Tag Archives: bond buying

Rate hike red flag? The Fed is worried about Greece

Bloomberg, Jul 8, 2015

Rate hike red flag? The Fed is worried about Greece

The Federal Reserve is worried about Greece hurting the U.S. economy. That could make the Fed pause on a rate hike.

In a shift from the Fed’s April meeting, the banks’ committee members grew more concerned about Greece’s impact on the United States.

“Many participants expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States,” according to the Fed’s minutes of its two day meeting which started June 16.

Much has already happened since the Fed’s June meeting. Greece is now asking for a third bailout. China’s stock market is tanking as the government tries to prop it up. Puerto Rico is still at risk of defaulting on its debt later this year.

Fed Chair Janet Yellen will offer an updated view on the bank’s outlook on Greece in a speech on Friday.

“The [Fed’s committee] recognizes Greece as a risk to the forecast, but ultimately they are thinking, ‘How does this affect the U.S. economy?'” said Luke Tilley, chief economist, Wilmington Trust Investment Advisors. Tilley believes it’s still possible the Fed will raise rates twice this year, starting in September.

Yellen and other committee members must determine this summer whether these developments will delay a Fed rate hike. The U.S. economy is not directly exposed to the Greek crisis. But it’s tied to Europe’s economy, which is tied to Greece. If the dominoes start to fall, America’s economy could get hit.

Many economists believe the Fed will raise its key interest rate in September, a move that would signal that the economy is almost fully recovered from the Great Recession. Rates have been at zero since late 2008.

Some experts believe Greece will have a limited impact on the Fed’s thinking as a potential rate hike, or “liftoff,” approaches.

“Greece has spiraled downward,” says Mike Materasso, senior vice president at Franklin Templeton Investments. But: “The Fed will be looking domestically.”

The Fed’s has two big goals: improve the job market and get inflation to rise to 2%. The job market is getting better by most measures, but inflation is still flat. If Greece or China appear to hurt those goals, the Fed might wait beyond September to raise rates.

However, the Fed’s committee affirmed that it remains on the path to raising rates this year.

“Members thus saw economic conditions as continuing to approach those consistent with warranting a start to the normalization of the stance of monetary policy,” according to the Fed’s minutes. Translation: A September rate hike is still an option.


Bonds beware as money catches fire in the US and Europe

By Ambrose Evans-Pritchard, Apr 15, 2015

money, burning, dollar, waste, cash, flames, burn, conflagration, dancing, fire, flame, flaming, flickering, heat, hot, inferno, passion, raging, red, dollar, money, cashThe world is still on a dollar-standard, moving to US monetary rhythms, whatever the central banks elsewhere may be doing

Broad M3 money indicators point to a reflationary mini-boom in America and Europe by the end of the year, but be careful what you wish for.

Be thankful for small mercies. The world economy is no longer in a liquidity trap. The slide into deflation has, for now, run its course.

The broad M3 money supply in the US has been soaring at an annual rate of 8.2pc over the past six months, harbinger of a reflationary boomlet by year’s end.

Europe is catching up fast. A dynamic measure of eurozone M3 known as Divisia – tracked by the Bruegel Institute in Brussels – is back to growth levels last seen in 2007.

History may judge that the European Central Bank launched quantitative easing when the cycle was already turning, but Italy’s debt trajectory needs all the help it can get.

The full force of monetary expansion – not to be confused with liquidity, which can move in the opposite direction – will kick in just as the one-off effects of cheap oil are washed out of the price data. “Forecasters ignore broad money at their peril,” says Gabriel Stein, at Oxford Economics.

Inflation will soon be flirting with 2pc across the Atlantic world. Within a year, the global economic landscape will look entirely different, with an emphasis on the word “look”. In my view this will prove to be mini-cyclical in a world of “secular stagnation” and deficient demand, but mini-cycles can be powerful.

Mr Stein said total loans in the US are now growing at a faster rate (six-month annualised) than during the five-year build-up to the Lehman crisis. “The risk is that the Fed will have to raise rates much more quickly than the markets expect. This is what happened in 1994,” he said.

That episode set off a bond rout. Yields on 10-year US Treasuries rose 260 basis points over 15 months, resetting the global price of money. It detonated Mexico’s Tequila crisis.

Bonds are even more vulnerable to a reflation shock today. You need a very strong nerve to buy German 10-year Bunds at the current yield of 0.16pc, or French bonds at 0.43pc, at time when EMU money data no longer look remotely “Japanese”.

Granted, there may be tactical reasons for buying Bunds, even at negative yields out to eight years maturity. Supply is drying up. Berlin is pursuing a budget surplus with religious zeal, paying down €18bn of debt over the past year. It has left the Bundesbank little to buy as it launches its share of QE.

Yet this is collecting pfennigs on the rails of a high-speed train. The German property market is on the cusp of a boom. David Roberts, of Kames Capital, warns of a “poisonous cocktail” of resurgent inflation and rising wages. “If you look at Bunds in anything other than the shortest possible timescale, the risk becomes very clear.”

US bond markets are equally vulnerable. Investors are pricing in rates of 0.9pc by the end of 2016, compared with 1.875pc by the Fed itself. This is extraordinary. The St Louis Fed’s James Bullard could hardly have been clearer on a recent trip to London.

“I think reconciliation between what markets think and what the committee (FOMC) thinks will have to happen at some point. That’s a potentially violent reconciliation,” he said.

It is not as if the Fed is hawkish. It is rightly wary of tightening with the labour participation rate still stuck at a 40-year low of 62.7pc. Yet the market is turning. The quit rate – a gauge of willingness to look for a better job – is nearing 2pc, the level when employers must build pay-moats to keep workers.

It is true that the US economy gave a good imitation of hitting a brick wall in the first quarter. Retail sales have fallen for three months, the worst drop since 2009. The Atlanta Fed’s snap indicator – GDPNow – suggests that growth dropped to stall speed in March. The rise in non-farm payrolls slumped 126,000 in March, half expectations.

Yet economies do not fall out of sky. The US has already survived the biggest fiscal squeeze since demobilisation after the Korean War without falling into recession. Fiscal policy is now neutral.

The oil crash is a net plus: every one cent cut in petrol prices adds $1bn to the US economy as a de facto “tax cut”. The eurozone is recovering.

The rising dollar cannot alone explain what has happened. The US tradeable sector is too small, and the time-lags are too long. New York Fed chief Bill Dudley said the 15pc rise since mid-2014 has been a “significant shock” and will knock 0.6pc off GDP this year, but it is not enough to derail recovery. Let us blame this recession scare on winter snow, the sort of anomaly that happens from time to time.

The greater threat – muttered sotto voce at the IMF Spring meeting this week – is that the Fed will soon be forced to hit the brakes hard, throwing dollar-debtors through the windscreen across the emerging world.

The official line is that all is under control. There will be no repeat of the “taper tantrum” in 2013. Behind the scenes, IMF officials acknowledge that it may be worse, a full-fledged margin call on $9 trillion of external dollar borrowing, much of it by companies in China, Hong Kong, Brazil, Mexico, South Africa and Russia. They fear too that it will combine with a nasty unwinding of East Asia’s internal credit bubble.

Willem Buiter, at Citigroup, says those countries that drank mostly from the cup of global dollar liquidity when the Fed was feeling generous are about to discover that not all forms of stimulus are equal.

The world is still on a dollar-standard, moving to US monetary rhythms, whatever central banks elsewhere may be doing. You cannot offset QE in Japan and Europe, against the end of QE in the US, let alone US rate rises. They are not remotely equivalent.

“The dollar is the only global reserve currency worth the name. The euro is in intensive care, the yen is too small, nobody has heard of sterling, and the renminbi is not yet ready for prime time. Strangely enough, the dollar is more dominant today than I remember in a long time,” he said.

Global lending in dollars has grown fourfold since 2000. We will find out over the next 18 months whether the world can withstand the rigours of Fed tightening and a dollar drought, or indeed whether the US itself is strong enough to withstand the eventual economic blowback if this turns serious.

That is a story for another day. The plain fact before our eyes is that monetary data in the US and Europe are catching fire. If you can figure out what the convoluted consequences mean for asset prices, you are doing better than anybody at the IMF this year.


German Yields Negative to 2021 as Investors Set for ECB Buying

Bloomberg, March 9, 2015

German government bonds advanced, pushing yields on securities due in as many six years further below zero, as investors prepared for the European Central Bank’s program of sovereign-debt purchases.

Anticipation of the 1.1 trillion-euro ($1.2 trillion) quantitative-easing plan, which is due to start on Monday, has already fueled a debt-market rally that sent yields across the euro region to record lows. The purchases, which are to include public and private debt, will be conducted in the secondary market by national central banks via existing counterparties.

“The ECB may well have to bid bonds aggressively to procure them from their holders, in particular to avoid question marks around the credibility of its QE delivery,” Cagdas Aksu, an analyst at Barclays Plc in London, wrote in an e-mailed report. Yields on the safest euro-area bonds “will remain suppressed,” he wrote. “We also expect the core-periphery spreads of Italy and Spain versus Germany to grind tighter in this environment.”

The yield on German 10-year bunds, Europe’s benchmark sovereign securities, fell three basis points, or 0.03 percentage point, to 0.37 percent at 8:26 a.m. London time. The 0.5 percent security due in February 2025, rose 0.265, or 2.65 euros per 1,000 euro face amount, to 101.305.

Germany’s six-year yield was at minus 0.03 percent. A negative yield means investors buying the securities would get less back than they paid if they held the bonds to maturity.

Yields have plunged across the region on concern the plan may lead to a scarcity of fixed-income assets. Seventy-seven of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index have rates below zero, data compiled by Bloomberg show.

Off Bounds

ECB President Mario Draghi spurred demand for higher-yielding bonds last week when he said securities won’t be purchased under the debt-buying plan if their yields are below the ECB’s deposit rate of minus 0.2 percent.

Only bonds due between a minimum two years and a maximum 30 years and 364 days at the time of purchase will be eligible, and there are other limits on what can be bought to reach the target of 60 billion euros a month.

The trading desks of the euro-area’s national central banks do have some discretion over what they buy and when, the ECB said in a March 5 document.

Italy’s 10-year yield declined two basis points to 1.30 percent and Spain’s decreased two basis points to 1.28 percent.


QE Experiment in Sweden Produces Scant Results

Bloomberg, Feb 26, 2015

Sweden’s first foray into quantitative easing on Thursday had next to no effect.

The 3 billion kronor ($360 million) the Riksbank bought in five-year government bonds pushed the yield down 1 basis points to below 0.12 percent. The spread to similar-maturity German bunds was unchanged. The transaction means Sweden has completed about one-third of its planned purchases as Scandinavia’s biggest economy struggles to end a wave of deflation.

“The aim of our bond purchases is to press down yields generally and we had a big effect when we announced that we would start buying government bonds,” Heidi Elmer, head of the central bank’s markets unit, said in a phone interview. “Now that we’re beginning to buy, it’s relatively small amounts in several batches and then it’s not reasonable to expect the same effect.”

Policy makers in Stockholm are fighting to prevent deflation from taking hold, reversing policies designed to limit household debt growth. Sweden has also joined Switzerland and Denmark in resorting to negative benchmark rates in what some analysts have dubbed a global currency war.

SEB AB said the Riksbank could increase its purchasing fivefold before it starts disrupting the market. Deutsche Bank AG earlier this month said the plan was “minuscule” while Citigroup Inc. has said more will be needed.

Marginally Under

The reverse auction received 9.2 billion kronor in bids and the Riksbank bought bonds at an average yield of 0.098 percent. It accepted 11 out of 27 bids.

“It went smoothly, the average yield was only marginally under the level it was before the Riksbank’s purchase,” Jussi Hiljanen, head of fixed-income strategy at SEB AB in Stockholm, said yesterday.

“There are preconditions for this to work smoothly also next time, but of course, that will depend on the situation in the market, which type of bond it is and so on,” said Hiljanen. “This first buy created a positive undertone, it didn’t disturb the market.”

Sweden has about 600 billion kronor in nominal bonds outstanding and SEB predicts the Riksbank could buy as much as 50 billion kronor without disrupting the market.

Symbolic Value

The bond purchases are a “quite marginal” part of the total and more of a “symbolic value,” said Claes Maahlen, head of trading strategy at Svenska Handelsbanken AB. The minutes this week indicated that an increase in purchases is also dependent on what happens with economic data, he said.

“Many have now changed their views,” he said. “Yields have come up slightly if you look at Sweden against Germany. Not least in the latest 24 hours, we’ve seen a strengthening of the krona. Both are reacting to a slightly smaller likelihood that the Riksbank will act in the near future.”

The central bank has said it stands ready to much more, if needed, to reverse a momentum that has seen consumer prices decline for six straight months. The bank targets a 2 percent inflation rate.

“Supplementing the cut in the repo rate with purchases of government bonds is a step toward a more expansionary monetary policy,” First Deputy Governor Kerstin af Jochnick said in minutes from the Feb. 11 meeting released this week. “It also facilitates further government bond purchases on a larger scale if this is deemed necessary for monetary policy purposes.”

“There should be a continued large interest this week and the week after,” said Elmer.