Tag Archives: Wall Street

Wall Street’s Bond Forecasters Splinter as Fed Credibility Wanes

Bloomberg, May 16, 2016



To Thomas Costerg, the big question for bond investors isn’t whether the Federal Reserve will raise U.S. interest rates this year.

As a senior economist at Standard Chartered Bank, Costerg says the risk of a recession will cause the Fed to backtrack on its move to end seven years of near-zero rates. That will underpin demand for Treasuries and push benchmark 10-year yields to 1.6 percent, one of the lowest forecasts in Bloomberg’s latest survey.

 At the opposite end of the spectrum is Amherst Pierpont Securities’ Stephen Stanley. He’s calling for yields to jump more than a percentage point to 2.8 percent as inflation and jobs growth push the Fed to raise rates twice this year.
Forecaster Firm Highest 2016 Yield Forecasts (%)
John Dunham Guerrilla Capital 3.53
Stephen Stanley Amherst Pierpont 2.80
Ian Shepherdson Pantheon 2.75
Chris Rupkey Tokyo-Mitsubishi 2.70
Scott Brown Raymond James 2.61
Forecaster Firm Lowest 2016 Yield Forecasts (%)
Paul Mortimer BNP Paribas 1.50
Steven Major HSBC 1.50
Thomas Costerg Standard Chartered 1.60
Sergio Capaldi Intesa Sanpaolo 1.60
Mikhail Melnik Kennesaw State Univ 1.67

Their conflicting views are emblematic of how little consensus there is over the direction of the U.S. economy — and its impact on the $13.4 trillion market for Treasuries. The divide also reflects how mixed policy signals from Fed officials, worries about China and negative rates in Europe and Japan have raised the stakes for investors as yields plunge and bond prices soar. In 2016, the gap between bullish and bearish forecasts is wider than it’s been in each of the past three years as bouts of volatility plague the financial markets.

‘Lot Earlier’

“If you followed, strictly speaking, the Fed’s forward guidance, the Fed should have hiked rates a lot more and a lot earlier,” Costerg, 30, said in a telephone interview from Standard Chartered’s office in midtown Manhattan. “Some forecasters have fallen into that trap. That’s been the red herring.”

Over the past three years, it’s paid to listen to the bond market’s biggest bulls. Since peaking at 3 percent at the end of 2013, yields on benchmark 10-year Treasuries have tumbled as disappointing inflation and wage numbers, as well as lackluster global growth, kept haven assets in demand.

Ten-year yields, which have declined more than a half-percentage point this year alone, were little changed Monday at 1.71 percent as of 9:57 a.m. in London. Yet even as Treasuries have rallied in 2016 and pushed down the average yield projection to 2.21 percent as of May 12 from 2.8 percent, individual forecasters are splitting further apart.

Guerilla Forecast

In Bloomberg’s May survey of 66 strategists and economists, BNP Paribas SA had the lowest official forecast at 1.5 percent, while Brooklyn-based research firm Guerilla Economics had the highest at 3.53 percent. That’s pushed the average gap between the highest and lowest estimates this year to 1.96 percentage points, which is the widest since at least 2013, according to data compiled by Bloomberg.

Costerg, who hasn’t ruled out the possibility that yields will return to the all-time low of 1.38 percent, bases his year-end projection on the view that there’s a 50 percent chance the U.S. will sink into a recession during the next 12 months. That will derail the Fed’s goal of two rate increases in 2016 and prompt the central bank to reverse itself and lower its target by a quarter-point.

The rate is currently a range of 0.25 percent to 0.5 percent.

Amherst Pierpont’s chief economist Stanley, who has consistently been among the most bearish bond-market forecasters surveyed by Bloomberg, says market watchers are underestimating the U.S. economy’s growth potential.

Longest Streak

Although headline inflation remains below 1 percent, consumer prices excluding volatile food and energy costs have exceeded 2 percent for five straight months. That’s the longest streak since early 2012. Wages have also picked up, with year-over-year growth averaging 2.4 percent this year, the highest in seven years.

Greater earning power has bolstered American consumers. Retail sales in April rose by the most in 13 months and consumer confidence surged in early May to an almost one-year high as households were the most upbeat about their inflation-adjusted incomes in a decade.

“I’m taking a look from 30,000 feet at the historical relationships between the economy and rates,” said Stanley, 47. Investors “conclude inflation will be low for a long time and the Fed is almost powerless to achieve its target. We’re starting to see evidence of a gradual move higher in wages. They are going to have to bite the bullet and start normalizing rates.”

Disappointing Earnings

Yet it’s still too soon to conclude the U.S. economy is back on track.

Weaker-than-forecast quarterly earnings reports have come from tech companies including Apple Inc., Microsoft Corp. and Google parent Alphabet Inc., while Walt Disney Co. and Macy’s also reported disappointing results.

Meanwhile, employers added the fewest number of workers in seven months as April payroll figures fell short of economists’ forecasts. That prompted Goldman Sachs Group Inc., Barclays Plc and Bank of America Corp. to push back their rate calls and buoyed bullish debt investors who see no end to years of tepid growth and inflation.

Futures traders aren’t convinced by the U.S. growth story, either. They’re pricing in just a 4 percent chance the Fed raise rates by June, down from 75 percent at the start of this year. The likelihood of a move by year-end, which was once a near certainty, is now little better than a coin flip.

“There are so many reasons for yields to be pulled lower,” said Timothy High, a New York-based U.S. interest-rates strategist at BNP Paribas.

Part of the disparity among forecasters has to do with conflicting signals from officials at the Fed itself.

Too Quickly

On May 12, Kansas City Fed President Esther George reasserted her call for higher rates, saying current levels are “too low for today’s economic conditions.” A day later, Fed Governor Lael Brainard said the central bank risks moving too quickly if it underestimates the impact that the world’s major economies could have on U.S. growth.

And that’s particularly important now as the European Central Bank and the Bank of Japan experiment with negative interest rates to spur their flagging economies, while bond-buying stimulus has caused debt prices to soar and pushed yields on more than $9 trillion of securities below zero.

Forecasting “used to be all about the business cycle,” said Krishna Memani, who oversees $204 billion as chief investment officer at Oppenheimer Funds Inc. “What’s going on in terms of policy easing around the world has had a bigger impact.”


Early signs of a debt ceiling freakout in this market

CNN Money, Oct 22, 2015

us debt ceiling

Most of Wall Street remains unfazed by the looming debt ceiling deadline. But one corner of the financial market is getting jittery.

The Treasury Department runs out of accounting options to make payments on November 3. That means the clock is ticking for Congress to raise the debt ceiling at a time when there’s political paralysis in Washington.

The part of the market that’s getting stressed is the very short-term debt that would be directly impacted if the U.S. Treasury can’t make its payments. Rates on one-month Treasury bills due in November spiked earlier this week to levels unseen since 2013.

Social Security, military payments will be on hold

Former Federal Reserve head Ben Bernanke called the debt ceiling situation very dangerous and pointed out that if the debt limit isn’t raised, “the government can’t pay Social Security, can’t pay military, can’t meet its obligations.”

He said such an event would be very disruptive to the global economy and the financial system.

“I think the risks have risen. The political paralysis has been such that you really can’t count on things getting done in a timely way,” Bernanke said on Wednesday at an event in New York to discuss America’s fiscal future organized by Politico.

Yields on T-bills hit 2-year highs

debt ceiling freakout

On Monday the yield on one-month Treasury bills shot up to 0.17%, the highest level since 2013 during the fiscal cliff standoff, according to FactSet. Compare that with just 0.01% on October 15 and -0.02% on September 18. Yields have since receded to 0.07% on Wednesday on signs that Paul Ryan may be willing to serve as speaker.

Technical default

The fear still remains that Congress will fail to raise the debt ceiling before Treasury runs out of money to pay its bills. That could result in a technical default on U.S. Treasurys — considered the safest investment on the planet.

“We’ve seen this before when the debt ceiling situation percolates to a crisis level and investors become concerned payments may not be made. That’s what we’re seeing now,” said Brian Erickson, vice president of fixed income strategy at Ameriprise Financial.

All eyes on mid-November

The scrutiny has focused on a one-month Treasury bill that is due on November 12, said Erickson.

That makes sense because the Bipartisan Policy Center estimates Treasury won’t have enough money to pay what’s due at some point between November 10 and November 19. That raises the potential for a technical default because the U.S. owes at least $30 billion in interest on Treasury securities around mid-November.

Tellingly, the interest on the one-month bill is now higher on those that are due two months later.

Markets aren’t panicking yet

But some believe fears about the debt ceiling are overblown.

“The idea that the U.S. Treasury would default on its T-bill obligation is absurd,” said Anthony Parish, vice president of research and portfolio strategy at Sage Advisory.

Most analysts believe Congress will eventually raise the debt ceiling before disaster strikes.

No wonder, the broader stock market is enjoying its best month in four years. In fact, CNN’s Fear and Greed index has recovered from extreme fear and is even slowly moving to greed territory.

And the federal government is still borrowing money for next to nothing from the bond markets.

Parish said if there were a real risk the government wouldn’t honor its debt obligations, “we might as well buy canned goods and hunker down because the entire capital markets are going to grind to a halt.”

Guy LeBas, managing director of fixed income strategy at Janney, said bond yields would have to spike much higher before signaling real panic.

“Nobody truly believes the U.S. will be unable to pay its debt,” LeBas said.


The Fed Is Looking at a Very Different Dollar Than Wall Street

Bloomberg, Aug 24, 2015


That may spell trouble for investors.

By many popular measures, the dollar has traded sideways for the last six months. Then there’s the Federal Reserve’s measure.

The greenback is surging, according to an index the Fed created to track the U.S. currency versus 26 of the country’s biggest trading partners. It’s risen 1.3 percent beyond a 12-year high reached in March, when the central bank fired the first of a series of warnings that a stronger dollar may hurt growth and lower inflation.

At a time when the Fed’s tightening path has become one of the biggest drivers in the $5.3 trillion-a-day foreign-exchange market, the discrepancy between Wall Street’s view — largely based on the dollar’s performance against the euro and the yen — and that of policy makers may lead to a jolt for investors expecting recent ranges to persist. The rapid trade-weighted appreciation this quarter has come mostly against big exporters such as China and Mexico, and it undercuts the Fed’s goal of quicker inflation. It may trigger further jawboning from officials looking to cool the dollar’s broad gains as the Fed begins raising interest rates for the first time in almost a decade.

“The dollar still continues to strengthen on a trade-weighted basis and the Fed definitely takes that into the equation,” said Brad Bechtel, a managing director at Jefferies Group LLC in New York. “The risk is the Fed starts really emphasizing that, and the market would be caught offside.”

Yuan, Peso

The Fed’s trade-weighted broad dollar index measures the greenback against the currencies of 26 economies according to the size of bilateral trade. China, Mexico and Canada make up 46 percent of the gauge.

Meanwhile, most private-sector dollar gauges track a basket of the world’s most liquid, widely used currencies. Intercontinental Exchange Inc.’s U.S. Dollar Index, which serves as the benchmark for various futures and options instruments, has a 58 percent weight to the euro and 14 percent for the yen. It lacks representation from any emerging markets, which account for more than half of the U.S.’s total trade flow.

The two indexes had moved alongside each other until a month ago. The Fed’s broad dollar index surged 3.4 percent this quarter to a 12-year high as China devalued the yuan to support a slowing economy, while a renewed commodities rout undermined Canada’s loonie and the Mexican peso. The ICE dollar gauge dropped 1.9 percent during the same period.

 Measures Matter

“It’s important to be mindful of which dollar measures matter, especially if you’re looking at it through the Fed’s eyes,” Ellen Zentner, chief U.S. economist at Morgan Stanley, said on Bloomberg Radio. One of the criteria for the Fed to raise rates is “a leveling out of the trade-weighted dollar. At the time of the June meeting, they could check off that box. Today, they can’t.”

Dollar bulls as recently as March were buffeted by unexpected warnings from the central bank. On March 18, a few days after the Fed index rose to the strongest in more than a decade, Chair Janet Yellen said the dollar would be a “notable drag” on growth this year.

The same day, policy makers lowered their forecasts for the fed funds rate by almost half. The ICE dollar index dropped 1.2 percent over the next two weeks.

In the minutes from the Fed’s July meeting released last week, the dollar was mentioned 12 times, as some officials “continued to see downside risks to inflation from the possibility of further dollar appreciation and declines in commodity prices.”

Inflation Detriment

The dollar’s surge may restrain inflation and limit the Fed’s ability to raise interest rates, punishing the U.S. currency against some major counterparts, according to Nomura Holdings Inc.

“In coming months we’ll be looking at import price deflation that is the most severe we’ve had for many years,” said Jens Nordvig, a managing director of currency research at Nomura. “There may be opportunities to fade dollar gains in Group-of-10, where the direction of the Fed really is a key driver.”


John Rubino: 2007 All Over Again? Let Us Count The Ways (And Remember What Happened Then)

By John Rubino, Apr 17, 2015

There’s a journalistic sub-genre that might be called “The Highest/Lowest Since XXX,” in which a reporter takes a current statistic and illustrates (often with snazzy charts) how it hasn’t been this high or low since some date in the distant past. This is a compelling theme, implying as it does that the connection between now and then makes the current situation more important or meaningful while providing context with which to judge current trends.

Unfortunately, these articles often miss the point of the whole context thing by not exploring what subsequently happened last time the stat in question hit that level. Here’s a good recent example from Bloomberg:

For the First Time Since 2007, Most Americans Feel Good About Money

For the first time since 2007, more than half of Americans, 52 percent, say their financial situation is “getting better,” a new Gallup poll shows. That’s up from a low of 29 percent three years ago.

American's finances

A third of Americans still say their finances are getting worse, Gallup says. But that’s a big improvement from the poll’s 2008 peak, when 49 percent of respondents said things were going south.

Millennials are the most optimistic of any group in the survey. Seventy percent of 18-to-29-year-olds say their financial picture is improving, up from 60 percent last year. Meanwhile, just 33 percent of those 65-plus are feeling better.

Not surprisingly, the wealthier you are, the better you feel. Of those making $75,000 or more, 65 percent say they’re doing better. For those earning less than $20,000, the number is 36 percent, though that’s up 7 points from last year.

The reasons for the improving mood include a rising stock market, falling debt levels, and a better job market.

What’s amazing about this article from an analytical standpoint is that while mentions in passing that the 2007 high in good feelings was followed by a low in 2008, it doesn’t connect the two numbers. This, it would seem, is the key piece of the puzzle: if the stat matters enough to be article-worthy, then a discussion of why it matters should be mandatory. And if its previous high was followed by a catastrophic low, the reason for this reversal should be the story’s narrative center.

So here’s what it means: Extreme optimism — whether in the form of stock valuations, consumer spending, or happiness surveys like the one mentioned here — tend to be followed by corrections because to get to an extreme point in a data series, extreme behavior is usually required. That is, a lot of really optimistic investment decisions have to be made to push financial markets to cyclical highs, and these kinds of moves tend to exhaust themselves and produce big moves in the other direction. Hence the 2008 low following the 2007 high.

If reporters got this, and asked the two obvious questions “what happened next and why did it happen?” these articles would contain a lot more useful information. But of course they also wouldn’t lead readers to borrow, spend and speculate, which seems to be the overall goal.

And while we’re on the subject of reporters not getting life’s cyclicality, check this out:

Wall Street’s 2007 Heroes Ascendant as Goldman, Blackstone Surge

Goldman Sachs Group Inc. and Blackstone Group LP were the toast of Wall Street in 2007 as they raised record-setting funds and earned returns of more than 30 percent. Eight years later, they captured some of that dominance again in the first quarter.Goldman Sachs rode a rare increase in trading and more than $1 billion of gains from equity investments made with its balance sheet to post the highest earnings per share in five years. Blackstone, the largest alternative-asset manager, doubled first-quarter profit to a record.

Commercial banks’ margins remained squeezed by interest rates near record lows, leading to Wells Fargo & Co.’s first profit drop since the global credit crunch of 2008. Goldman Sachs’s return on equity, boosted by its highest post-crisis merger advisory revenue, topped Wells Fargo’s for the second time in the last four years.

“This quarter, they got some cyclical strength,” said Alison Williams, senior financials analyst with Bloomberg Intelligence. “The pick-up shows the opportunity still in these businesses, and supports the view that at the depths of last year, at least some of the weakness was cyclical.”

After posting losses in multiple years in the wake of the financial crisis, Blackstone has made steady progress culminating in last quarter’s record profit. It has benefited from the increased regulation on banks, entering new businesses and buying assets from financial firms.

Blackstone also gained from the rebound in the U.S. property market, as the real estate group reported a 99 percent jump in profit from a year earlier. Its real estate unit, already the biggest of its kind, has raised almost $15 billion in just four months for a new fund.

“All signs point to 2015 being a very big year for us and our shareholders,” CEO Steve Schwarzman, 68, told analysts and investors on a conference call Thursday. “I do not believe Blackstone is in any way at a long-term peak.”

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:


IMF tells regulators to brace for global ‘liquidity shock’

By Ambrose Evans-Pritchard, Apr 15, 2015

Financial engineering that preceded the last two financial crises is back, International Monetary Fund warns.

An illusion of liquidity has beguiled financial markets across the world and spawned some of the worst excesses seen on Wall Street in modern times, the International Monetary Fund has warned.

Investors are borrowing money to buy shares on the US stockmarket at a torrid pace and are resorting to the same sorts of financial engineering that preceded the last two financial crises.

“Margin debt as a percentage of market capitalisation remains higher than it was during the late-1990s stock market bubble. The increasing use of margin debt is occurring in an environment of declining liquidity,” said the IMF in its Global Financial Stability Report.

“Lower market liquidity and higher market leverage in the US system increase the risk of minor shocks being propagated and amplified into sharp price corrections,” it said.

The report said there are clear signs that underwriting standards are deteriorating in a pervasive search for yield. So-called “covenant-light loans” with poor protection for creditors now make up two-thirds of all new leveraged loans in the US.

The ratio of non-financial corporate debt to underlying assets has reached 27pc, even higher than it was just before the Lehman crash in 2008. Issuance of “second lien” loans that face a likely wipe-out in cases of default are running near record levels once again.

This is becoming hazardous as the US Federal Reserve prepares to raise rates, a move that risks a spike in global borrowing costs and may cause liquidity to dry up almost overnight. “A sudden shift in market views that unwinds compressed premiums and sends yields higher could trigger a market liquidity shock,” said the report.

The so-called ‘flash crash’ on US bond markets last October and the collapse of the Swiss currency floor in January showed how quickly liquidity can vanish, acting as “a powerful amplifier of financial stability risks.”

The risk of seizure has been made worse by new regulations that effectively force market makers and dealers to hold much lower inventories, or to drop out of the business altogether. The IMF said that large inflows of money into mutual funds have “provided an illusion of liquidity in credit markets” but this will be no protection in a major shock.

The report warned that distress in the global oil industry could be the trigger for the next storm. Lending to the oil and gas industry reached $450bn last year, double the pre-Lehman peak. New bond issuance graded at `junk’ level have almost tripled to 45pc. The total debt outstanding is now $3 trillion.

Defaults in the energy sector tend to lag oil price crashes by around twelve months since drillers typically hedge their output on the futures markets for a while. “Aftershocks for the corporate sector may not yet have fully filtered through,” said the IMF.

The slump in oil prices is a powerful shot in the arm for world economy. It rotates vast sums of surplus capital from the oil-states into consumption, countering the chronic lack of demand that has held back global growth since 2008.

Yet there is a dark side for investors. The IMF said the oil states have accumulated $1.1 trillion over the last five years in foreign reserves alone, “an important source of funding for the global banking sector and capital markets.”

These states hold $2 trillion in US assets, with $1.3 trillion concentrated in equities and $580bn in US Treasuries, and $230bn in credit. They are already having to draw down on this wealth to plug holes in their budgets at home, extracting a net $88bn last year. This could have “market repercussions” if it accelerates, said the report.

The IMF itself is in a delicate position. It is has been a cheer-leader for ultra-loose monetary policy to stave off global deflation and prevent debt-dynamics spinning out of control in Europe, Japan, and the US. Yet many of the risks now emerging are a direct result of quantitative easing and zero-rates.

A third of all sovereign bonds in the eurozone now carry negative yields. This is causing havoc for money markets and for the life insurance industry, which has locked into commitments stretching out for thirty years that are becoming untenable.

“A prolonged low interest rate environment will pose severe challenges for a number of financial institutions. Weak European midsized life insurers face a high and rising risk of distress. The failure of one or more midsize insurers could trigger an industry-wide loss of confidence,” it said.

“The industry has a portfolio of €4.4 trillion in assets in the EU, with high and rising interconnectedness with the wider financial system. A large mark-to-market shock could force life insurers into asset reallocations and sales that could engulf the financial system,” it said.

The IMF does love to keep us awake at night.