Login

Bonds & Interest Rates

Raising Rates Reflect Bigger Debt Not Faster Growth

Share on Facebook Tweet on Twitter

Posted by Peter Schiff - Euro Pacific Capital

on Tuesday, 06 February 2018 06:25

While investors are justifiably focused on what may be the opening crescendo of a long overdue sell-off in stocks, there is not, as of yet, as feverish a discussion of the parallel sell-offs in bonds and the U.S. dollar, which have been underway for at least a year and a half in bonds and 14 months for the dollar. I contend that this should be widely understood as the root causes of the jittery Dow, and are ultimately far more important. A continued decline in the dollar and bonds holds the potential to ignite inflation while increasing mortgage rates, borrowing costs, and federal deficits. These developments would strike at the very heart of the economic foundation that has supported the country since the Financial Crisis of 2008, and threaten to push the economy into a recession that the Fed may be powerless to confront.

Secretary of the Treasury, Steve Mnuchin, stunned markets late last month when he said that a cheaper dollar would be a welcome development for the U.S. economy. The dollar sold off sharply as Mnuchin's words appeared to be taken as proof that the Trump Administration overtly embraced a weaker dollar. To quell the uproar, President Trump himself, freshly arrived in Davos, Switzerland, had to "clarify" the Secretary's comments, explaining, as only 'the Donald' can, that by "weaker" Mnuchin really meant "stronger."

The exchange did provide a fresh twist on our decades-old "strong dollar policy," which traditionally works like this: The President and/or senior Fed officials refer all questions about the health and trajectory of the U.S. dollar to the Secretary of the Treasury, who proclaims loudly and clearly, with no trace of irony, that "a strong dollar is in the national interest." These comments reassure the markets, the dollar rises, and the operation is complete. Although this protocol is one of the simplest Washington has to offer, the Trump Administration managed to get it wrong on its first try.

Despite the fact that Trump's vocal support for a "strong dollar" was not accompanied by any indication that he would actually do anything to support it, his words temporarily reversed the dollar's 24-hour skid. But apart from reacquainting us to the absurdity of a "policy" that is simply based on mouthing a canned phrase, the episode raises a couple of key issues. Trump claimed that the economy is surging and, as a result, the dollar will keep getting stronger and stronger. The problem with these assertions is that neither is true.

Last week's newly released Q4 GDP report from the Bureau of Economic Analysis (BEA) shows that the economy grew at 2.6% in the Fourth Quarter, bringing the entire year's GDP growth rate to 2.4%, only .2% higher than the 2.2% GDP growth that we have averaged over the prior three years (2014-2016). And while 2.4% is marginally higher than the average growth we have had since the end of the 2008 financial crisis, it is still significantly below the average over the past century, and even weaker than two years of Obama's second term.

The news is also surprisingly weak on the trade and employment fronts, another two areas for which Trump has shown particular enthusiasm. Contrary to the supposed "record job creation," average monthly job gains in 2017 were 17% slower than the combined averages in 2015 and 2016, based on data from the Bureau of Labor Statistics. In fact, job growth in 2017 was its slowest pace since 2010. Similar disappointments can be found in America's trade balance, which, according to Trump, has improved dramatically due to his "tough" negotiations and our resurgent manufacturing sector. But according to the U.S. Census Bureau, average monthly 2017 trade deficits (through November) were 11% wider than 2016, and 14% wider than the average over the prior 4 years. What's worse is that these increases come at a time when a falling dollar, in theory, should have narrowed the gap!

Given all this, one would be hard-pressed to find the "boom" Trump describes, especially if one is also claiming that such windfalls were not occurring under Obama. But since when have facts ever mattered in Washington or on Wall Street?

So if Trump is wrong about the economy, jobs, and trade, what should we make of his view that "the dollar will get stronger and stronger?"

While the financial media has been focused on the stock market, most have dismissed the significance of the declining dollar. 2017 saw the first annual; decline in the dollar in five years and its largest decline in 14 years. 2018 is off to an even worse start, with the dollar registering its steepest January decline since 1987. In fact, against the Chinese yuan, January was the weakest month for the dollar since 1994. The current decline in the dollar index that began in December 2016 is now the longest continuous decline in the last 12 years. And while other recent declines have been steeper (see chart below), this one is distinct because it is occurring against a set of economic conditions that should be bullish for the dollar. Economic growth is assumed to be strong, consumer confidence is high, and the Fed is expected to keep raising interest rates and actually shrink its balance sheet (which would diminish the supply of dollars).

 cvcv



Read more...

Banner

Bonds & Interest Rates

USTreasury Bonds: Fuse to Light the Bonfire

Share on Facebook Tweet on Twitter

Posted by Jim Willie

on Wednesday, 31 January 2018 08:19

Many are the metaphors used to describe the agent that initiates a major crisis. Light the fuse, or pull the trigger, pull the rug out from under the room, or pull on the string for unraveling the sweater, these are commonly heard. What comes soon is the Bonfire of the Vanities, a term the Jackass prefers since irony is thick. Hardly the burning of objects deemed as tempting toward occasions of sin as in the 15th Century. In the present-day case, the burning would be of the massive piles of paper assets the US Federal Reserve has been illicitly supporting for the past several years. The bonfire would be of falsely valued heaps of paper. If truth be known, the Quantitative Easing was put in place in 2012 when the big US banks were all in danger of failures. They required amplified liquidity infusions in order to prevent these giant silos of insolvency from entering financial failure. Their huge bond holdings were supported. Generally, when insolvency meets illiquidity, big failures occur. The USGovt and USFed colluded to prevent the entire set of Wall Street banks from failing like Lehman Brothers did. They all had the same ugly insolvent traits. Few tell the story correctly, but Goldman Sachs and JPMorgan suffocated Lehman to death. Lehman did not fail without help. Like Chief Justice Scalia, Lehman was suffocated in a bed of unpaid bond sales. What comes next is a nasty corrosive dangerous sequence of financial market crises, where pumped paper assets suffer notable declines. It will include the stock, bond, and currency markets. The last times all three suffered simultaneous declines was 1979 and 1987. Add soon 2018.

GLOBAL SYSTEMIC LEHMAN EVENT

What comes next is what the Jackass has come to call the Global Systemic Lehman Event. For ten years, the Powers that Be, namely the banker cabal, have been supporting the entire global bond market in almost exactly the same manner as they supported the mortgage finance market in 2005 through 2007 before it erupted. The subprime bond market crisis of 2008 will be repeated, but on a global scale which includes major sovereign bonds. Recall that Greenspan justified the off-loading of risk, and Bernanke justified the asset backed bond market as sound. They were both wrong, both heathen heretics. It can accurately be said that these top-rated sovereign bonds are all subprime, with horrendous fundamentals led by grand deficits and economic recessions. 

The entire Western world bond market and stock market has subprime traits. The worst offender is the United States, with its $550 billion annual trade deficit, expected to go over $600 billion this year. The USGovt deficits have been running regularly at over $1.0 trillion each of the last three years, despite fanciful adjustments and clever line items in perverse one-off attempts to conceal reality. New military budget additions and tax reforms will ensure a larger federal deficit this year, unless and until the nation enjoys a renaissance of re-industrialization with 100 thousand new businesses formed and several $trillion invested. Not likely.

WARNING SIGNALS

Warning signs are numerous. Consider the Money Velocity index, the flattened Treasury Yield Curve, the junk bond index, the pension fund shortfalls, the business defaults, the high leverage in big bank bond portfolios, and the growing automobile bond market travesty that features a full repeat episode of the subprime mortgage market. The USFed is more guilty of heretical monetary policy with each passing year. In the last several months, they have seen fit in their dim vision to support (rig) the actual measures that give warnings and alerts, like the VIX volatility index. For the last two years, the central bank has been buying US stocks with both hands using their Wall Street partners in collusion. For the last four years, the central bank has been supporting (rigging) the Treasury Inflation Protected Securities (TIPS) bonds, in order to silence the price inflation warnings. Of course, the USFed justifies their actions in silly ways, but they are trying desperately to conceal the vicious chronic economic recession by putting fingers in the dike holes. As partner in crime, the Euro Central Bank has been supporting corporate bonds, like in a division across the Atlantic Ocean of criminal labor initiatives. All the while, the standard economic statistics for economic growth, price inflation, and unemployment continue to be grossly falsified. The Fascist Business Model has not only gone haywire, gone totally mad, but broadened its reach. Next comes a reality check.

However, the two biggest warning signals are the flat yield curve and the rising long-term bond yield for USTreasurys. To begin with, imagine a supported (controlled, rigged) bond market for the 10-year USTreasury Bond Yield with the full power of the QE bond purchase program. It is failing to stop a widely recognized recession warning signal. This time it is from a rising short-term bond yield, combined with a rising long-term bond yield simultaneously. The USFed rate hikes are responsible for the short end, while global USDollar rejection is responsible for the long end of maturities. The Jackass has been adamant, and mostly (not completely) alone in heralding that the QE might be financial stimulus but it causes capital destruction in an unavoidable deadly manner. QE is wrecking the USEconomy on Main Street while providing a party-like atmosphere on Wall Street.

FUSE, TRIGGER, STRING

The fuse to light the financial market bonfire is the USTreasury Bond market, in particular the long-term maturity. Much of the various market run-ups over the course of the last two to three years have been predicated upon the ultra-low interest rates. They are kept down by USFed pressure, using QE with strong support by the Exchange Stabilization Fund (ESF). That is the multi-$trillion fund managed by the USDept Treasury, for the purpose of controlling several very important financial markets in the West. There are no free markets anymore, not since 9/11 and the installation of the fascist bankers at the helm. They committed the terrorist crime, sacked the World Trade Center giant bank, installed the Patriot Act, captured the $700 billion TARP Fund, and have controlled the USGovt ever since. It is all a crime scene, a coup d’etat, with cover provided by the lapdog corrupted press networks. Former actor, wrestler, and governor Jessie Ventura tried to run a cable show to reveal the 9/11 crimes, but his life was threatened and he quit the program.

The ESFund is the control center for fabricated USTBond demand, using the nifty Interest Rate Swap contract. It balances short-term versus long-term securities, and coupon versus cash types, to create mythical bond demand. The USGovt steps in to declare wondrous bond rallies, like in 2011 for that historic rally which was built upon $8.5 trillion in IRSwaps clearly evident by Morgan Stanley on the OCC Reports. The Office of the Comptroller to the Currency reports are rarely read by market mavens, but it shows the rigging very effectively. Lastly, the rise in the stock market usually indicates an imminent economic revitalization and growth period. But QE distorts it all. The typical Fed Valuation Model calls for higher stock indexes as a result of low interest rates. In past cycles, the model was effective, but that was before QE and the multi-$billion bond monetization program that has been firmly in place for six years. The entire set of big Wall Street banks join the bandwagon, and rely upon the faulty valuation model. We were told QE would be temporary, like for six months. The Jackass instantly declared in 2011 that it would be permanent, just like the Zero Rate Interest Rate policy. Third World fundamentals and absent bond buyers dictated desperate measures. It should be noted that the QE bond program is unsterilized hyper monetary inflation. No bond removal is done as compensatory drainage. It is pure inflation of the worst kind, deemed good by the heretics behind the curtain. 

LIT FUSE IN PROGRESS

The USTreasury 10-year yield is on the verge of a breakout. Interest rates are rising, and could cause tremendous damage, starting with the stock market. The USFed balance sheet is loaded for massive losses, from USTBonds bought at low rates. If and when TNX goes above 3.0% on the all-important bond yield, the S&P500 and Dow Jones Index will turn down hard and scream of a major stock market decline. For yet another rare moment in US history, the US-based stocks, bonds, and USDollar will all go down in unison. No counter-balancing will be seen this time, not in this correction from historical abuse. Maybe not all in unison at first, but later soon for certain. The great QE unwind is upon us, within view. It has even been given a name in the financial press recently, Quantitative Tightening. The policy of tightening after such pervasive monetization of financial assets is lunatic and certain to cause a crisis. 

Look for Gold & Silver to be the object of safe havens as the financial crisis elevates in pitch. Both precious metals already have begun to respond very favorably, with Gold comfortably over the $1300 level and Silver comfortably over the $17 level. Both precious metals have endured a long basing process, amidst unspeakable corruption in paper gold and paper silver games framed within a grand charade. Neither can be held back any longer. The Global Financial RESET will be urgently put into motion, jumping up a gear in activity and intensity. Ironically, expect in several months that the East will be invited to help stabilize matters. They will comply, but on condition the Gold Standard is re-instated.

DIRE CHART PATTERN

The Jackass adds a few points, first on the technical chart and then on the pessimistic viewpoint toward the vile banker sector. Notice a severely dangerous looking chart, with a Head & Shoulders reversal pattern evident, and a slight upward bias in addition. A secondary H&S reversal has reached completion over the last several months, adding propulsion for completing the major H&S reversal. The secondary pattern hit its 2.7% yield target. It is a highly reliable pattern in general. The recent move above the 2.60% key resistance level  with gusto could continue to provide impetus in pushing the USTreasury 10-year yield (TNX) above the 3.0% level. That would cause severe problems, and issue loud dire signals. It would pop and pinprick the S&P500 stock index and the Dow Jones Industrial Average. They are an accident waiting to happen.

The Head & Shoulders reversal target calls for an upward move in the neighborhood of 3.4% to 4.0% incredibly, as the great unwind is near, for both stocks and bonds. The more conservative 3.4% target pertains to the basic H&S pattern without considering its upward bias tilt. The more aggressive 4.0% target pertains to the more liberal interpretation when taking into account the positive upward bias evident in the entire chart for four full years. Refer to the two long parallel lines at the neck and shoulder levels, each with upward slope. Either way, the move toward the 3.5% area will cause tremendous grief and lead to significant publicity. Expect a major stock market decline, together with a major bond market decline, the worst of both worlds. Two declines simultaneously under the King Dollar banner will signal ignominious light.

 1



Read more...

Banner

Bonds & Interest Rates

How Did That Get Into My Bond Fund??

Share on Facebook Tweet on Twitter

Posted by John Rubino - Dollarcollapse.comm

on Wednesday, 31 January 2018 06:16

Towards the end of financial bubbles, people who previously paid little attention to things like “quality” start trying to figure out what they actually own. The result is either funny or terrifying, depending on the point of view. 

This time around bonds are (finally) getting a closer look. From today’s Wall Street Journal:

Decade of Easy Cash Turns Bond Market Upside Down

Debt deals set records from Tajikistan to East Rutherford, N.J., as investors keep hunting yield.

Last fall, a hydroelectric dam in Tajikistan, the government of Portugal and a cruise-ship operator all issued debt at unusually low interest rates. The seemingly unconnected deals are part of a proliferation of aggressive bond sales influenced by a decade of loose monetary policy and a demographic shift in global investing.

Historical limits on who can borrow, and at what cost, have broken down as fund managers agree to previously unpalatable terms.

Central bankers in the U.S., Europe and Japan helped shape the new breed of deals by simultaneously purchasing over $1 trillion in high-quality bonds since 2009 and lowering benchmark interest rates to jump-start their faltering economies. Modest economic growth came, but the strategy crowded private investors out of safe debt, prompting them to buy riskier bonds to boost returns.

Retiring baby boomers amplified the trend by moving their investments away from stocks into bonds, boosting assets in U.S. bond mutual funds to $4.6 trillion in November from $1.5 trillion a decade earlier, according to the Investment Company Institute, a trade group for investment firms.

The article goes on to present some examples of bonds that might not exist in less bubbly times. Here are three:

 

  • Tajikistan borrowed $500 million to finish construction of a hydroelectric dam that was started under the Soviet Union. This is one of the world’s most corrupt countries – a fact noted in the offering prospectus — and the dam’s electricity will be sold to Afghanistan, which, as most Americans know, is in the middle of a civil war that the “good guys” might easily lose (also mentioned in the prospectus). The deal’s investment bank, Citigroup, initially marketed the bonds to yield 8% but received such a warm welcome that it cut the rate to 7.1%. Buyers included big U.S. firms like Fidelity, which bought $14 million of the bonds, presumably to boost the yield of funds sold to retirees.
  • The American Dream Mall in East Rutherford, N.J. broke ground in 2003 but ran out of money to finish construction. In 2017 the mall’s current owner—its third—employed Goldman Sachs to sell $1.1 billion of 6.9% muni bonds, fully half of which were bought by the Nuveen fund family. “Unlike most malls, American Dream will derive most of its revenue from experiential attractions that can’t be replicated online, rather than depending on retailers,” said a Noveen executive.
  • On Nov. 8, Portugal sold €1.25 billion ($1.55 billion) of 10-year bonds that yielded 1.94%—the lowest rate ever for the country. Portugal needed an international bailout in 2011 and still has a junk credit rating. It’s one of the most heavily indebted countries in Europe, but the auction set its borrowing cost below that of the U.S. government, which sold 10-year bonds in November to yield 2.31% [those bonds now yield 2.7%].

 

Portugal-10-year



Read more...

Banner

Bonds & Interest Rates

The Chart That Worries Me: HY Bond A-D Line

Share on Facebook Tweet on Twitter

Posted by Tom McClellan - Financial Sense

on Tuesday, 16 January 2018 06:48

01-hy-bond-a-d-line-jan-2018

There is no divergence yet between stock indices and the NYSE’s composite A-D Line. But there is one in the High Yield Bonds A-D Line, and that is an early warning of big trouble to come.

....continue reading HERE



Banner

Bonds & Interest Rates

How Will Interest Rates Double in Europe from Here

Share on Facebook Tweet on Twitter

Posted by Martin Armstrong - Armstrong Economics

on Monday, 15 January 2018 07:04

IntRate-Manipulate

Martin forecasts rising rates in Europe as well as a rise in the Euro and decline in the US Dollar. A declining US dollar is something not many people are expecting right here - Money Talks Ed

QUESTION: Marty

 You mention rates are going up soon in Europe but how can the ECB achieve this when they are still implementing QE. I work in the European HY market and the technicals are horrible as so much money is flooding in chasing yield driving up leverage and deteriorating lending conditions. If rates do go up soon can we expect a spectacular unwinding of the HY bond market that has ground so tight due to CSPP?

Thanks for all your guidance and help in navigating these markets. Thanks so much, keep up the amazing work.

NS

ANSWER: Central banks can only control short-term rates for brief periods of time. They cannot control the long-end. The problem the ECB has is by backing off of QE, it will require private buyers to replace them, which will not happen at negative to low rates. The interest rates will be set by the private sector – not the ECB. The QE program has degenerated from an economic stimulus to simply life-support for member states. The “stimulus” never made it past the governments and we have nearly 10 years of QE that has just failed completely. Once the government have to turn back to private buyers, that is when you will see rates rise sharply to try to sell new debt.

....also from Martin:

The Rush to the Euro with QE Ending?



Banner

<< Start < Prev 1 2 3 4 5 6 7 8 9 10 Next > End >> Page 6 of 210

Free Subscription Service - sign up today!

Exclusive content sent directly to your Inbox

  • What Mike's Reading

    His top research pick

  • Numbers You Should Know

    Weekly astonishing statistics

  • Quote of the Week

    Wisdom from the World

  • Top 5 Articles

    Most Popular postings

Learn more...



Our Premium Service:
The Inside Edge on Making Money

Latest Update

The end of the longest bull market?

It’s increasingly looking like we’re now at or near the end of one of the longest running and most important bull markets in history. ...

- posted by Eric Coffin

Michael Campbell
Tyler Bollhorn Eric Coffin Patrick Ceresna
Josef Mark Leibovit Greg Weldon Ryan Irvine