Thursday, July 14, 2016

Extra Links--Bond Mania

1--Corporate bond defaults cross 100, highest level since crisis


Corporate bond defaults have just crossed an ominous milestone.

Fully 100 companies have defaulted on debt, 50 percent more than for the same period in 2015 and the highest level since 2009, according to S&P Global Ratings.


2--Investors Now Pay Germany to Borrow for 10 Years


Yields in the U.S., Europe and Japan have been plummeting as investors pile into government debt in the face of tepid growth, low inflation and high uncertainty, and as central banks cut rates into negative territory in many countries.

In the U.S., a $12 billion sale of 30-year Treasury bonds attracted stellar demand Wednesday despite a record-low yield of 2.172%, which smashed the previous low of 2.43% set in January 2015. Indirect bidding, a proxy of foreign demand, surged to 68.5% of total bids at the sale.


Eurozone countries, including Germany, have sold shorter-dated bonds at a negative yield before, and Switzerland and Japan have issued 10-year bonds at yields below zero. But the 10-year bund is considered the benchmark issue in Europe, a region that is riven with economic insecurity...

For investors, it means they are now paying for the privilege of lending money to Germany for 10 years, in the sort of upside-down math that is rewriting economics textbooks.

These yields are “symptomatic of serious structural problems with the global economy,” said Daniel Loughney, a portfolio manager at AllianceBernstein. “Clearly this poses a serious predicament for investors, as investing in [a] negative-yielding instrument is impossible to justify from a buy and hold perspective.” ...


Overall, there is now about $13 trillion of global negative-yielding debt, according to Bank of America Merrill Lynch. That compares with $11 trillion before the Brexit vote, and barely none with a negative yield in mid-2014.

The free fall in yields on developed-world government debt is also dragging down rates on global bonds broadly as investors fan out further in search of income, including in emerging markets and in corporate bonds.

The average yield on euro-denominated investment-grade corporate debt has almost halved to 0.77% from 1.41% at the start of the year, according to Barclays’ Euro-Aggregate Corporates bond index, which has an average maturity of just under six years. ...

Meanwhile, many believe yields will continue to fall.

“What we are seeing at the moment is an overshooting in the demand for such [government] paper, so it is difficult to call the bottom for yields at this time,” said Jürg Bretscher, portfolio manager for the Vontobel Fund-Swiss Franc Bond


3--Why Ultralow Interest Rates Are Here to Stay


While central-bank bond buying is the proximate cause of a plunge in U.S. Treasury yields, the drop represents the cost of economic and political choices made over decades ...

Companies have been borrowing at a record clip, thanks to low rates. Yet capital investment is sagging, while share buybacks have flourished in a return to the financial engineering that we were supposed to have forsworn. The Dodd-Frank financial overhaul shored up U.S. banks, but at the expense of tighter credit that has hampered recovery ...

Global debt hit 235% of gross domestic product at the end of 2015, the Bank for International Settlements estimates, up from 212% on the eve of the financial crisis. The figures reflect private, nonfinancial borrowing in the corporate and household sectors.

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But even in the U.S., where substantial deleveraging has taken place in the household and banking sectors, total debt has been on the rise. U.S. debt hit 251% of GDP at the end of 2015, the BIS said, up from 228% in 2007. Government debt in the U.S. has risen to 100% of GDP from 60% over that span, reflecting in part the costs of cleaning up the 2008 meltdown....

Inflation-adjusted U.S. median household income has fallen 7% from its 1999 high to $53,657. Food-stamp use has more than doubled, to 43.6 million people


4--Lessons From the Land of the Weirdest Markets


Investors looking for ways to navigate a world of low and negative interest rates should study Japan’s example


5--35-Year-Old Bond Bull Is on Its Last Legs

There is a limit to how negative yields can go before money becomes meaningless


That hasn’t stopped Eric Lonergan, who runs a multistrategy fund for M&G in London. He has 15% of his fund betting against long-dated JGBs, and has endured a brutal move in the market against him in the past few weeks. Yet, he believes the likelihood is that the market will soon turn....

there is a limit to how negative yields can go before money becomes meaningless. This means investors switch to holding physical cash, even with all the risks and inconvenience it brings. The limit could be removed by abolishing bank notes, but such radical action would cast doubt on the entire currency, and surely prompt a flight to gold.
Reversing the 35-year trend is most likely to be driven by governments loosening the purse strings. Central bankers have been urging such fiscal stimulus as they worry that their own monetary tools are having damaging side effects, hurting banks and risking share- and property-price bubbles....

It is dangerous to try to time the end of a bubble, as prices can always get even more disconnected from reality. Sometimes it really is different this time, too. But investors thinking of buying bonds at record-low yields should worry both about short-term excess and a long-term change in politics.

6--The Fed’s New Froth Problem  From an economic standpoint, it makes sense for the Federal Reserve to hold off on rates; but then there’s what’s happening with asset prices


The past few weeks have been very good for the Fed. Its Brexit worries proved prescient and its inaction on rates this year looks like a canny prediction of slowing growth and weaker currencies overseas. The risk is that asset prices keep soaring, potentially setting markets up for a crash when the Fed does move....

Moreover, expectations that the Fed won’t tap the brakes may only increase the attractiveness of U.S. assets for global investors. That may be one of the factors behind the rally in stocks, and part of the reason why yields on junk bonds have fallen to their lowest point against Treasurys in nearly a year. Prices for other income-generating assets, such as commercial property, could also get bid higher


7--Bernanke Floated Japan Perpetual Debt Idea to Abe Aide Honda


Etsuro Honda, who has emerged as a matchmaker for Abe in corralling foreign economic experts to offer policy guidance, said that during an hour-long discussion with Bernanke in April the former Federal Reserve chief warned there was a risk Japan at any time could return to deflation. He noted that helicopter money -- in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them -- could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option, he said.

Though Honda said he thought Japan was already engaged in a strategy that involved helicopter money, he wanted to convey the idea to Abe and asked Bernanke to meet with the premier in Japan. While this didn’t happen in the spring, Bernanke joined central bank chief Haruhiko Kuroda over lunch this Monday and on Tuesday he attended a gathering with Abe and key officials, including Koichi Hamada, another influential economic adviser....

Bernanke at the Tuesday meeting said Japan should carry on with Abenomics policies by supplementing monetary policy with fiscal stimulus, according to Hamada. Bernanke told Abe that the BOJ still has instruments to further ease monetary policy, said Yoshihide Suga, Japan’s top government spokesman. The central bank didn’t reveal what Kuroda and Bernanke discussed.
Hamada said helicopter money wasn’t mentioned with Bernanke on Tuesday. Suga denied an earlier report in the Sankei newspaper that officials around Abe were considering helicopter money as a policy option.....

Bernanke at the Tuesday meeting said Japan should carry on with Abenomics policies by supplementing monetary policy with fiscal stimulus, according to Hamada. Bernanke told Abe that the BOJ still has instruments to further ease monetary policy, said Yoshihide Suga, Japan’s top government spokesman. The central bank didn’t reveal what Kuroda and Bernanke discussed.
Hamada said helicopter money wasn’t mentioned with Bernanke on Tuesday. Suga denied an earlier report in the Sankei newspaper that officials around Abe were considering helicopter money as a policy option....

“I told him now is the time for Japan to expand fiscal spending and at the same time, additional monetary easing should be taken,” Honda said. “I told him it is necessary to strengthen the effects of Abenomics” through such a strategy....

"I do not believe that there is any credible scenario in which Japanese government debt can be repaid in the normal sense of the word repay," according to Turner. “It would therefore be useful to make clear to the Japanese people that the public debt does not all have to be repaid, since some of it can be permanently monetized by the Bank of Japan.”

8--Uber wealthy hoarding cash


9--Investors keep record cash on U.S. election fears: UBS executive

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