“Higher beta peripheral markets are suffering the worst of the post-FOMC fallout, as to be expected. Irish bonds however remain the exception where they are wider, but are also still faring significantly better than the other programme countries.”
Warren Mosler pointed this out. It shows the ECB operating a kind of Bagehot rule on liquidity: “OMTs are designed to keep government bond yields just below ‘panic’ levels, as previously defined, not to bring them down to levels that would somehow help government solvency. “
This is what happens when yields are low and companies issue bonds to profit from that. Investors in the Apple bond debut have no one to blame but themselves.
“Bond managers have been well aware of the risks. Bill Gross, who is often referred to as the “bond king” for his role as manager of the Pimco Total Return Fund (PTTRX.O), the world’s largest bond fund, set the Wall Street Twittersphere alight several weeks ago with this 62-character missive: “The secular 30-yr bull market in bonds likely ended 4/29/2013.”
The “price peak refers not to Treasuries but to all bonds, including a weighted amount of high-yield debt. Thus the 4/29 date will not exactly correspond to a bottom in 10-year Treasury yields, for instance,” Gross said in an email response to Reuters. The Pimco Total Return fund is down 3.25 percent since the end of April.
In early May, Bernanke began what appeared to be a campaign of jaw-boning investors to stop dangerously chasing yield.”
This was a week ago. And the market has now reacted violently. It is an over-reaction because the labour market is weaker than it appears given the decline in participation rates. I believe the Fed will stick to its unemployment guideposts, thresholds and targets and that the risk is for easing for longer than now anticipated rather than for less time
This presentation by Gavyn Davies with John Authers gets to the real problem for the Fed. Despite the improvement in the unemployment numbers, much of the fall in the unemployment rate has been due to falling labour participation and not to genuine upticks in the labour market. The inference here is that the Fed is overestimating the resiliency of the US economy by focusing on the stated unemployment number as a guide of its level of monetary easing. As I wrote yesterday, I believe the Fed is concerned about politics and fostering bubbles, and therefore is caught between a rock and a hard place on that score. The reality is the Fed CANNOT bring the economy back to life without accommodative fiscal policy or inflating asset prices i.e. bubbles.
This is from a couple of days ago but still shows you that Brazil is having serious problems with this massive protest – all during an international sporting tournament. EM is in crisis.
“The impasse highlights the possible international consequences of Ankara’s use of police force on peaceful demonstrators.”
Another report from today on the easing in credit conditions after the liquidity injection by the PBoC
From today: “China’s benchmark money-market rates retreated from records after the central bank was said to have made funds available to lenders amid a cash squeeze.
The one-day repurchase rate dropped 384 basis points, or 3.84 percentage points, to 7.90 percent as of 9:33 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That is the biggest drop since 2007. The seven-day rate fell 351 basis points to 8.11 percent. They touched record highs yesterday of 13.91 percent and 12.45 percent, respectively. “
Before PBoC moved to add liquidity: “Credit default swaps (CDS) on five-year bonds rose by 33 basis points to 133bps, according to financial data firm Markit”
This report from before PBoC moved to add liquidity is still relevant.
Canada and Australia
From last week, this article shows you that the real economy in Canada is uneven.
This is the best argument for why Canada can avoid a housing collapse. Implicitly then it blames the Fed for popping the housing bubble by raising rates and making mortgages unaffordable. The question for Canada is whether the softly, softly approach will produce better results.
“Neither has happened in Canada yet. Mortgage interest costs as a percentage of personal disposable income have actually fallen, even as the debt-to-income ratio has climbed — a byproduct of continued low interest rates. That’s particularly important, because it needs to be pointed out the U.S. Federal Reserve was raising interest rates up until 2007, when mortgage costs peaked.”
My question is whether the fall in household debt presages a collapse in house prices or whether it set Canada up for a more benign outcome. This story suggests the fall is a good thing that will protect the Canadian market. The right question is about causality i.e. whether the fall in debt is because of falling prices or whether the fall in debt helps keep prices from falling. We need to watch the price trends.
This is a particularly weak argument to justify the extreme levels of overvaluation in Canada. I am not convinced at all by this. It almost makes me think many are living in denial about how frightening the Canadian housing market is. Can the air come out of this thing slowly? I hope so, but I wouldn’t bet on it.