US treasuries are front and centre of mind at the moment. As we go to print this morning the 10yr UST yield is up another 4bp at a fresh two year high of 2.87% in Tokyo trading, adding to last week’s 20bp selloff. As it currently stands, 10yr yields are up by more than 120bp from the YTD lows in early May and more than 80bp higher since Bernanke’s now infamous JEC testimony. We should also note that the recent US rates selloff has been accompanied by a rapid steepening in the rate curve. Indeed, the 2s/10s curve is at a 2 year high of 250bp and the 2s/30s and 2s/5s are also at close to their highest level in two years.
Some have noted that the selloff has been exacerbated by the lower summer liquidity but it’s also fair to say that markets have been on tenterhooks. On Friday it seemed that all it took was a tweet from PIMCO’s Bill Gross for 10yr UST yields to gap cross the 2.85% mark on their way to an intraday high of 2.863%. Gross tweeted that “(without) central bank (check) writing we only have ourselves (to sell to)”. From the intraday peak, there was a bit of a rally into the close with market talk of an imminent Hilsenrath/WSJ article (supposedly about the Fed’s worry over increasing rates) driving rates off the day’s wides, closing at 2.825%.
2---Analysis: Higher prices sap foreign interest in U.S. real estate, Reuters
Foreign investors, who rapaciously scooped up U.S. real estate during the 2007-2009 recession, are backing away from the same markets they so eagerly jumped into a few years ago.....
International sales of U.S. residential real estate dropped by $14 billion to $68.2 billion for the 12 months ending in March, the latest data available from the National Association of Realtors. Foreign purchases comprise 6.5 percent of the $1.050 trillion in total U.S. existing home sales.
Sluggish foreign economies and unfavorable exchange rates are reasons behind the decline, the NAR said. That hurts cities dominated by foreign buying but has little impact on large stretches of the country.
The NAR recorded buying from 68 countries, with Canada, China, Mexico, India and the United Kingdom accounting for about 53 percent of the transactions in the year ending in March.
At 23 percent, Canada took in the largest share. But real estate website Trulia.com said Canada's share of foreign-based searches of its site fell 9 percent year-over-year in the second quarter.
The dollar is up more than 2 percent versus the Canadian dollar in the last six months. That's a reversal from 2012, when the dollar fell 2.7 percent against the Canadian dollar, commonly called the loonie because of the image of a waterfowl engraved on the coin.
"Due to higher prices and a falling loonie, I decided to hold off on buying in Miami," said Norm Glick, a Canadian investor who owns property in Lake Worth, on Florida's east coast. "Miami is no longer the bargain it was a mere year ago."
About 45 percent of Miami's real estate is owned by foreigners, said Brigitte Lina Lombardi, an associate at Keller Williams Elite Properties, and home prices there gained over 14 percent year-over-year in May.
"About 25 percent of foreign investors who bought in Miami between 2009 and 2012 are not purchasing anymore because of the increase in price," she said. "Now they are thinking to sell."
3---Bond bubble finally bursting? CNN
Worries that the central bank could taper its $85 billion a month in bond purchases, or quantitative easing, as early as September has spurred a huge sell-off in bonds...
Investors have yanked nearly $20 billion from bond mutual funds and exchange traded funds so far in August. That's the fourth highest pullback ever, according to TrimTabs data. In June, investors took out $69.1 billion -- the highest on record.
The heavy selling has pushed long-term bond rates to two-year highs, with the benchmark 10-year Treasury yield nearing 2.87%.
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"As much as bond professionals say they've never really liked QE, they're trading as though they miss it already," said Jim Vogel, interest rate strategist at FTN Financial.
Concerns about the Fed tapering have hit stocks as well. The Dow Jones industrial average, the S&P 500 and the Nasdaq have dropped for two consecutive weeks.
4---India Rupee Sinks to Record Low, Bonds Drop on Fed Taper Concern, Bloomberg
(QE wind-down unleashes Hell on EM currency. Here come the bandaid capital controls followed by currency crisis.)
India’s rupee plunged to a record low on speculation a strengthening U.S. economy will prompt the Federal Reserve to pare its $85 billion of monthly bond purchases as soon as next month. Government bonds declined.
The Bloomberg Dollar Index climbed 0.5 percent last week as data showed U.S. jobless claims decreased to their lowest level since 2007 and retail sales rose for a fourth month in July. The Fed may taper its stimulus in September by $10 billion, according to the median estimate of economists in a survey concluded last week. The central bank will release minutes of its July 30-31 meeting on Aug. 21.
The rupee slid as much as 1.3 percent today to an unprecedented 62.4600 per dollar and traded at 62.3138 at 10:00 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. It weakened 1.3 percent last week.
“The rupee is reacting to the strength of the dollar globally and I think the weakness in the local currency will persist,” Ashtosh Raina, head of foreign-exchange trading at HDFC Bank Ltd. in Mumbai, said by phone. “None of the efforts by the government and the central bank seem to be having any impact.” ...
The Reserve Bank of India on Aug. 14 announced measures to limit foreign-currency outflows from local companies and residents, and boosted efforts to lure investment. India will seek to increase capital inflows with steps including allowing state-owned financial companies to issue “quasi-sovereign” bonds to finance long-term infrastructure investment, Finance Minister Palaniappan Chidambaram said Aug. 12.
5---We’re Building a Domestic Army” – Marine Corps Colonel Peter Martino Before Concord, NH Town Council, naked capitalism
6---Repo Market Decline Raises Alarm as Regulation Strains Debt, Bloomberg
Regulations aimed at reducing the risk of another financial crisis are starting to upend a key part of the bond market that expedites trading in everything from Treasuries to junk bonds.
The U.S. repurchase, or repo, market where banks and investors borrow and lend Treasuries and other fixed-income securities shrunk to $4.6 trillion daily outstanding last month, down 35 percent from a peak of $7.02 trillion in the first quarter of 2008, based on Federal Reserve data compiled from its 21 primary dealers.
From fewer repos to lower inventories of bonds, financial institutions are responding to more stringent capital standards imposed by regulators around the world. Already, the group of dealers and investors that advise the U.S. Treasury say that they see declines in liquidity in times of market stress, including wider gaps between bid and offer prices and the speed of completing trades. The potential consequences are higher borrowing costs for governments, companies and consumers.
“During the market selloff over the past few months, those rules, a lot of which are just proposed or not yet taken effect, already impacted dealers’ willingness to take on inventory of Treasuries, investment grade corporates to emerging market debt,” Gregory Whiteley, who manages government debt investments at Los Angeles-based DoubleLine Capital LP, which oversees $57 billion, said in an Aug. 14 telephone interview. “That exacerbated the intensity of the selloff.”
Bond LossesDealers are cutting back at the same time volatility is rising amid speculation an improving economy will cause the Fed to reduce the $85 billion it’s spending every month to buy bonds in an effort to boost the economy.....
Repos are part of the non-bank, or “shadow banking,” sector. Banks use repos to help finance investments in Treasuries, corporate bonds and mortgage-backed securities. Money-market funds such as those used by individuals to park cash and savings, are a major provider of repo financing.
“The repo markets are really the grease in many financial market systems,” Josh Galper, the managing principal of securities-finance consultant Finadium LLC in Concord, Massachusetts, said in an Aug. 14 telephone interview. “Any increased friction in fixed-income markets, such as decreased repo or increased taxation, and the outcome usually is much less liquidity in government-bond markets, higher costs to borrow, more volatility and less security.” ...
Even though Fed data show primary dealers trade almost $600 billion of Treasuries each day on average, making the market the deepest, most liquid in the world, prices suggest constraints on bank balance sheets are having an impact on trading. ...
The repo market is also shrinking as the Fed scoops up Treasuries through its monthly bond purchases. The central bank owns about 17 percent of the market
7---Cameron Proves Greenwald Right , Andrew Sullivan
(terror laws used to attack political enemies)
8--- At least 25 policemen were killed Monday when assailants ambushed two minibuses carrying security personnel in Egypt's north Sinai Peninsula, which shares a border with Israel and the Gaza Strip and has been a restive center for militant activity, USA Today
9---And the rich got richer, Guardian
(The class war that fuels the revolution.)
Egypt is lauded as a poster child for neoliberal reform. But few of its people have enjoyed the spoils of the boom...
Since 1991, the year Egypt yoked itself to an IMF structural adjustment programme and embarked on a series of wide-ranging economic reforms, the country has been something of a poster child for neoliberal economists who point to its remarkable levels of annual GDP growth as proof that "Washington consensus" blueprints for the developing world can work. Coming on the back of an economic crisis precipitated partly by profligate government spending on arms sales (subsidised by US aid), the regime of President Hosni Mubarak signed up to an IMF loan that was conditional on economic liberalisation. Those conditions – relaxed price controls, reduced subsidies, an opening up of trade – were met with gleeful abandon.
Ever since, the country has been subject to successive waves of neoliberal reform. In 1996 a huge privatisation drive kicked off – resulting in sham sales to public banks and regime cronies, a rapid deterioration of working conditions and a wave of strikes so powerful that one analyst labelled it the largest social movement seen in the Middle East in half a century.....
Then 2004 brought a new cabinet which swiftly cut the top rate of tax from 42% to 20%, leaving multimillionaires paying exactly the same proportion of their income into government coffers as those on an annual salary of less than £500. Special economic zones were created, foreign investment reached dizzying heights ($13bn in 2008) and, in the past three years, economic growth has clocked in at a consistently high 7%. The minimum wage, incidentally, has remained fixed at less than £4 a month throughout. The global business community applauded Mubarak's rule as "bold", "impressive" and "prudent".
So Egypt is now a glitzier, more prosperous land with pharaonic-style riches to match its pharaonic-style leader (now entering his 29th year in power). Except, as the GAFI report inconveniently points out, 90% of the country has yet to see any of the bounty. Foreign investment has been largely channelled into sectors like finance and gas which create few new jobs. While national resources like natural gas have been sold at subsidised rates to the tycoon owners of iron and fertiliser factories, the cost of ordinary commodities like bread and cooking oil has spiralled. In fact since the IMF began hauling Egypt's economy into modernity, Egyptians have got steadily and dramatically poorer: when structural adjustment began 20% of the population were living on less than (inflation-adjusted) $2 a day; today, that figure stands at 44%. In the past decade, when GDP growth was at its strongest, absolute poverty has climbed from 16.7% to almost 20%. Chomsky called neoliberalism "capitalism with the gloves off"; it's hard, looking at this jumble of statistics, to discern anything but a shameless hit-and-run job perpetrated by a tiny band of Egypt's business elite.
10--Corporate Valhalla--No regulations, low taxes, no labor laws, Economist
Big companies, for instance, want to have more freedom to fire full-time workers, which is almost impossible in Japan. But politicians fear this would lift unemployment and increase inequality—and have in effect ruled it out at a national level for now. Testing such reforms in special zones is politically easier. And once the benefits become clear, champions of the zones argue, the rest of the nation would clamour to follow.
Recent reports suggest that the reforms to be tried could indeed be far-reaching, and even include measures letting firms fire workers with severance pay. Another idea is to create a giant special agricultural zone on the island of Hokkaido, where firms would be allowed to own farmland, not just rent it. That would help modernise Japan’s agriculture, now dominated by part-time tillers with tiny plots of land (such a step has been ruled out for the country as a whole, since the farming lobby wields much political clout).
11---US Bond Funds get slammed again: $19.7 billion were yanked out of mutual and exchange-traded bond funds so far in August, which makes it already the fourth highest on record, though the month is barely half over. Since June, bond funds suffered $103.5 billion in outflows, or 2.7% of their assets. Treasuries have gotten hammered last week (see below), and Monday is starting out rough as well, with the yield on the 10-year note rising to 2.86%. How will higher borrowing costs, including mortgages and auto loans, impact the immensely leveraged US economy? They won’t, apparently, if you look at stock-market players, who are exuberant: margin debt of $377 billion remains just under its all-time high, and significantly above the prior highs just before the dotcom blowup and the Lehman moment. No fear! A scary thought.
12---Austerity in the US (gov spending edition), Bus Insider
13---Mortgage rates on march to 5 percent, inmannews
14---Obama Bubblewatch: The next crash is only a matter of time, Bloomberg
Some investors, such as Mohamed El-Erian, Pimco’s co-chief executive officer, argue that a bubble may be emerging. “We see artificial pricing in virtually every asset class,” he said. ....
The president’s concerns also are evident in appointments to economic-policymaking posts. In February, Jeremy Stein, a Fed governor Obama named to his post in 2011, warned of potential “overheating” in credit markets.
Greater Risks“A prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage,” Stein said.
The extra yield investors demand to hold speculative-grade or junk bonds rather than investment-grade corporate debt has narrowed over the past year from more than 4 percentage points to 3.2 percentage points, according to the Bank of America Merrill Lynch’s US High Yield Master II Index.
Sarah Bloom Raskin, a Fed governor nominated by Obama to be deputy Treasury secretary, highlighted the need for regulatory policy to prevent the emergence of asset bubbles and make the financial system more resilient.
“Asset bubbles are a feature of our financial landscape,” she said at a Washington luncheon in July. “What happened before could happen again.”
While economists are more concerned with inadequate growth, there’s reason for vigilance. Thanks to low borrowing costs, U.S. companies have issued $241 billion in junk bonds this year, more than twice the amount during the same period in 2007; investors’ use of borrowed money to buy stocks is up about one-third in the past year to a near record, and housing prices are surging in areas such as Las Vegas and Phoenix.
U.S. stocks also are near record highs, with the Standard & Poor’s 500 Index rising about 16 percent so far this year.
Republican opposition to increased government spending has left monetary policy to bear most of the burden of spurring the economy. The Federal Reserve has kept interest rates near zero for almost five years and expanded its balance sheet to more than $3.6 trillion, up from about $900 billion at the time of Lehman Brothers’ bankruptcy in September 2008.
Republicans and firms such as Pacific Investment Management Co., manager of the world’s largest bond fund, have criticized the Fed for fueling potential bubbles with easy credit and through its asset-buying program known as quantitative easing.
Obama doesn’t share that criticism, saying in June that Bernanke has done “an outstanding job.” The president sees bubbles arising from other causes. Chief among them: an increasingly skewed distribution of income.
“When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy,” the president said in a July 24 speech.
Both the White House and Fed have acted to prevent another bubble. Bernanke told a Senate committee on July 18 that Fed officials are watching for signs of deteriorating credit standards, such as weaker loan covenants, that could signal destabilizing financial imbalances.
15---Abenomics: making matters worse, quartz
The Abenomics conundrum: Exports surge, but imports surge more
16---Researchers Say Weak Job Growth to Slow Down New Housing , DS News
17---Mortgage Applications Plummet Throughout July , DS News
18---Drastic growth in “extreme poverty” in US, wsws
19---Five years after the financial crash, global economy continues to weaken, wsws
The Financial Times reported last week that, according to Fitch Ratings analyst Charlene Chu, a study of China’s so-called shadow banking sector had revealed that the country’s total debt could be as much as 200 percent of gross domestic product. Chu warned that the banking sector as a whole was more exposed to shadow banking loans than most people realised. She estimates that the assets of the Chinese banking system expanded by $14 trillion between 2008 and 2013, equivalent to the size of the entire US banking system.
Official figures show that non-performing loans held by Chinese banks rose by $2 billion in the second quarter, the seventh quarterly rise in a row.
The growing financial problems of India--another economy that used to be regarded as a potential centre for global growth--could well be a sign of what is to come elsewhere. There are fears that its worsening economic slowdown--with economic growth predicted to come in at only 5 percent this year, half of its level three years ago--could be increasing the debt burden of some of the country’s biggest industrial companies.
The Indian financial system is being hit by a capital flight which last week saw the reimposition of capital controls in a bid to try to halt the fall in the value of the rupee.
The Indian economy is being hit by what the Financial Times described as a “toxic combination of a falling rupee, a sharp slowdown in growth, swollen current account and budget deficits and persistently high inflation.”
India is not the only emerging economy that faces growing financial problems. The expectation that the US Federal Reserve will soon begin to “taper” its purchases of US Treasury bonds, the centrepiece of the program of “quantitative easing,” possibly as early as next month, has triggered capital outflows from other regions as well. Besides India, Indonesia, which has also been touted as a new growth centre, is experiencing growing financial problems.
Markets across Asia experienced falls last week amid fear that that Fed “tapering,” which will lift interest rates in the US, could see the movement of capital back into American financial assets. The danger is that the present capital outflow could turn into a flood once “tapering” begins.
In 1997-98, the collapse in the value of the Thai baht sparked the collapse of a financial bubble across Asia, the regional economic consequences of which were equivalent to the impact of the Great Depression in the major capitalist economies.