Category Archives: Bonds

Hedge Fund CIO: “America’s Yield Curve Inversion Can Mean One Of Three Things”

Three Worlds

America’s yield curve inversion can mean one of three things,” said (Eric Peters, CIO of One River Asset Management). “We’re either living in a world of secular stagnation and investors worry that central banks no longer have sufficient policy tools to spur growth and inflation,” he continued. “Or the economy is simply sliding toward recession and the inversion will persist until the Fed panics and spurs a recovery,” he said. “Or we’re living in a world, where the market is moving in ways that defy historical norms because of global QE. And if that’s the case, the curve is sending a false signal.”

https://www.zerohedge.com/s3/files/inline-images/TSY%20yield%20curve%203.31.jpg?itok=B16pb_qT

“If we’re sliding toward recession, then it seems odd that credit markets are holding up so well,” continued the same CIO. “So keep an eye on those,” he said. “And if the curve is sending a false signal due to German and Japanese government bonds yielding less than zero out to 10yrs, then the recent Fed pivot and these low bond rates in America may very well spur a blow-off rally in stocks like in 1999.” A dovish Fed in 1998 (post-LTCM) and 1999 (pre-Y2K) provided the liquidity without which that parabolic rally could have never happened.

https://www.zerohedge.com/s3/files/inline-images/aligator%20jaws%20march%202019_1.jpg?itok=KGvQ1sIB

“But if investors believe America is succumbing to the secular stagnation that has gripped Japan and Europe, and if they’re growing scared that global central banks are no longer capable of rescuing markets, then we have a real problem,” said the CIO. “Because a recession is bad for markets, but not catastrophic provided that central banks can step in to spur recovery. But with global rates already so low, if investors lose faith in the ability of central banks to do what they have always done, then we’re vulnerable to a stock market crash.”

Sovereignty:

Turkish overnight interest rates squeezed to 300% on Monday. Then 600% on Tuesday. By Wednesday, they hit 1,200%. Downward pressure on the Turkish lira, and the government’s efforts to punish speculators fueled the historic rise. Erdogan allegedly wants to limit lira loses ahead of today’s elections. The pressures that drove the currency lower were mainly of Turkish origin. Of course, the Turks have every right to their own economic policies, but they must bear the consequences. That’s what comes with being a sovereign state.

The Greeks and Turks are neighbors. The Turks began negotiations to join the EU in 2005, with plans to adopt the Euro after their acceptance. Those negotiations stalled in 2016. As they look across the border at their Greek neighbors now, and see their interest rates stuck at -0.40%, are they envious? Perhaps. But having witnessed the 2011 Greek humiliation, would the Turks be willing to forfeit sovereignty for the Euro’s stability and stagnation? And how do the Greeks (and Italians) feel about having forfeited their sovereignty?

Anecdote:

“Only optimists start companies,” I answered. The Australian superannuation CEO had asked if I’m an optimist or pessimist. “I see the potential for technological advances to produce abundance in ways difficult to fathom. But I also see the chance of something profoundly dark,” I continued. He observed that people seemed consumed by the latter but spend so little time on the former. “That’s good. Humans are wonderful at solving problems of our own creation. The more we worry, the less goes wrong,” I said. So he asked what worries me most?

“Not the displacement of human labor by machines, we can solve the resulting social challenges. I worry that the only thing Americans seem to agree on now is that China is our adversary.” And pressing, he asked me to list the things I admire about China. “Okay. I admire China’s work ethic, drive, ambition, economic accomplishments. They’ve overtaken us in many advanced scientific fields. I admire that very much.” He smiled and asked me to carry on. “I’m grateful for their competition. It makes us better. And I admire that they’ve evolved communism to make it work while all others failed. The world is better with diversity of thought, philosophy – diversity increases resiliency, robustness. And democratic free-market capitalism will grow stronger with a formidable competitor.” He smiled.

“But China’s system values the collective over the individual. We value the opposite. And I’m concerned the two systems cannot peacefully coexist now that we’re the world’s two largest economies. I don’t want to live under their system, I don’t want their vision of the future for my children. They probably feel the same way. Both views are valid but incompatible, and increasingly in conflict,” I explained. He nodded and said, “I don’t want that for our children either.”

Source: ZeroHedge

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“Recap & Release” – Trump Unveils Plan To End Govt Control Of Fannie, Freddie

After months (or years) of on-again, off-again headlines, President Trump is expected to sign a memo on an overhaul of Fannie Mae and Freddie Mac this afternoon, kick-starting a lengthy process that could lead to the mortgage giants being freed from federal control.

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The White House has been promising to release a plan for weeks, and its proposal would be the culmination of months of meetings between administration officials on what to do about Fannie and Freddie.

Bloomberg reports that while Treasury Secretary Steven Mnuchin has said it’s a priority to return the companies to the private market, such a dramatic shift probably won’t happen anytime soon.

In its memo, the White House sets out a broad set of recommendations for Treasury and HUD, such as increasing competition for Fannie and Freddie and protecting taxpayers from losses.

The memo itself has a worryingly familiar title (anyone else thinking 2007 housing bubble?):

President Donald J. Trump Is Reforming the Housing Finance System to Help Americans Who Want to Buy a Home

“We’re lifting up forgotten communities, creating exciting new opportunities, and helping every American find their path to the American Dream – the dream of a great job, a safe home, and a better life for their children.”

President Donald J. Trump

REFORMING THE HOUSING FINANCE SYSTEM: The United States housing finance system is in need of reform to help Americans who want to buy a home.

  • Today, the President Donald J. Trump is signing a Presidential memorandum initiating overdue reform of the housing finance system.
  • During the financial crisis, Fannie Mae and Freddie Mac suffered significant losses and were bailed out by the Federal Government with billions of taxpayer dollars.
    • Fannie Mae and Freddie Mac have been in conservatorship since September 2008.
  • In the decade since the financial crisis, there has been no comprehensive reform of the housing finance system despite the need for it, leaving taxpayers exposed to future bailouts.
    • Fannie Mae and Freddie Mac have grown in size and scope and face no competition from the private sector.
    • The Department of Housing and Urban Development’s (HUD) housing programs are exposed to high levels of risk and rely on outdated business processes and systems.

PROMOTING COMPETITION AND PROTECTING TAXPAYERS: The Trump Administration will work to promote competition in the housing finance market and protect taxpayer dollars.

  • The President is directing relevant agencies to develop a reform plan for the housing finance system. These reforms will aim to:
    • End the conservatorship of Fannie Mae and Freddie Mac and improve regulatory oversight over them.
    • Promote competition in the housing finance market and create a system that encourages sustainable homeownership and protects taxpayers against bailouts.
  • The President is directing the Secretary of the Treasury and the Secretary of Housing and Urban Development to craft administrative and legislative options for housing finance reform.
    • Treasury will prepare a reform plan for Fannie Mae and Freddie Mac.
    • HUD will prepare a reform plan for the housing finance agencies it oversees.
  • The Presidential memorandum calls for reform plans to be submitted to the President for approval as soon as practicable.
  • Critically, the Administration wants to work with Congress to achieve comprehensive reform that improves our housing finance system.

HELPING PEOPLE ACHIEVE THE AMERICAN DREAM: These reforms will help more Americans fulfill their goal of buying a home.

  • President Trump is working to improve Americans’ access to sustainable home mortgages.
  • The Presidential memorandum aims to preserve the 30-year fixed-rate mortgage.
  • The Administration is committed to enabling Americans to access Federal housing programs that help finance the purchase of their first home.
  • Sustainable homeownership is the benchmark of success for comprehensive reforms to Government housing programs.

*  *  *

Because what Americans need is more debt and more leverage at a time when home prices are at record highs and rolling over.

https://www.zerohedge.com/s3/files/inline-images/bfm7374_0.jpg?itok=3W8iDDOR

Hedge funds that own Fannie and Freddie shares have long called on policy makers to let the companies build up their capital buffers and then be released from government control.

It’s unclear whether the White House would be willing to take such a significant step without first letting lawmakers take another stab at overhauling the companies.

But not everyone is excited about the recapitalizing Fannie Mae and Freddie Mac. Edward DeMarco, president of the Housing Policy Council, warned that releasing them from conservatorship would do nothing to fix the mortgage giants’ charters or alter their implied government guarantee:

“I’m not sure what is good about recap and release,” DeMarco, a former acting director of the Federal Housing Finance Agency, said in a phone interview.

DeMarco also noted that the government stepped in to save the companies in 2008, and they continue to operate with virtually no capital. On Tuesday, DeMarco told the Senate, during the first of two hearings on the housing finance system that “recap and release should not even be on the table.”

But shareholders in the firms were excitedly buying… once again.

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Deciding the fate of Fannie and Freddie, which stand behind about $5 trillion of home loans, remains the biggest outstanding issue from the 2008 financial crisis.

Source: ZeroHedge

It’s Not Too Soon For A Fed Rate Cut, According To This Chart

  • The time between the Fed’s final interest rate hike and its first rate cut in the past five cycles has averaged just 6.6 months, according to Natixis economist Joseph LaVorgna. 
  • The bond market  has quickly pivoted, and fed funds futures are pricing in a quarter point of easing for this year, just days after the Fed forecast no more hikes for this year. 
  • LaVorgna said there are three conditions required for a Fed reversal, and that of a soft economy could soon be met.

(by Patti Domm) The bond market has quickly priced in a Federal Reserve interest rate cut this year, just days after the Fed said it would stop raising rates.

That has been a surprise to many investors, but it shouldn’t be — if history is a guide.

Joseph LaVorgna, Natixis’ economist for the Americas, studied the last five tightening cycles and found there was an average of just 6.6 months from the Federal Reserve’s last interest rate hike in a hiking cycle to its first rate cut.

The economist points out, however, that the amount of time between hike and cut has been lengthening.

“For example, there was only one month from the last tightening in August 1984 to the first easing in September 1984. This was followed by a four-month window succeeding the July 1989 increase in rates, a five-month gap after the February 1995 hike, an eight-month interlude from May 2000 to January 2001, and then a record 15- month span between June 2006 and September 2007,” he wrote.

The Fed last hiked interest rates by a quarter point in December. Last week, it confirmed a new dovish policy stance by eliminating two rate hikes from its forecast for this year. That would leave interest rates unchanged for the balance of the year, with the Fed expecting one more increase next year.

But the fed funds futures market has quickly moved to price in a full fledged 25 basis point easing, or cut, for this year.

“The market’s saying it’s going to happen in December,” said LaVorgna.

There are three conditions that need to be met for the Fed to reverse course and cut interest rates, LaVorgna said. First, the economy’s bounce back after the first quarter slump would have to be weaker than expected, with growth just around potential. Secondly, there would have to be signs that inflation is either undershooting the Fed’s 2 percent target or even decelerating. Finally, the Fed would have to see a tightening of financial conditions, with stock prices under pressure and credit spreads widening.

LaVorgna said the condition of a sluggish economy could be met.

“I don’t think the economy did very well in the first quarter just based on the fact the momentum downshifted hard from Q4, sentiment was awful, production was soft,” he said. ’I’m worried growth is close to zero in the first quarter.”

LaVorgna said he does not see much of a snap back in the second quarter.

In the current cycle, the Federal Reserve began raising interest rates in December 2015 after taking the fed funds target rate to zero during the financial crisis.

Source: by Patti Domm | CNBC

***

Americans Are Only Now Starting To Seek Higher Deposit Rates… Just As The Fed Prepares To Cut

 

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

The most prescient recession indicator in the market just inverted for the first time since 2007.

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https://i0.wp.com/northmantrader.com/wp-content/uploads/2019/03/yield.png?ssl=1

Don’t believe us? Here is Larry Kudlow last summer explaining that everyone freaking out about the 2s10s spread is silly, they focus on the 3-month to 10-year spread that has preceded every recession in the last 50 years (with few if any false positives)… (fwd to 4:20)

As we noted below, on six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal. 

And here is Bloomberg showing how the yield curve inverted in 1989, in 2000 and in 2006, with recessions prompting starting in 1990, 2001 and 2008. This time won’t be different.

https://www.zerohedge.com/s3/files/inline-images/prior%20inversions.jpg?itok=BgnEMjCQ

On the heels of a dismal German PMI print, world bond yields have tumbled, extending US Treasuries’ rate collapse since The Fed flip-flopped full dovetard.

https://www.zerohedge.com/s3/files/inline-images/bfm14B0.jpg?itok=Ez0lIVd_

The yield curve is now inverted through 7Y…

https://www.zerohedge.com/s3/files/inline-images/bfm1EA4.jpg?itok=xPH6zVO8

With the 7Y-Fed-Funds spread negative…

https://www.zerohedge.com/s3/files/inline-images/bfm2864.jpg?itok=HqnSx1RR

Bonds and stocks bid after Powell threw in the towell last week…

https://www.zerohedge.com/s3/files/inline-images/bfmA98E.jpg?itok=D4zUXHf3

But the message from the collapse in bond yields is too loud to ignore. 10Y yields have crashed below 2.50% for the first time since Jan 2018…

https://www.zerohedge.com/s3/files/inline-images/bfm5670.jpg?itok=rocy5sKV

Crushing the spread between 3-month and 10-year Treasury rates to just 2.4bps – a smidge away from flashing a big red recession warning…

https://www.zerohedge.com/s3/files/inline-images/bfm36A8.jpg?itok=3cfUyMJ1

Critically, as Jim Grant noted recently, the spread between the 10-year and three-month yields is an important indicator, James Bianco, president and eponym of Bianco Research LLC notes today. On six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal. 

Bianco concludes that the market, like Trump, believes that the current Funds rate isn’t low enough:

While Powell stressed over and over that the Fed is at “neutral,” . . . the market is saying the rate hike cycle ended last December and the economy will weaken enough for the Fed to see a reason to cut in less than a year.

https://www.zerohedge.com/s3/files/inline-images/bfm1B73_0.jpg?itok=iZGfa7C7

Equity markets remain ignorant of this risk, seemingly banking it all on The Powell Put. We give the last word to DoubleLine’s Jeff Gundlach as a word of caution on the massive decoupling between bonds and stocks…

“Just because things seem invincible doesn’t mean they are invincible. There is kryptonite everywhere. Yesterday’s move created more uncertainty.”

Source: ZeroHedge

10Y Treasury Yield Tumbles Below 2.50% As 7Y Inverts

The bond bull market is alive and well with yesterday’s bond-bear-battering by The Fed extending this morning.

10Y Yields are back below 2.50% for the first time since Jan 2018…

https://www.zerohedge.com/s3/files/inline-images/bfmCA1F.jpg?itok=_jgnif7R

…completely decoupled from equity markets….

https://www.zerohedge.com/s3/files/inline-images/bfm51AD.jpg?itok=s4YZh3r-

The yield is now massively inverted to Fed Funds…

https://www.zerohedge.com/s3/files/inline-images/bfm8BAA.jpg?itok=hEx0M8LV

With 7Y yields now below effective fed funds rate…

https://www.zerohedge.com/s3/files/inline-images/bfm5F7C.jpg?itok=yYvetY6-

Source: ZeroHedge

US Department Store Sales Lowest Since 1992 (Retail REIT and CMBS Alert!)

The US Commerce Department reported that Department stores are a “wipeout.”

E-commerce continue to wipeout brick and mortar store sales.

https://confoundedinterestnet.files.wordpress.com/2019/03/screen-shot-2019-03-15-at-11.59.42-am.png?w=621&h=277

At the same time, e-commerce sales continue to rise.

https://confoundedinterestnet.files.wordpress.com/2019/03/screen-shot-2019-03-15-at-12.00.35-pm.png?w=621&h=282

It’s not the end of the world for bricks and mortar shopping. Consumers still eat out at restaurants, use fitness clubs, bars, etc. But, it does cause a rethinking of retail REIT and CMBS valuation and growth projections.

https://confoundedinterestnet.files.wordpress.com/2019/03/wipo.jpg?w=625

Source: Confounded Interest

Alarm! Europe’s And US Bond Volatility Grinding To A Halt (Precursor To Recession)

European bond volatility (according to the Merrill Lynch 3-month EUR option volatility estimate) has plunged to the lowest level on record.

https://confoundedinterestnet.files.wordpress.com/2019/03/dyingvol.png?w=623&h=353

A similar chart for the US bond market is the Merrill Lynch Option Volatility Estimate for 3-months shows exactly the same thing. The US bond market is grinding to a halt.

https://confoundedinterestnet.files.wordpress.com/2019/03/move3.png?w=624&h=449

Note that the US MOVE 3-month estimate hit a low in May 2007, just ahead of The Great Recession of 2007-2009.

Alarm!

Source: Confounded Interest

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Stocks End Week With Five Days Of Declines

  • U.S. stocks almost clawed their way to break-even, shaking off concerns over slowing global growth, a weak hiring report in the U.S., and disappointing China trade data.
  • S&P fell 0.2% as did the  Nasdaq, and the Dow nudged down 0.1%.
  • For the week, the Nasdaq declined 2.5%, while the S&P 500 and the Dow each slipped 2.2%.
  • Among industry sectors, utilities (+0.4%) and materials (+0.2%) gained the most on Friday, while energy (-2.0%) and consumer discretionary (-0.7%) were the biggest underperformers.
  • 10-year Treasury yield fell is down about 1 basis point to 2.63%.