The Race to Hell is On!




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ORIGINAL POST

Posted by Ed 19 days ago
Financial World Gone Nuts: $15 Trillion Negative Yielding Debt
12 countries with negative 10-year yields. A race to hell.
 
 
Every day brings new indications that the financial world is going from already nuts to even nuttier. According to Bloomberg, the total amount of bonds outstanding globally that are trading with a negative yield exceed for the first time $15 trillion. This includes government and corporate debt, and also some euro junk bonds that have joined the elite group:
 
 https://wolfstreet.com/wp-content/uploads/2019/08/Global-negative-yield-debt-2019-08-06.jpg
 
 

A chart like this, of markets and central banks chasing each other further and further into the negative-yield absurdity, is crying out loudly: “Somebody has got to put a stop to this race to hell.”

The Fed was dabbling in trying to stop this race that is now leading ever deeper into negative-yield absurdity, and had even tried to reverse it, and got shouted down as can be seen in the above chart.
 
https://wolfstreet.com/2019/08/06/financial-world-gone-nuts-15-trillion-negative-yielding-debt/ 

COMMENTS

Ed 17 days ago
The ECB Is Dragging Us Deeper Into Madness
 
With markets already pricing in a cut into even deeper negative rates, the yield curve is collapsing. This is alarming for the real economy.
 
The European Central Bank will doubtless cut its overnight deposit rate even deeper than the current -0.4% at its next meeting in September. That doesn’t mean it’s the right way to try to breathe life into the euro zone economy. It might just make things worse.
 

By the time the ECB’s governing council gets around to making the cut official, it’s highly likely that the benchmark yield on 10-year German bonds will already be deeper in negative territory than the central bank’s deposit rate.
 
HSBC analysts reckon 10-year bunds will end 2019 at a mind-boggling -0.8%. You now have to pay to hold any kind of German debt from the shortest maturities right out to three decades. As my colleague Mark Gilbert wrote this week, the bond market has gone through the looking glass.
 
 
https://www.bloomberg.com/opinion/articles/2019-08-08/ecb-is-dragging-the-bond-market-deeper-into-yield-curve-madness?srnd=premium-europe

Ed 12 days ago

 Trading Sardines: The Case Of Currency Hedged Negative Yielding Bonds

You might have heard the story about the three traders who decided to go into the business of trading sardines. The first trader bought a can of sardines for $5. He sold the same can of sardines to the second trader for $10, doubling his money. The second trader again doubled his money by selling the can of sardines to the third trader for $20.
 
The third trader, knowing very well that he was overpaying for the sardines said to himself that “if the market for sardines crashed, at least I will be able to open the can of sardines and eat it”. The market did crash, and he opened the can to find that the sardines were rotten. He promptly went to the trader who had sold him the bad sardines and said “these sardines are no good!”, to which the second trader responded “of course they are no good for eating – they are trading sardines”!
 

Almost 10 trillion USD worth of the world’s government bond market is currently like these sardines. When a bond has negative yield, like a majority of the bond market in Germany and Japan today does, the bonds are being bought for trading, not for holding as investments, unless we undertake some financial alchemy to figuratively turn garbage to gold (and vice versa).

 
When, and if yields rise, a ten year German Bund trading today at -0.25% nominal yield will almost certainly lose a good part of its principal, and for those who hold it to maturity, will also likely provide no income for their investment. In other words, unless the current holders of the bonds are able to trade them to someone else before they lose value, they will likely find that these bonds were neither a good long term investment nor a diversifier.

 

 
The things that seem to make the system work so far for bond funds seem to be (a) the fact that interest rates have been headed down, so asset prices have tended to rise (b) there are other buyers who want to get into this business of hoping for asset gains (c) the big positive interest rate differential to the US$ from the currencies that sell these negatively yielding currencies, and (d) a relatively favorable price for using derivatives to hedge against the possibility of a shift of US$ wiping out these gains.
 

By the time these negatively yielding bonds are hidden inside bond funds, few realize where they are. As soon a investors see a problem, they start pulling bonds out. But if the bond fund is committed to a certain distribution, it will need to keep buying regardless of how rates are going.

 

Of course, other parts of the system could break as well. Currency hedges look vulnerable, with the big changes we have been seeing likely, such as the changes in the value of the Yuan. Indirectly, they would seem to affect other currencies as well, since (for example) cheap goods from China would tend to adversely affect European sales of goods.

 
 https://www.forbes.com/sites/vineerbhansali/2019/06/17/trading-sardines-the-case-of-currency-hedged-negative-yielding-bonds/#1aa0ca305f70

Ed 5 days ago
The Helicopter is Warming Up 
 
BlackRock has just published a paper detailing what it expects the guardians of monetary stability to do next. Here’s the key recommendation from the paper, which is entitled “Dealing with the next downturn: From unconventional monetary policy to unprecedented policy coordination.” 
 
An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough. That response will likely involve “going direct”: Going direct means the central bank finding ways to get central bank money directly in the hands of public and private sector spenders.
 
What’s incredible about the BlackRock policy prescription is that three of the paper’s four authors are former central bankers who now work for the asset manager. Hildebrand is the former head of the Swiss Central Bank, Stanley Fischer did stints at the Federal Reserve and the Bank of Israel, while Jean Boivin is ex-deputy governor of the Bank of Canada.
 
 
https://www.bloomberg.com/opinion/articles/2019-08-20/ecb-helicopter-money-a-weird-summer-for-bond-investors?srnd=premium-asia

Ed 1 day ago
Negative interest rates are coming and they are downright terrifying
 
What if I said I wanted to borrow $100 from you and pay you back $99 five years later? Would you do it?

Hell no!

And yet this is exactly what’s happening right now in the banking systems of Japan, Germany, France, and other European countries.

Negative interest rates — where the lender gets paid back less than they’ve loaned — now add up to 30%, (and counting), of the global tradable bond universe, according to JPMorgan (JPM). You may have seen for instance that Germany just sold the first negative yielding 30-year bond issue.

In case you’re wondering, yes, this is crazy.

“It’s really unusual and really distorting the global financial system,” says Torsten Slok, chief economist at Deutsche Bank Securities (DB). “I spend all my time talking about it.”

This is not going to end well
 
Negative rates are counterintuitive, unprecedented — and to my mind — mind-bendingly insane and downright scary. They are like a parallel universe where everything you’ve ever learned about finance and human behavior is turned upside down.
 
Worse, negative rates are being normalized by economists, bankers, and commentators.


Worst, I have a funny feeling this will end badly. Negative interest rates have all the hallmarks of serious trouble for the financial markets; an anomaly growing in scale which seemingly came out of nowhere that is under-recognized, poorly understood and dismissed as not consequential. (Flashing red lights here.)
 
 
 https://news.yahoo.com/negative-interest-rates-japan-germany-france-150324580.html;_ylt=AwrC0F9qS2BdRj4AQQ.ZmolQ;_ylu=X3oDMTByOHZyb21tBGNvbG8DYmYxBHBvcwMxBHZ0aWQDBHNlYwNzcg--
 


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