Godzilla Alert! Trillion-Dollar Monster Lurks as Bonds Price Out Duration Risk (Historic High Risk!)

So much for MMT (modern monetary theory) where deficits and debt don’t matter. Size and quality of debt DOES matter. Just look at the interest rate risk of staggering debt loads, not to mention the credit risk!

(Bloomberg) — Investors riding easy-money policies are breeding a trillion-dollar monster in the bond market, the likes of which has never been seen in decades of history.

Wall Street will tell you it’s low risk for now — one that’s been hyped-up for years. But on the current trajectory, just a modest bump in yields near record lows could inflict a world of pain for traders all over the globe.

Dovish monetary bets, relentless demand for safe assets and conviction in the lowflation era are spurring money managers to gorge on long-maturity bonds, or duration risk.

One measure of the relative compensation investors receive to hold longer-dated obligations is a whisker away from a 58-year low. Over in Europe, they’re taking a century of risk for yields barely above 1% in order to escape a $13 trillion global stockpile of negative debt.

All that is leaving duration, a measure of sensitivity to interest-rate changes, near all-time highs across sovereign debt markets. As hopes rise of a U.S.-China breakthrough on trade, bond bulls could suddenly find themselves on the backfoot.

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And the interest rate volatility cube seems to be giving the middle finger to investors.

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Debt now emerges as the new Godzilla in the room.

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Grim Fandango! U.S. 2-Year Swap Spread Turns Negative (First Time Ever!!)

As central banks like the US Federal Reserve try to counter a sagging global economy (and preserve asset bubbles), strange things begin to happen. Like the US 2-year swap spread going negative for the first time ever!

(Bloomberg) — The U.S. 2-year swap rate moved below the 2-year Treasury note’s yield for the first time ever Tuesday after 3-month dollar Libor’s latest drop, turning the 2-year swap spread negative. It was the last tenor on the swap spread curve to fall below zero.

Currently around -0.25bp, 2-year spreads dropped as low as -0.5bp, tighter on the day by 1bp; spread is tighter by ~12.5bp since the start of May

3-month dollar Libor fixed lower by 2.16bp at 2.31125 Tuesday, lowest since August 2018
A combination of higher general collateral rates, overseas selling and hedging flows have weighed on front-end spreads over the past couple of months;

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Here is the US Dollar Swap Curve and the Swap Spread curve.

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Is this a Grim Fandango?

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US New Home Sales Tank 7.8% MoM As Interest Rates Drop And Home Price Growth Slows

US New Home Sales dropped 7.8% MoM in April to 626k units SAAR.

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Notice that new home sales YoY are down 3.7% while median prices for new home sales are down 2.7% YoY. New home sales YoY peaked in 2012 and have been slowing cooling.

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And new home sales are declining despite declining mortgage rates.

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Bitcoin And Gold Zooming Through The Roof (While Switzerland’s Yield Curve Is Negative At 30-Years)

Once again, crypto currencies are generating interest. Check out Bitcoin~

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But this time around, Bitcoin has a competitor: Gold. Both are racing through the roof!

All is well? Check out the Swiss sovereign curve (in Swiss francs!) Negative at 30-years and in.

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The Swiss apparently love Facebook’s crypto entry, Libra. So much so that Facebook is setting up their crypto shop in Switzerland

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The Fed’s Little Red Book … Of Asset Bubbles: Commercial Real Estate Prices Have Over Doubled Since Post Financial Crisis Low (Equity REITs Have Quadrupled)

No, not The Fed’s little beige book. This is The Fed’s little red book of assets bubbles.

Speaking of asset bubbles, the RCA CPPI commercial real estate index has over doubled since May 2010 (that is just over 9 years!). And the NAREIT all-equity index has over quadrupled since 2009. Notice the lack of volatility in the RCA CPPI index.

The S&P 500 Index has over tripled since 2009 and the Russell 2000 index has almost quadrupled since 2009.

The math is pretty simple. Real estate equity and stock market indices have doubled to quadrupled since 2009/2010.

7 + 7 is …

Gold Achieves Liftoff as Prices Rocket Toward $1,400 an Ounce As Fed Rate Cut Probability Increases

(Bloomberg) Until this month, gold held claim to the title of being one of the most boring asset classes. Prices barely budged and popularity was fading.

Now that’s all changed. Over the past few weeks, a clear bull case has started to emerge. A key resistance level has broken. Investors are pouring money into exchange-traded funds. The dollar is weakening and the Federal Reserve seems to be charting a path to cut interest rates. China is on a buying spree to stock up reserves.

“It has been a long wait,” said Mark O’Byrne, research director at GoldCore Ltd. “Gold has finally broken out, we nearly touched $1,400.”

Gold rose as much as 2.5% Thursday to the highest since September 2013, and traded at $1,381.64 an ounce at 1:03 p.m. in London.

Yes, gold prices are rising as the odds of a Fed rate cut increase.

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The odds of a Fed rate cut (from Fed Funds futures) is 100%. Only the size of the cut is unknown. But it looks like two cuts by September.

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It looks like there is a disturbance in the force (or at least Fed Funds 30 day volatility).

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Look at the 10 Delta Call at December maturities for gold!

Gold ETFs are booming again!

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Fed Leaves Rates Unchanged, Dots Plots Signal Rate Increases After 2020 (Inflation Still Below Fed’s Target)

Today, the Federal Reserve’s Open Market Committee (FOMC) met and revealed … no change to rates. BUT are willing to cut more than 25 basis points at the upcoming meeting on July 31 (more flexibility).

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The FOMC’s Dots Plot (where members think rates will be in the future) is expected to rise after 2020. (Thanks to Rudy Havenstein!)

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The economy is generating only 1.5% core inflation, below The Fed’s target rate of 2%.

On the announcement of no rate cuts and a possible rate cut of 50 basis points in July, both the 10-year and 2-year Treasury yields declined.

10-year Treasury Note.

2-year Treasury Note.

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Fed Funds volatility surface? Looks like a Tsunami!

Where is the inflation??

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Don’t Panic! Mortgage Purchase And Refi Applications Drop 5% and 3.5% Despite Plunging Mortgage Rates (Seasonal Effect)

Don’t panic. It is June. Mortgage purchase applications typically peak in May and it is generally downhill from there until the beginning of January.

Mortgage purchase applications dropped 5% for the week ending June 14. Mortgage refi applications dropped 3.5%.

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Mortgage purchases applications have been trending down since 2007 until 2015 when they began rising again. Note that mortgage originations with FICO scores below 620 also plunged after 2007.

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Mortgage purchase applications rose after the first of the year with declining mortgage rates, but that happens every year (even when rates rise!). But mortgage purchase application are remaining strong relative to previous years, likely due to declining mortgage rates.

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Mortgage refi applications declined 3.5% WoW as mortgage rates were steady. But we are not seeing the surge in refi applications with a large decline in mortgage rates since the pool of eligible refi applications has shrunk.

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So, don’t panic! The Fed is likely going to cut their target rate again in July.

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Twilight Zone? Treasury Yields Flirt With 2% As Draghi and Trump Whipsaw Bonds (Negative Yield Global Bonds Near $12.2 TRILLION)

The US-China tariff squabble is definitely roiling markets, but the global economic slowdown (read Europe) is helping push interest rates into The Twilight Zone.

(Bloomberg) — Government debt markets surged worldwide on Tuesday on the growing prospect of central-bank stimulus amid concern about dimming global growth. The move lost some steam on signs of apparent thawing in U.S.-China tensions.

Benchmark 10-year Treasury yields slid as much as 8 basis points to 2.01%, the lowest level since 2017, as comments from European Central Bank President Mario Draghi dragged down rates across Europe. French, Swedish, German and Austrian 10-year yields fell to unprecedented lows. The move in Treasuries was briefly reversed, in part, following news that the U.S. and Chinese presidents will meet at the upcoming Group-of-20 summit in Japan, assuaging some market concerns about the fractious relationship between the world’s two largest economies.

Federal Reserve officials, who are due to deliver a policy decision on Wednesday, are confronted by a market that is pricing in a quarter point interest-rate cut by July and around 62 basis points of easing by the end of this year. Comments from Draghi that additional stimulus may be needed if the economic outlook doesn’t improve added fuel to bets on ECB rate cuts, and in turn helped spur speculation that the U.S. central bank will act too. The 10-year yield was around 2.05%, down 4 basis points on the day, as of 11:48 a.m. in New York, while U.S. equities also climbed.

“Draghi’s comments were one more indication that one of the major central banks will likely begin another round” of monetary support, said Mark Grant, chief global strategist of fixed income at B. Riley FBR Inc. “This gives the Fed one more reason to consider cutting rates because the American rates are so much higher than those in Europe or Japan. U.S. 10-year yields are headed lower.”

The ECB is grappling with an economic slowdown and an inflation rate that remains entrenched below its goal. In the U.S., the Fed is faced with inflation running persistently below the Fed’s 2% target, falling inflation expectations and signs that the labor market is beginning to slow.

And the global stockpile of negative yield bonds is near $12.2 TRILLION.

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Europe is really seeing plunging sovereign yields with Sweden now in negative yield territory at the 10-year maturity.

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But negative interest rates don’t seem to be helping European economies.

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US Housing Starts (1-unit) Fall 6.4% In May Despite Mortgage Rates Falling To 3.99% (Jay Powell To The Rescue?)

The housing starts report for May was dismal. 1-unit housing starts fell 6.4% from the previous week despite mortgage rates breaking through the 4% barrier to 3.99%.

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At least 1-unit starts got one surge from declining mortgage rates in January 2019.

Will The Fed’s Jay Powell come to the rescue?

Go Jay Powell! Go Jay Powell!

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