time from during the last quarter of 2018, only a few months away, to no later than mid-2019.” ^[i]

The crisis is arriving on cue and can be expected to evolve into something far nastier in the coming months. Corporate bond markets have seized up, giving us a signal it has indeed arrived. It is now time to consider how the credit crisis is likely to develop. It involves some guesswork, so we cannot do this with precision, but we can extrapolate from known basics to support some important conclusions.

If it was only down to America without further feed-back loops, we can now suggest the following developments are likely for the US economy. Warnings about an economic slowdown are persuading the Fed to soften monetary policy, a process recently set in motion and foreshadowed by US Treasury yields backing off. However, price inflation, which is being temporarily suppressed by falling oil prices, will probably begin to increase from Q2 in 2019. This is due to a combination of the legacy of earlier monetary expansion, and the consequences of President Trump’s tariffs on consumer prices.

After a brief pause, induced mainly by the threat of an unstoppable collapse in equity prices, the Fed will be forced to continue to raise interest rates to counter price inflation pressures, which will take the rise in the heavily suppressed CPI towards and then through 4%, probably by mid-year.

…click on the above link to read the rest of the article…

Is The Long-Anticipated Crash Now Upon Us?

October 27, 2018

Shutterstock

Is The Long-Anticipated Crash Now Upon Us?

Is this the market’s breaking point?

I admit: I’m a permabear.

This is no surprise to those who know and have followed me over the years. But I’m publicly proclaiming my ‘bearishness’ because doing so might open up a needed and long overdue dialog.

Here’s my fundamental position: Infinite growth on a finite planet is impossible.

Cutting to the chase, this is why I predict a major crash/collapse across stocks, bonds and real estate is on the way.

The recent market weakness seen over the past two weeks is nothing compared to what’s in store. As we’ve been carefully chronicling, bubbles burst from ‘the outside in’, starting at the weaker places at the periphery before progressing to the center.

Emerging market equities are now down -26% from their January highs and -18% year-to-date. China’s stocks market is down -32%, even with substantial intervention by the government to prop things up.

The periphery has been weakening all year, and the contagion has now spead worldwide.

Taken as a whole, global equities have shed some $13 trillion of market capitalization for a -15% decline:

The rot has spread to the core with surprising speed. Now even the formerly bullet-proof US equity markets are stumbling.

The S&P 500 is now negative on the year:

It’s been obvious for a long time to those who have watched The Crash Course that endless growth is simply not possible. Not for a bacteria colony in a petrie dish, not for an economy, not for any species on the planet. Eventually, when finite resources are involved, limits matter.

But the vast majority of society pretends as if this isn’t true.

…click on the above link to read the rest of the article…

Tag Archives: bond market

Content

Post categories

Economic Links

Energy/Resource Links

Environmental Links

Geopolitical Links

Liberty Links

News Links

Other Links

Survival Skills

Post Archives by Category

«If the past is prologue and if the great bond bull market is over, then on form, we are looking at what could be a very prolonged and perhaps gradual move higher in interest rates»: Jim Grant.

A newspaper headline is shown after the Treaty of Versailles was signed in 1919. Global bonds are in one of their worst bear markets since the treaty went into effect in 1920, establishing the terms for peace at the end of World War I.

Post navigation

Latest Posts