Tag Archives: bond market

This Goose Is Cooked: “I’ve Never, Ever, Ever Seen Anything Like This Before”

“You have enormous buyers of debt meeting massive coordinated fiscal stimulus by governments across the globe. For bond investors, you’re caught between a rock and a hard place.”

With the Fed buying $622 billion in Treasury and MBS, a staggering 2.9% of US GDP, in just the past five days…

… any debate what to call the current phase of the Fed’s asset monetization – “NOT NOT-QE”, QE4, QE5, or just QEternity – can be laid to rest: because what the Fed is doing is simply Helicopter money, as it unleashes an unprecedented debt – and deficit – monetization program, one which is there to ensure that the trillions in new debt the US Treasury has to issue in the coming year to pay for the $2 (or is that $6) trillion stimulus package find a buyer, which with foreign central banks suddenly dumping US Treasuries

… would otherwise be quite problematic, even if it means the Fed’s balance sheet is going to hit $6 trillion in a few days.

The problem, at least for traders, is that this new regime is something they have never encountered before, because during prior instances of QE, Treasuries were a safe asset. Now, however, with fears that helicopter money will unleash a tsunami of so much debt not even the Fed will be able to contain it resulting in hyperinflation, everything is in flux, especially when it comes to triangulating pricing on the all important 10Y and 30Y Treasury.

Indeed, as Bloomberg writes today, core investor tenets such as what constitutes a safe asset, the value of bonds as a portfolio hedge, and expectations for returns over the next decade are all being thrown out as governments and central banks strive to avert a global depression.

And as the now infamous “Money Printer go Brrr” meme captures so well, underlying the uncertainty is the risk that trillions of dollars in monetary and fiscal stimulus, and even more trillions in debt, “could create an eventual inflation shock that will trigger losses for bondholders.”

Needless to say, traders are shocked as for the first time in over a decade, they actually have to think:

“You have enormous buyers of debt meeting massive coordinated fiscal stimulus by governments across the globe. For bond investors, you’re caught between a rock and a hard place.”

And while equity investors may be confident that in the long run, hyperinflation results in positive real returns if one sticks with stocks, the Weimar case showed that that is not the case. But that is a topic for another day. For now we will focus on bond traders, who are finding the current money tsunami unlike anything they have seen before.

Indeed, while past quantitative easing programs have led to similar concerns, this emergency response is different because it’s playing out in weeks rather than months and limits on QE bond purchases have quickly been scrapped.

Any hope that the Fed will ease back on the Brrring printer was dashed when Fed Chairman Jerome Powell said Thursday the central bank will maintain its efforts “aggressively and forthrightly” saying in an interview on NBC’s “Today” show that the Fed will not “run out of ammunition” after promising unlimited bond purchases. His comments came hours after the European Central Bank scrapped most of the bond-buying limits in its own program.

The problem is that while this type of policy dominates markets, fundamental analysis scrambling to calculate discount rates and/or debt in the system fails, and “strategic thinking is stymied and some prized investment tools appear to be defunct”, said Ronald van Steenweghen of Degroof Petercam Asset Management.

“Valuation models, correlation, mean reversion and other things we rely on fail in these circumstances,” said the Brussels-based money manager. Oh and as an added bonus, “Liquidity is also very poor so it is difficult to be super-agile.”

The irony: the more securities the Fed soaks up, be they Treasuries, MBS, Corporate bonds, ETFs or stocks, the worse the liquidity will get, as the BOJ is finding out the hard way, as virtually nobody wants to sell their bonds to the central bank.

Another irony: normally the prospect of a multi-trillion-dollar government spending surge globally ought to send borrowing costs soaring. But central bank purchases are now reshaping rates markets – emulating the Bank of Japan’s yield-curve control policy starting in 2016 – and quashing these latest volatility spikes.

In effect, the Fed’s takeover of bond markets (and soon all capital markets), means that any signaling function fixed income securities have historically conveyed, is now gone, probably for ever.

“Investors shouldn’t expect to see much more than moderately steep yield curves, since the Fed and its peers don’t want higher benchmark borrowing costs to undermine their stimulus,” said Blackrock strategist Scott Thiel. “That would be detrimental to financial conditions and to the ability for the stimulus to feed through to the economy. So the short answer is, it’s yield-curve control.”

Said otherwise, pretty soon the entire yield curve will be completely meaningless when evaluating such critical for the economy conditions as the price of money or projected inflation. They will be, simply said, whatever the Fed decides.

And with the yield curve no longer telegraphing any inflationary risk, it is precisely the inflationary imbalances that will build up at an unprecedented pace.

Additionally, when looking further out, Bloomberg notes that money managers need to reassess another assumption that’s become widely held in recent years: that inflation is dead. Van Steenweghen says he’s interested in inflation-linked bonds, though timing a foray into that market is “tricky.”

Naeimi also said he expects that the coordination by central banks and governments will spike inflation at some stage. “It all adds to the volatility of holding bonds,” he said. But for the time being, he’s range-trading Australian bonds — buying when 10-year yields hit 1.5%, and selling at 0.6%.

That’s right: government bonds have become a daytrader’s darling. Whatever can possibly go wrong.

But the biggest fear – one we have warned about since 2009 – is that helicopter money, which was always the inevitable outcome of QE, will lead to hyperinflation, and the collapse of both the US Dollar, and the fiat system, of which it is the reserve currency. Bloomberg agrees:

Many market veterans agree that faster inflation may return in a recovery awash with stimulus that central banks and governments may find tough to withdraw. A reassessment of consumer-price expectations would be a major setback for expensive risk-free bonds, especially those with the longest maturities, which are most vulnerable to inflation eroding their value over time.

Of course, at the moment that’s hard to envisage, with market-implied inflation barely at 1% over the next decade, but as noted above, at a certain point the bond market no longer produces any signal, just central bank noise, especially when, as Bloomberg puts it, “central bank balance sheets are set to explode further into unchartered territory.” Quick note to the Bloomberg editors: it is “uncharted”, although you will have plenty of opportunity to learn this in the coming months.

Alas, none of this provides any comfort to bond traders who no longer have any idea how to trade in this new “helicopter normal“, and thus another core conviction is being revised: the efficacy of U.S. Treasuries as a safe haven and portfolio hedge.

Mark Holman, chief executive and founding partner of TwentyFour Asset Management in London, started questioning that when the 10-year benchmark hit its historic low early this month.

“Will government bonds play the same role in your portfolio going forward as they have in the past?” he said. “To me the answer is no they don’t — I’d rather own cash.”

For now, Mark is turning to high-quality corporate credit for low-risk income, particularly in the longer maturity bonds gradually rallying back from a plunge, especially since they are now also purchased by the Fed. He sees no chance of central banks escaping the zero-bound’s gravitational pull in the foreseeable future. “What we do know is we’re going to have zero rates around the world for another decade, and we’re going to have the need for income for another decade,” he said.

Other investors agree that cash is the only solution, which is why T-Bills – widely seen as cash equivalents – are now trading with negative yields for 3 months and over.

Yet others rush into the safety of gold… if they can find it. At least check, physical gold was trading with a 10% premium to paper gold and rising fast.

Ultimately, as Bloomberg concludes, investors will have to find their bearings “in a crisis without recent historical parallel.”

“It’s very hard to look at this in a historical context and then apply an investment framework around it,” said BlackRock’s Thiel. “The most applicable period is right before America entered WW2, when you had gigantic stimulus to spur the war effort. I mean, Ford made bombers in WW2 and now they’re making ventilators in 2020.”

Welcome to the New America

Source: ZeroHedge

The Man Who Accurately Predicted The Collapse In Bond Yields Reveals “There Is A Lot More To Come”

Earlier this week ZeroHedge wrote that after decades of waiting, for Albert Edwards vindication was finally here – if only outside the US for now – because as per BofA calculations, average non-USD sovereign yields on $19 trillion in global debt had, as of Monday, turned negative for the first time ever at -3bps.

So now that virtually every rates strategist is rushing to out-“Ice Age” the SocGen strategist (who called the current move in rates years if not decades ago) by forecasting even lower yields (forgetting conveniently that just a year ago consensus called for the 10Y to rise well above 3% by… well, some time now), what does the man who correctly called the unprecedented move in global yields – which has sent $17 trillion in sovereign debt negative – think?

In a word: “There is a lot more to come.

Although the tsunami of negative yields sweeping the eurozone has attracted most attention, yields have also plunged in the US with 30y yields falling to an all-time low just below 2%. For many this represents a bubble of epic proportions, driven by QE and ripe for bursting.

Here Edwards makes it clear that he disagrees , and cautions “that there is a lot more to come.”

What does he mean?

As Albert explains, “when you see the creeping advance of negative bond yields throughout the investment universe, you really start to doubt your sanity. For me it is not so much that 10Y+ government bond yields are increasingly negative, but when European junk bonds go negative I really start to scratch my head.” And as we wrote in “Redefining “High” Yield: There Are Now 14 Junk Bonds With Negative Yields“, there certainly is a lot of scratching to do.

One thing Edwards isn’t scratching his head over is whether this is a bond bubble: as he explains, his “own view is that this government bond rally is not a bubble but an appropriate reaction to the market discounting the next recession hitting the global economy from all over leveraged corners of the world (including China), with close to zero core inflation and precious few working tools left at policymakers’ disposal.”

This means that “the bubbles are not in the government bond market in my view. They are in corporate equities and corporate bonds.

If Edwards is correct about the focus of the next mega-bubble, it is very bad news for risk assets as the “global deflationary bust will wreak havoc with financial markets”, prompting Edwards to ask a rhetorical question:

Does anyone seriously believe that in the next global recession equity markets will not collapse? Do market participants really believe fiscal stimulus and helicopter money will save us from a gut wrenching global bust that will make 2008 look like a picnic? Has the longest US economic cycle in history beguiled investors into soporific complacency? I hope not.

He may hope not, but that’s precisely what has happened in a world where for over a decade, even a modest market correction has lead to central banks immediately jawboning stocks higher and/or cutting rates and launching QE.

So to validate his point that the rates market is not a bubble, Edwards goes on to show that “US and even euro zone government bond yields are not in fact overextended – certainly not on a technical level – but also that fundamentals should carry government bond yields still lower.”

In his note, Edwards launches into an extended analysis of the declining workweek for both manufacturing and total workers, and explains why sharply higher recession odds (which we recently discussed here), are far higher than consensus expected.

But what we found most notable was his technical analysis of the ongoing collapse in 10Y Bund yields. As Edwards writes, “looking at the chart for German 10Y yields (monthly plot) their decline to close to minus 0.7% does not seem so extraordinary – merely the continuation of a downtrend within very clearly defined upper and lower bounds (see chart below).”

As Edwards explains referring to the chart above, “the bund yield has remained in the lower half of that band since 2011, but there is good reason for that as the ECB has struggled with a moribund euro zone economy and core inflation consistently undershooting its 2% target.”

Still, even Edwards admits that the pace of the recent decline in bund 10Y yields is indeed unusually rapid (with a 14-month RSI of 26, middle panel).

And although this suggests a pause in the decline in yields is technically warranted, the MACD (bottom panel) doesn’t look at all stretched. After a pause (data allowing), 10Y bunds could easily fall to the bottom of the lower trend line (ie below -1.5%) without any great technical excess being incurred.

His conclusion: “This market certainly doesn’t look like a bubble to me.”

Shifting attention from Germany to the US, Edwards writes that unlike the 10Y German bund yield, “the US 10Y has mostly occupied the top half of its wide downtrend band since 2013.”

That is fairly unsurprising given the stronger US economy together with Fed rate hikes. Technically the RSI is much less extended to the downside than the bund, but like Germany the MACD could still have a long way to fall. The bottom of the lower downtrend is around minus 0.5% by the end of 2020.

It is Edwards’ opinion that “we are on autopilot until we get” to 0.5%.

But wait, there’s more, because in referring to the charting of Pictet’s Julien Bittle (shown below), Edwards points out the right-hand panel which demonstrates how far US 10Y yields might fall over various time periods after hitting a cyclical peak. “He shows that on average we should expect a decline of 1-1½ pp from the trend line, which takes us pretty much to zero (see slide).” Personally, Edwards says, he is even “more bullish than that!”

Edwards then points us to the work of Gaurav Saroliya, Director of Macro Strategy at Oxford Economics who “certainly doesn’t think that QE is depressing bond yields.” In this particular case, Saroliya uses a simple model which fits US 10Y bond yields with trend growth and inflation reasonably accurately (see left hand chart below). As Edwards notes, “given the demographic situation, inflation is likely to remain subdued.”

In conclusion Edwards presents one final and classic Ice Age chart to finish off.

As the bearish – or is that bullish… for bonds – strategist notes, “the last few cycles have seen a sequence of lower lows and highs for nominal quantities (along with bond yield and Fed Funds). I have used a 4-year moving average and have added where I think we may be heading in the next downturn and rebound – and more importantly where I think the market is now thinking where we are heading.”

Referring to the implied upcoming plunge in nominal GDP, Edwards explains that “that is why this is not a bond bubble. It is the next phase of The Ice Age. And it is here.”

One last note: is it possible that Edwards’ apocalyptic view is wrong? As he admits, “of course” he could be wrong: “And given my dystopian vision for the global economy, equity and corporate bond investors, I sincerely hope I am.”

Source: ZeroHedge

Recession Signal Getting Louder: 5-Year Yield Inverts With 3-Month Yield

The yield curve is inverted in 11 different spots. The latest is 5-year to 3-month inversion.

https://www.zerohedge.com/s3/files/inline-images/2019-02-27_5-47-38.jpg?itok=PW46u5cc

The yield curve recession signal is louder and louder. Inversions are persistent and growing.

https://www.zerohedge.com/s3/files/inline-images/https___s3-us-west-2.amazonaws%20%2810%29_1.jpg?itok=a4nvYnOV

Let’s compare the spreads today to that of December 18, the start of the December 2018 FOMC meeting.

Yield Curve 2019-02-26 vs December and October 2018

https://www.zerohedge.com/s3/files/inline-images/https___s3-us-west-2.amazonaws%20%2811%29_1.jpg?itok=fBQyAcf-

Yield Curve Spread Analysis

https://www.zerohedge.com/s3/files/inline-images/https___s3-us-west-2.amazonaws%20%2812%29_1.jpg?itok=rSGh9O9m

Spread Changes

  • Yellow: Spreads Collapsed Since October (1 Month to 5 Years)
  • Pink: Spreads Remained Roughly the Same (7 Year)
  • Blue: Spreads Increased (30-Year and 10-Year)

Something Happening

Something is happening. What is it?

https://www.zerohedge.com/s3/files/inline-images/2019-02-27_5-51-51.jpg?itok=EnviRvls

Possibilities

  1. The bond market is staring to worry about trillion dollar deficits as far as the eye can see
  2. The bond market has stagflation worries
  3. The bond bull market is over or approaching

My take is number one and possibly all three.

An in regards to recession the economy is weakening fast.

Source: by Mike Shedlock via MishTalk| ZeroHedge

***

Core US Factory Orders Suffer Worst Slump In 3 Years

US core factory orders (ex transports) fell for the second month in a row in December. This is the worst sequential drop since Feb 2016.

New orders ex-trans fell 0.6% in Dec. after falling 1.3% the prior month.

https://www.zerohedge.com/s3/files/inline-images/2019-02-27_7-13-00.jpg?itok=bUbibSEj

The headline factory orders rose 0.1% MoM (well below the 0.6% MoM gain expected).

Capital goods non-defense ex aircraft new orders for Dec. fall 1% after falling 1.1% in Nov.

Non-durables shipments for Dec. fall 1% after falling 2% in Nov.

Not a pretty picture, but it was an 8.0% drop in Defense spending that triggered the weakness – so we’re gonna need moar war.

Where The Next Financial Crisis Begins

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(Global Macro Monitor) We are not sure of how the next financial crisis will exactly unfold but reasonably confident it will have its roots in the following analysis. Maybe it has already begun.

The U.S. Treasury market is the center of the financial universe and the 10-year yield is the most important price in the world, of which, all other assets are priced. We suspect the next major financial crisis may not be in the Treasury market but will most likely emanate from it.

U.S. Public Sector Debt Increase Financed By Central Banks 

The U.S. has had a free ride for this entire century, financing its rapid run up in public sector debt,  from 58 percent of GDP at year-end 2002, to the current level of 105 percent, mostly by foreign central banks and the Fed.

Marketable debt, in particular, notes and bonds, which drive market interest rates have increased by over $9 trillion during the same period, rising from 20 percent to 55 percent of GDP.

Central bank purchases, both the Fed and foreign central banks, have, on average, bought 63 percent of the annual increase in U.S. Treasury notes and bonds from 2003 to 2018. Note their purchases can be made in the secondary market, or, in the case of foreign central banks,  in the monthly Treasury auctions.

In the shorter time horizon leading up to the end of QE3,  that is 2003 to 2014, central banks took down, on average, the equivalent of 90 percent of the annual increase in notes and bonds.  All that mattered to the price-insensitive central banks was monetary and exchange rate policy. 

Stunning.

Greenspan’s Bond Market Conundrum

The charts and data also explain what Alan Greenspan labeled the bond market conundrum just before the Great Financial Crisis (GFC).   The former Fed chairman was baffled as long-term rates hardly budged while the Fed raised the funds rate by 425 bps from 2004 to 2006, largely, to cool off the housing market.

The data show foreign central banks absorbed 120 percent of all the newly issued T-notes and bonds during the years of the Fed tightening cycle, freeing up and displacing liquidity for other asset markets, including mortgages. Though the Fed was tight, foreign central bank flows into the U.S., coupled with Wall Street’s financial engineering, made for easy financial conditions.

Greenspan lays the blame on these flows as a significant factor as to why the Fed lost control of the yield curve.  The yield curve inverted because of these foreign capital flows and the reasoning goes that the inversion did not signal a crisis; it was a leading cause of the GFC (great financial crisis) as mortgage lending failed to slow, eventually blowing up into a massive bubble.

Because it had lost control of the yield curve, the Fed was forced to tighten until the glass started shattering.  Boy, did it ever.

Central Bank Financing Is A Much Different Beast

The effective “free financing” of the rapid increase in the portion of the U.S debt that matters most to markets, by creditors who could not give one whit about pricing, displaced liquidity from the Treasury market, while at the same time, keeping rates depressed, thus lifting other asset markets.

More importantly, central bank Treasury purchases are not a zero-sum game. There is no reallocation of assets to the Treasury market in order to make the bond buys.  The purchases are made with printed money.

Reserve Accumulation

It is a bit more complicated for foreign central banks, which accumulate reserves through currency intervention and are often forced to sterilize their purchase of dollars, and/or suffer the inflationary consequences.

Nevertheless, foreign central banks park much of their reserves in U.S. Treasury securities, mainly notes.

Times They Are A Chang ‘en

The charts and data show that since 2015, central banks have on average been net sellers of Treasury notes and bonds to the tune of an annual average of -19 percent of the yearly increase in net new note and bonds issued. The roll-off of the Fed’s SOMA Treasury portfolio, which is usually financed by a further increase in notes and bonds, does not increase the debt stock but, it is real cash flow killer for the U.S. government.

Unlike the years before 2015, the increase in new note and bond issuance is now a zero-sum game and financed by either the reallocation from other asset markets or an increase in financial leverage. The structural change in the financing of the Treasury market is taking place at a unpropitious time as deficits are ramping up.

Because 2017 was unique and an aberration of how the Treasury financed itself due to debt ceiling constraint, the markets are just starting to feel this effect. Consequently, the more vulnerable emerging markets are taking a beating this year and volatility is increasing across the board.

The New Market Meta-Narrative 

We suspect very few have crunched these numbers or understand them and this new meta-narrative supported by the data is the main reason for the increase in market gyrations and volatile capital flows this year.   We are pretty confident in the data, and the construction of our analysis. Feel free to correct us if you suspect data error and where you think we are wrong in our analysis. We look forward to hearing from you.

Moreover, the screws will tighten further as the ECB ends their QE in December.  We don’t think, though we reserve the right to be wrong, as we often are, this is just a short-term bout of volatility, but it is the beginning of a structural change in the markets as reflected in the data.

Interest Rates Will Continue To Rise

It is clear, at least to us, the only possibility for the longer-term U.S. Treasury yields to stay at these low levels is an increase in haven buying, which, ergo other asset markets will have to be sold. If you expect a normal world going forward, that is no recession or sharp economic slowdown, no major geopolitical shock, or no asset market collapse,  by default, you have to expect higher interest rates.  The sheer logic is in the data.

Of course,  Chairman Powell could cave to political pressure and “just print money to lower the debt” but we seriously doubt it and suspect the markets would not respond positively.

Stay tuned.

https://macromon.files.wordpress.com/2018/10/central-bank_2.png

https://macromon.files.wordpress.com/2018/10/central-bank_5.png

https://macromon.files.wordpress.com/2018/10/central-bank_10.png

Source: Global Macro Monitor

From Russia With Love?

Russia Dumps US Treasuries As Rates Climb

As predicted, Russia has reduced its holdings of US Treasuries as US rates continue to rise.

https://confoundedinterestnet.files.wordpress.com/2018/10/russiawithlove1.png

But Russia is a relatively small player in the US Treasury market (unless they are using proxies like postage-stamp sized Luxembourg, Ireland or the Cayman Islands).

https://confoundedinterestnet.files.wordpress.com/2018/10/fedholdings.png

As The Federal Reserve SLOWLY unwinds its balance sheet, the Confounded Interest blog is surprised that Japan and China have not unloaded MORE of their Treasury holdings.

Source: Confounded Interest

Bonds Experienced Biggest Bloodbath Since Trump’s Election

Yields spiked by the most since Nov 2016 (the day of and following President Trump’s election).

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-03_12-28-06.jpg?itok=9ksI3vBw

NOTE – After 1430ET, bond were suddenly bid (and stocks sold off).

30Y yields spiked to the highest since Sept 2014…

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-03_12-28-57.jpg?itok=EQdN9mnQ

10Y yields spiked to the highest since June 2011…

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-03_12-20-38.jpg?itok=CJftSC_v

5Y yields spiked to the highest since Oct 2008…

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-03_12-21-26.jpg?itok=WPeoecA9

The yield curve steepened dramatically…

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-03_11-06-13.jpg?itok=_YVCE3Zz

All of which is fascinating given that Treasury Futures net speculative positioning is already at record shorts…

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-03_7-51-10_0.jpg?itok=1clcbFN-

The entire global developed sovereign bond market saw yields surge

https://www.zerohedge.com/sites/default/files/inline-images/2018-10-03_11-20-58.jpg?itok=8o6Ynw1W

…observations and serious concerns from a trader.

JGB Market Enters “Uncharted Territory” As Bond Rout Goes Global

“Monster Move” In Treasuries Unleashes Global Market Rout

https://www.zerohedge.com/sites/default/files/inline-images/10y%20tsy%20yield%2010.4.jpg?itok=Y8eDvwh3

Fed Chair Powell Hints He May Soon Crash The Market

Source: ZeroHedge

Emerging Markets Continue to Slide as Dollar Pressures $3.7 Trillion Debt Wall

Emerging Markets Continue to Slide as Dollar Pressures $3.7 Trillion Debt Wall

Emerging market stocks extended their declines Friday as investors continue to pull cash from some of the world’s biggest developing economies amid concerns that the greenback’s recent rally will pressure the cost of servicing some of the $3.7 trillion in debt taken on in the ten years since the global financial crisis.

Argentina has been at the forefront of the recent emerging market pullback this week, with the peso suffering its biggest single-day slump in three years — including a fifth of its value yesterday — before the central bank stepped in with a move to lift interest rates to an eye-watering 60% amid concerns that President Mauricio Macri’s efforts to cut spending and stave off a looming recession in South America’s third largest economy will ignite social unrest that could toppled his government.

“We have agreed with the International Monetary Fund to advance all the necessary funds to guarantee compliance with the financial program next year,” Macri said Wednesday in reference to a $50 billion support plan in the works. “This decision aims to eliminate any uncertainty. Over the last week we have seen new expressions of lack of confidence in the markets, specifically over our financing capacity in 2019.”

Those moves shadow a similar concern for the Turkish Lira, which resumed its slide against the dollar Thursday following a warning from Moody’s Investors Service earlier this week as the ratings agency downgraded its outlook on 20 domestic banks owning to the country’s slowing growth and their exposure to dollar-denominated debts.

The Turkish lira recovered from yesterday’s decline, but was still marked at 6.57 against the dollar, near to the weakest since the peak of its currency crisis in early August. Larger emerging market economy currencies were on the ropes Thursday, with the Indian rupee hitting a lifetime low of 70.68 against the dollar this week and falling 3.6% this month, the biggest decline since August 2015, while the Russian ruble bounced back from a two-year low to trade at 68.06.

The sell-off has also affected emerging market stocks, which continue to lag their advanced counterparts, with most major EM benchmarks either in or near so-called ‘bear market’ territory, which defines a market that has fallen 20% from its recent peak.

The benchmark MSCI International Emerging Markets index, for example, is down 0.4% today and more than 3% this month alone, extending its decline from the high it reached on January 29 to nearly 17%, while Reuters data notes that 20 out of 23 emerging market benchmarks are trading below their 200-day moving average, a technical condition that investors use as a signal for further selling.

Each of the three major emerging market ETFs, which collectively hold around $143 billion in assets — Vanguard’s FTSE EM (VWOGet Report) , and iShares’ Core MSCI EM (IEMGGet Report) and MSCI EM (EEMGet Report)  — have seen net asset values fall by an average of 15.3% since their January 26 peak.

The Bank for International Settlements, often described as the ‘central bank for central bank’s, estimates that emerging market countries are sitting on $3.7 trillion in dollar-denominated debt, all of which must be serviced in increasingly expensive greenbacks.

And while the dollar index is sitting at a four-week low of 94.60, it has risen more than 5% since the start of the second quarter and is expected to add further gains as the Federal Reserve signals future rate hikes amid a surging domestic economy, which grew 4.2% last quarter and is on pace for a similar advance in the three months ending in September, according to the Atlanta Fed’s GDPNow estimate.

“We look for the dollar to stay bid particularly against the emerging market FX segment where a meaningful decline in risky currencies is spilling over into the wider risk sentiment,” said ING’s Petr Krpata. “

Debt service costs aren’t the only concern, however, as many emerging market economies rely on the export of basic resources, such as oil and gas and other commodities, to fuel their growth.

With China’s economy showing persistent signs of a second half slowdown amid its ongoing trade dispute with the United States, many of those countries are seeing slowing demand, which is pressuring dollar-denominated revenues at exactly the time their needed to both support the value of their currencies in foreign exchange markets and make timely payments on the estimated $700 billion worth of debt that is set to mature over the next two years.

Source: by Martin Baddarcax | TheStreet.com