Now that analysts are comparing markets to Tom Cruise movies, it must be a sign we’ve all lost the plot. But at least it’s not Cocktail, because that would make no sense.
Michael Every, head of financial markets research for Asia Pacific at Rabobank, has compared current events to Cruise’s relatively recent sci-fi flick, ‘Edge of Tomorrow’. It’s a bit like Source Code, but with aliens, writes Peter Wells.
Mr Every explains his choice:
Not because earth is threatened with invasion by giant alien monsters (I’m bearish, but I’m not that bearish!) Yet one key plot device from the film rings true:
Tom Cruise knows that the battle he is fighting ends in bloody defeat for his forces despite all their hi-tech hubris; and he knows this because every time he dies he is forced to play the same day out over and over again in an endless loop of déjà-vu.
So where’s the analogy? Mr Every says authorities, policymakers and the like have “learned next to nothing” from the global financial crisis, or even any that preceded it. “They also keep repeating the hubristic mantra that ‘one more rate cut will do it’…and then, after a pause, the markets show them they are still wrong. And it keeps happening over and over again.”
The Bank of Japan is the latest in the list, after it declared its redoubled intention to defeat deflation and then cutting interest rates into negative territory last month.
So it seems markets have adopted the rallying cry of other Tom Cruise movies – Jerry Maguire – as central banks backflip and commit to more easing. Show me the money!
Mr Every concludes:
Please note all this is happening with China still firmly on holiday, underlining that it isn’t only Beijing that is behind the financial markets’ problems. As I’ve long tried to stress, China faces huge challenges and a major currency devaluation seems inevitable this year, but weakness there is only problematic because it sits alongside weakness everywhere else.
No question’ policy makers were effective in crisis years ago
Focus turns to G-20 finance chiefs meeting in Shanghai
Central banks are running into diminishing returns from their use of easy monetary policies, seven years after first championing quantitative easing to save the world from depression.
The new reality is clear across global financial markets: The Standard & Poor’s 500 Index fell on Monday to a 22-month low as bank shares dropped to their weakest since 2013. Japan’s benchmark equity index careened on Tuesday toward levels unseen since 2014 and the yield on the country’s 10-year bonds dipped below zero for the first time. Stocks are also falling in Europe, where memories of the region’s debt crisis are being stirred by rising bond yields in Portugal and a slide in Greek banks.
All that despite the Bank of Japan’s surprise shift to negative interest rates, the European Central Bank’s signal it will deploy new stimulus next month and speculation the Federal Reserve will slow its campaign to raise interest rates. Underscoring the lack of policy potency is that the yen and euro are both climbing even as policy eases.
“The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “It’s a reasonable question to ask given the events of the last few weeks.”
The shifts may strengthen the argument of opponents to the “whatever it takes” approach by central banks to stoke inflation expectations, appetites for risk and, ultimately, economic growth.
“Right at the beginning, there’s absolutely no question that what the central banks did was totally appropriate to try to get the markets operating again,” William White, an adviser to the Organization for Economic Cooperation and Development, told Bloomberg Television on Tuesday. “More recently, the objective of that policy has changed totally. It’s trying to stimulate aggregate demand. The honest truth, I think, is it’s not capable
of doing that in a sustainable way.”
To be sure, the main economies aren’t in the shape they were in 2008, when the Fed turned to asset purchases in an effort to unfreeze credit markets. Job growth in the U.S., Germany, U.K. and Japan indicate that while expansions have been below their long-term averages, they may prove durable. Also, cheap oil may spur spending by companies and consumers, and fiscal policy is turning stimulative in some economies.
Such narratives were absent on the Tokyo Stock Exchange Tuesday, where the Topix index nosedived 5.5 percent, the most since August, without any fresh news about the economy or even worries about China to serve as a trigger for sales. The yen gained for a second straight day, trading at 115.18 as of 6:45 p.m. in Tokyo.
Financial companies were among the hardest hit, fueled by concern that the BOJ’s adoption of negative rates will hurt their margins. The Topix Banks Index is down 21 percent since the day before Governor Haruhiko Kuroda led a 5-4 vote to follow European counterparts into charging banks for some of their reserves, complementing the BOJ’s record asset-purchase program.
While Kuroda called his new plan the “the most powerful monetary policy framework in the history of modern central banking,” it’s packing nothing of the punch he got from his original stimulus announcement in April 2013, or his expansion of the program in October 2014.
In Europe, traders also are increasingly doubtful about ECB President Mario Draghi’s ability to weaken the currency by delivering more policy surprises. There, too, bank shares have led declines, with the Euro Stoxx 600 Banks Index tumbling 5.6 percent on Monday alone. Portugal’s 10-year bond yield has risen to its highest since 2014, while Greek stocks are the weakest since 1990.
Across the Atlantic, Fed Chair Janet Yellen also addresses lawmakers this week under pressure to strike a balance between sounding confident on the domestic economy and recognizing the risks posed from abroad and in markets. Goldman Sachs Group Inc. is among those to switch its forecasts recently, to a June Fed rate increase instead of March.
Traders in China are enjoying a break from the carnage, as their markets are closed this week for the lunar new year holiday. Monetary policy makers in that country have been constrained in their own monetary stimulus out of concerns about reigniting a credit boom and sending the yuan’s exchange rate sliding further against the dollar.
With calls from some quarters for coordinated moves by the world’s top economies, one opportunity for joint communication — if nothing else — comes in a little over two weeks, with the Group of 20 finance chiefs meeting in Shanghai. ECB Executive board member Benoit Coeure said on Monday that “global coordination” will be discussed by the G-20.
For all the current disappointment in markets, central banks show no sign of shrinking from further action. Kuroda and Draghi have both said there are no limits to their easing programs. Central banks could still cut rates even more deeply, buy more bonds or commit to longer time-frames for easy money.
“The notion that central banks and regulators could not act if the financial panic were to turn into a serious threat to the real economy and hence to jobs looks wrong,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Central banks can bolster confidence if they really have to in order to support the real economy.”
Yet for Japanese companies considering wage and investment plans for the fiscal year that starts April 1, the current market ructions pose a threat to sentiment. The BOJ itself identified the danger of market volatility to confidence in its decision to ease further last month.
“The period of central bank ‘shock and awe’ operations is likely to be behind us,” Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist, wrote in a note on Friday. “This will be the year that ‘gravity’ will overwhelm the central bank policies,” he said, recommending selling equities during rallies.
The $102 Billion of Bank Debt That’s Making Investors Nervous
2016-02-09 09:52:31.616 GMT
By Tom Beardsworth and Cordell Eddings
(Bloomberg) — Last year’s sure thing in credit markets is
quickly becoming this year’s nightmare for bond investors.
The riskiest European bank debt generated returns of about
8 percent last year, according to Bank of America Merrill Lynch
index data, beating every type of credit investment globally. In
less than six weeks this year, those gains have been all but
wiped out, even after interest payments.
Investors are increasingly concerned that weak earnings and
a global market rout will make it harder for banks to pay the
interest on at least some of these securities, or to buy them
back as soon as investors had hoped. The bonds allow banks to
skip interest payments without defaulting, and they turn into
equity in times of stress. Deutsche Bank may struggle to pay the
interest on these securities next year, a report from
independent research firm CreditSights earlier on Monday said.
The bank took the unusual step of saying that it has enough
capacity to pay coupons for the next two years.
“The worries about these bonds represent real fears that
the European banking system may be weaker and more vulnerable to
slowing growth than a lot of people originally thought,” said
Gary Herbert, a fund manager at Brandywine Global Investment
Management LLC, which oversees about $69 billion in global
fixed-income assets. “It’s the epicenter of growth concerns
globally. And it doesn’t look pretty,” he added.
Money managers’ concerns are spreading even to safer bank
bonds, underscoring how investors are running away from risk
across a broad range of assets now, from stocks to commodities
to corporate bonds. The cost of protecting against defaults on
safer U.S. and European financial debt known as senior unsecured
notes has jumped to the highest level since 2013.
European banks are looking less solid since their last
earnings reports. Deutsche Bank for example last month posted
its first full-year loss since 2008, and its shares have
plunged. Credit Suisse’s shares plunged to their lowest level
since 1991 after the Swiss bank posted its biggest quarterly
loss since the crisis.
Banks have issued about 91 billion euros ($102 billion) of
the riskiest notes, called additional Tier 1 bonds,since April
2013. The problem is the securities are untested and if a
troubled bank fails to redeem them at the first opportunity or
halts coupon payments investors may jump ship, sparking a wider
selloff in corporate credit markets.
“It’s the first thing that gets cut from portfolios,” said
David Butler, a portfolio manager at Rogge Global Partners,
which oversees about $35 billion of assets. “When the wider
credit market turns, it leaves investors exposed.”
The notes were issued in Europe and offer some of the
highest yields in credit markets, at an average 7 percent,
compared with an average yield for European junk credits of less
than 6 percent, according to Bank of America Merrill Lynch
But critics say banks are too opaque, the notes are too
complex to be properly understood, they’re too varied and too
much like equity to be considered bonds. With so many unknowns,
the risks are high.
“Basically you have the upside of fixed income and the
downside of equity,” said Gildas Surry, a portfolio manager at
Axiom Alternative Investments. “AT1s are instruments of
regulators, by regulators, and for regulators.”
Investors are not just concerned about banks missing
interest payments, they are also worried about whether banks
will redeem the notes at the first opportunity. Rising borrowing
costs may make banks less likely to redeem the notes, which
would force investors to hold the bonds for longer than they had
“It’s a risk factor that seems more pressing to the
market,” said Jonathan Weinberger, global head of capital
markets engineering at Societe Generale SA in London. “Certain
bank treasuries would be economically advantaged to let them
extend rather than call and refinance.”
It wouldn’t be the first time a bank has passed up the
chance to call notes. Deutsche Bank didn’t redeem 1 billion
euros of subordinated bonds in 2008, saying it would be more
expensive to refinance the debt. That led to a slump in the
bank’s shares and a jump in the cost of insuring its borrowings
The German lender’s 650 million pounds of 7.125 percent
perpetual bonds on Monday fell to less than 70 pence on the
pound, their lowest since being issued in May 2014. UniCredit
SpA’s 1 billion euros of 6.75 percent bonds have dropped to less
than 75 cents from 94 cents at the start of year. The Italian
bank reports earnings on Tuesday.
“If your business is financial markets related, stress in
the markets not good for you,” said Timothy Doubek, who helps
manage $26 billion of corporate debt at Columbia Threadneedle
Bloomberg reports that the Fed believes that it does not have the authority to implement negative rates here in US. Thanks to my former colleague Steve Liddy and Steve Feiss of Government Perspectives for the heads up on this one.
Fed May Lack Legal Authority for Negative Rates: 2010 Fed Memo
2016-02-08 21:06:22.225 GMT
By Matthew Boesler
(Bloomberg) — The Federal Reserve may not have the legal
authority to set negative interest rates in the U.S., according
to a 2010 staff memo that was posted late last month on the
central bank’s website.
The document, which is dated Aug. 5, 2010, and was
authorized for release to the public on Jan. 29, suggests the
law that authorized the Fed to pay interest on excess reserves,
or IOER, may not grant it the authority to charge interest,
which would be necessary to take interest rates below zero.
Speculation has increased that the Fed might consider
negative rates in the next economic downturn, as concerns of a
U.S. slowdown have mounted, and following recent moves to cut
borrowing costs below zero by central banks in Europe and Japan
that show it can be done. The opinion of Fed staff back in 2010
was that this would difficult under U.S. law.
“There are several potentially substantial legal and
practical constraints to implementing a negative IOER rate
regime, some of which would be binding at any IOER rate below
zero, even a rate just slightly below zero,” the authors wrote.
“Most notably, it is not at all clear that the Federal Reserve
Act permits negative IOER rates, and more staff analysis would
be needed to establish the Federal Reserve’s authority in this
The Financial Services Regulatory Relief Act of 2006
granted the Fed the ability to pay banks interest on reserve
balances deposited at the central bank. The IOER rate has been
instrumental in the Fed’s effort to lift rates, which it did in
December for the first time since 2006.
According to the Act, “balances maintained at a Federal
Reserve bank by or on behalf of a depository institution may
receive earnings to be paid by the Federal Reserve bank at least
once each calendar quarter, at a rate or rates not to exceed the
general level of short-term interest rates.”
The Fed released transcripts of its 2010 Federal Open
Market Committee meetings last month, and staff memos for those
meetings were subsequently published on the central bank’s
I have noted before in this space that I watch the spread between 10 yer US and 10 year Spain.That is a relationship which I began following when Europe was crumbling. I still follow it as a market for financial stress. It has experienced a huge move recently.
This morning that spread turned positive with 10 year US now trading rich to 10 year Spain by 3 basis points. On Friday morning just prior to the labor data the US traded 22 basis points cheap to Spain so there has been a 25 basis point move in that spread.
Dealers report that early last evening end users were better buyers of the 7 year through 10 year sector. As the market sold off trading accounts were better sellers of 2s and 10s.
AUSTRALIA: The Business Conditions Index will be released for January following a drop to 7.0 in December, an 8-month low.
CHINA: During the week ahead China will release January data on both Bank Loans and the broader Aggregate Financing Activity. Comments in late January suggested that bank lending was accelerating sharply in January (as it often does in the new year) and the Bberg consensus expects a jump to CNY2,200bn, which would be a 24-month high and be a strong outcome.
INDIA: During the week India will release Trade Balance data for January, which will focus on Export growth that could slip to a single-digit YOY decline for the first month since December 2014.
JAPAN: Machine Tool Orders have been sliding at an accelerating YOY pace in recent months, and the -25.7% YOY drop in December was the largest drop since December 2012.
GERMANY: The Bberg consensus expects that December Industrial Production will be reported -0.6% YOY, down from +0.1% YOY in November and would be the first YOY drop since Nov 2014. Despite lackluster Export momentum and solid domestic demand gains, the December Trade Balance is likely to show a continued improvement in the trend of the Trade surplus.
SWITZERLAND: The appreciation of the CHF in early 2015 appears to have damaged competitiveness and Employment growth, the the Bberg consensus expecting the UR to rise to 3.5% in January, which would be the highest since June 2010.
MEXICO: Despite disinflationary pressures globally, the Bberg consensus expects the YOY CPI rose 2.5% YOY in January, up from 2.1% in December, as the weaker MXN puts upward pressure on import costs. To the contrary, the weaker MXN help push down sharply the prices of avocados for Super Bowl guacamole.
Financial companies led a surge in the cost of insuring corporate bonds in Europe to the highest levels since 2013.
The Markit iTraxx Europe Subordinated Financial index of credit-default swaps on the junior debt of 30 banks and insurers soared for an eighth day, rising 35 basis points to 301 basis points, the highest since April 2013, according to data compiled by Bloomberg. The senior benchmark jumped 14 basis points to 134 basis points, the highest since October that year.
Signs of distress in financial markets are gathering force as concern over the state of the global economy deepens. A rout in commodity prices and a slowdown in emerging markets is hurting banks and sparking investor withdrawals and fund closures across the asset management industry.
“There’s been a sort of buyers’ strike,” Christy Hajiloizou, an analyst at Barclays Capital in London. “In this kind of market nothing feels overdone.”
– We see the US dollar’s recent weakness as a function of two “transitory” developments
– Fed Chair Yellen delivers semi-annual testimony to Congress starting in the middle of the week
– Sweden’s Riksbank meets on February 11
– The risk of Brexit and global market conditions may be more important for sterling than the December trade and industrial output figures
– EM assets for the most part fared well last week, but this has not carried over to this week
Price action: The dollar is mostly firmer against the majors as the week starts off on a sour note for risk appetite. The dollar bloc is outperforming, which is a bit surprising given their typical “risk off” performances. Sterling and the Norwegian krone are underperforming. The euro is trading lower near $1.1130, while sterling is trading lower near $1.4420. Dollar/yen is trading lower near 116.60. EM currencies are mostly weaker. RUB, RON, and SGD are outperforming while TRY, INR, and ZAR are underperforming. MSCI Asia Pacific was up 0.3%, with the Nikkei up 1.1%. MSCI EM is down 0.6%. Chinese markets are closed all week, while many other Asian markets are closed for the first part of the week. Euro Stoxx 600 is down 2.5% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 2 bp at 1.82%, while European bond markets are mixed. Portugal is underperforming, with the yield on 10-year bonds up 14 bp and the spread to Germany above 300 bp for the first time since 2014. Commodity prices are mostly lower, with oil down over 2% and copper down over 1%.
We see the US dollar’s recent weakness as a function of two “transitory” developments. First, the dollar had run-up since mid-October. Technically, that advance is being corrected, which is to say there a profit-taking phase. Second, and what may have helped fuel the technical correction, is the pendulum of market sentiment has swung hard against a Fed hike, and this has sapped some of the dollar’s strength as the interest rate differential leg buckled. However, we suspect that the pendulum has swung as far, or nearly as far is it can, without a further deterioration of the economy. And we think the economy is picking up here in Q1 16 from a disappointing Q4 15.
With many equity markets having fallen 20% from their peaks, meeting a common definition of a bear market, investors, analysts, and journalists understandably seek a narrative that gives it meaning. At the very start of the year, the culprit singled out was drop in Chinese shares and the yuan. However, the yuan has stabilized as the PBOC drew down another $100 bln of reserves in January to help ease the pressure what appears to at least in part be a speculative attack by hedge funds (who conclude the yuan is overvalued).
Some narratives attributed the market turmoil to the drop in oil prices. From the end of 2015 through January 20, the price of black gold fell by nearly 30%. Here too the explanation was not very convincing, and despite the recovery in oil prices over the past two weeks, investors are still anxious. We note, for example, that the German Dax finished last week at its lowest level since late 2014. It has fallen another 2.6% today.
A third narrative has been constructed: the US is recession-bound or worse. The Senior Investment Commentator at the Financial Times wrote that the tightening of lending conditions reported by the Federal Reserve’s Survey of Senior Loan Officers is a “reliable harbinger of depression in the past.” We have argued that there is no agreed upon definition of recession or depression. We have suggested that the word recession was ideological construct to distinguish the end of a business cycle with the experience in the late-1920s through much of the 1930s. The use of the word depression here is reflective of the extreme swing in market psychology. And it is overdone.
The US economy is not contracting, though the fallout from the energy sector the on dollar-value of industrial output, new orders, capex and the like is palpable. Not only is the US economy not contracting, but it is accelerating here in Q1. Specifically, the initial estimate of Q4 15 GDP was a lowly 0.7% annualized. Subsequent data suggests scope for a modest upward revision. More important, Q1 2016 growth tracking 2.1%, according the Atlanta Fed GDPNow.
The January employment data showed more Americans are working, for somewhat higher pay and the workweek increased. Although the overall job creation was a bit less than the consensus expected, as the economy reaches full employment job growth is going to slow. However, job growth remained sufficient to absorb more slack in the labor market. The unemployment rate ticked down to 4.9%. This is not associated with the end of a business cycle.
Moreover, average hourly earnings rose 0.5% for a 2.5% year-over-year pace. This was more than economists expected and remains above headline and core inflation measures. This bodes well for the nearly two-thirds of the economy that is driven by the consumer. In fact, this will likely be reflected in the January retail sales report on February 12. We already know that auto sales increased sequentially in January. Retail sales, excluding autos, gasoline, and building materials, which is used for GDP calculations, is expected to have risen 0.3% in January, despite the equity market turmoil. We suspect there is upside risks to the consensus forecast.
The 0.1% increase in the work week is also important. On one hand, it is the equivalent in output of around 400,000 full-time equivalents. On the other hand, it is often seen as a precursor to stronger hiring. In addition, the 29k increase in manufacturing (consensus was for -2k) matches the largest rise since November 2014, which itself was the highest since August 2013. Initially, manufacturing jobs rose by 8k in December. That was revised to 13k.
This lend credence to our view that manufacturing sector is set to recover. Although the ISM is still below the 50 boom/bust, we note that forward-looking new orders rose, and the balance between new orders and inventories was consistent with increased output.
What about those credit conditions? If it were a soccer match, the Senior Loan Officer Survey is a yellow card, not a red one. Why? Actual lending remains robust. Commercial and industrial loans over the past few months remain near the cyclical high. Investment-grade corporate bond issuance remains strong. The merger and acquisition wave is fueling high yield issuance.
Also, before the weekend, the US reported that consumer credit rose $21.3 bln in December. The consensus expected a $14 bln increase. The 7.7% annualized rate is the most since September. The acceleration from November was not a result of American use of credit cards. In fact, revolving credit slowed to $5.8 bln from $6.4 bln. The increase in consumer credit was a function of auto and student loans.
Fed Chair Yellen delivers semi-annual testimony to Congress starting in the middle of the week. We expect her to be cautious given recent market developments, but generally endorse our interpretation of the labor market and overall economy. She will not pre-commit to the March FOMC meeting. The January FOMC statement is fresh and relevant.
We suspect the statement and the thrust NY Fed President Dudley’s recent comments offer a reasonable preview of Yellen’s testimony. Dudley suggested a cautious stance as officials continue to decipher the impact of tumult in the markets (which contributed to the tightening of financial condition measures) on the economy and assessment of risks. Yellen’s economic analysis is highly influenced by her research into the labor markets. The latest readings may bolster her confidence in defending the Federal Reserve’s decision and strategy.
The March Fed funds futures contract implies an average effective yield of 38.5 bp. Over the last couple of weeks, barring the last day of January, Fed funds have actually averaged 38 bp. We do not think the Fed will likely raise rates in March, but we attribute higher odds than the market is pricing. However, the real mispricing in our opinion lies with the market not fully discounting a single hike this year.
Sweden’s Riksbank meets on February 11. The extreme of its tiered deposit rate regime stands at minus 1.1%. The market’s focus is on the minus 35 bp repo rate. The central bank is also engaged in bond purchases. Most recently, the central bank has threatened intervention. Its biggest concern has been deflationary forces.
However, real sector data reported last week was worrisome. Industrial output in December fell 2.9%. The consensus was for a 0.5% decline. Forward-looking orders fell 9.0%. While this is a volatile release, it is the second month in Q4 that saw an outsized drop (18.8% decline in October).
The krona has eased by about 3.7% against the euro and a little more against the Norwegian krone. There does not appear to be a compelling case to intervene now. The consensus expects no change in the Riksbank’s monetary settings. However, recognizing the lag effects of monetary policy, we think there is a greater risk than is discounted that the Riksbank’s takes preemptive measure ahead of anticipated action by the ECB next month.
The stream of high frequency economic data does not appear to be driving the capital markets recently. The main reports in the week ahead are unlikely to be exceptional. Still, it is worth noting that the eurozone economy likely expanded 0.3-0.4% in Q4 15, which is faster than the US.
Japan started the week by reporting a bigger than expected December current account. At JPY1.6 trln, the surplus broke the typical trend of being smaller than in November. Note that Japan ran a smaller trade surplus (on balance-of-payments basis) in December, and so the driver of the larger current account surplus is mostly from investment income earned abroad. The gains in the yen would be a headwind. Japan also reported weak earnings data for December, with labor cash earnings up only 0.1% y/y vs. 0.7% consensus.
The risk of Brexit and global market conditions may be more important for sterling than the December trade and industrial output figures. That said the data is unlikely to do sterling any favors. The UK’s merchandise trade deficit did not improve last year. The J-curve effect from sterling’s slide this year warns that it may worsen before improving. Industrial output is expected to a fallen for a second month. This would mean that industrial output posted on a single month of gains in H2 2015 (there were two flat months).
While the latest YouGov poll found a majority in UK favor leaving the EU, the event-markets are suggesting a different outcome. PredictIt, for example, shows a nearly 70% chance of the UK staying in the EU. Nevertheless, for many investors, this risk is too high because the impact could be so significant. This suggests that sterling is likely to underperform in the run-up to the referendum.
EM assets for the most part fared well last week, but this has not carried over to this week. China reported January foreign reserves over the weekend, and they fell less than expected to $3.231 bln. China markets are closed this week for the New Year holiday. While there should be little risk of headline risk from the mainland, markets should watch how CNH trades in the offshore markets that are open. Oil prices should also be regarded as an important factor behind general market sentiment.
Divergences within EM should continue to be seen. Brazil is closed for the first half of the week for Carnival. When markets reopen, investors will have to grapple with deteriorating fundamentals and a dysfunctional political backdrop. Ukraine is facing heightened political risk after the Economy Minister abruptly resigned. On the other hand, Argentina is making progress in dealing quickly with the debt holdouts, reaching agreements with two of the six largest remaining groups.
Thanks to Steve Feiss rate strategist at Government Perspectives for the heads up on this one:
Japanese investors bought a record amount of long-term U.S. Treasuries last year, the Ministry of Finance reported, as record-low yields at home drove the hunt for bonds abroad.
Net purchases for 2015 totaled 13.85 trillion yen ($118.2 billion), figures from the ministry in Tokyo showed Monday. It was the highest based on the data, which go back to 2005. Ten-year yields on Japanese government bonds, or JGBs, dropped to 0.195 percent in January 2015, a record at the time, and continued their decline to 0.02 last week.
“My customers are buying U.S. Treasuries and bunds because JGB yields are very, very low,” said Hideaki Kuriki, a bond investor in Tokyo at Sumitomo Mitsui Trust Asset Management, which oversees $56.9 billion. They’re hedging 70 percent to 100 percent of the currency risk, he said.
Japanese yields are tumbling again in 2016 after the central bank in January adopted a negative-interest-rate strategy as part of its battle to spur inflation. Investors seeking higher yields outside the nation can earn 1.86 percent from 10-year Treasuries and 0.3 percent on same-maturity German bunds.
Japan’s figures track purchases of long-term U.S. debt and are measured in yen. Data from the U.S. Treasury Department, which include short-term debt and are reported in dollars, show Japanese holdings fell almost 7 percent in 2015 through November, the most recent data available.
I follow 10 year Spain versus US and Germany and that spread has moved sharply since early Friday morning. At 920AM back on Friday that spread traded at 133 and currently trades at 142. A Bloomberg story notes that Portugal vs Bunds in the 10 year sector is at its widest level since 2014. Bloomberg also reports that an index which measures credit risk of European financials is wider by 11 basis points.
The Markit iTraxx Europe Senior Financial Index of credit-default swaps rose 11 basis points to 132 basis points. An index of swaps tied to junk-rated companies increased for a sixth day, the longest run since October 2014. A gauge of investment-grade swaps rose four basis points to 113 basis points. All three indexes are at the highest since 2013.
Germany’s government bonds advanced, pushing the two-year yield to the lowest on record, as investors sought the safest fixed-income assets.
Portugal led a drop in the bonds of Europe’s higher debt and deficit nations, pushing the yield spread with German bunds above 300 basis points for the first time since 2014.
Germany’s two-year note yield touched minus 0.506 percent, the lowest since Bloomberg began compiling the data in 1990. Portugal’s 10-year bond yield jumped as much as 14 basis points to 3.27 percent, the highest since June.