Huge Demand For 20Y Treasuries At Auction!

One month after the first 20Y auction in 34 years, the 20Y auction priced at a yield of 1.22% amid surprisingly strong demand. Moments ago, the Treasury sold its second batch of the recently restarted 20Y Treasury in the form of a $17 billion reopening of the original cusip (SR0), which priced at a high yield of 1.314%, which while higher than last month’s 1.22% yield was unexpectedly strong, stopping through the When Issued 1.329% by 1.5bps.

The auction metrics are as follows:

  • Bid to Cover: 2.63x, compared to 2.53x in the inaugural auction last month
  • Indirects: 61.6%, higher than last month’s 60.7%
  • Directs: 16.5%, also well above May’s 14.7%
  • Dealers: 21.9%, obviously lower than last month’s 24.6%

The 20Y Treasury appears at near the peak of the Treasury yield curve

Fear The Walking Dead … Corporations! Zombie Firms Now 18.9% Of All Firms

Another example of the damage done by government shutdowns over the COVID-19 “epidemic.” The percentage of firms that are zombies is now at 18.9%.

“Zombies” are firms whose debt servicing costs are higher than their profits but are kept alive by relentless borrowing, according to Axios.

Also helping the rise of corporate zombies and debt is the endless liquidity and low rates from The Federal Reserve.

When nearly 1 in 5 firms are zombies, it is time to re-open the economy.

Fed Will Begin Buying Broad Portfolio of U.S. Corporate Bonds (Will Munis, Stocks and Residential Real Estate Be Next??)

Well, it was only a matter of time with foreign central banks buying corporate bonds … and stocks.

(Bloomberg) — The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.

The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.

“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”

The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

The Federal Reserve announced Monday it will begin purchases of individual corporate bonds.

The move comes nearly three months after first unveiling the Secondary Market Corporate Credit facility and one month after it began buying corporate-credit ETFs through the program.

The central bank will “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release. (Like Fed Chair Jerome Powell’s portfolio?)

The Fed’s late-March announcement of its move into corporate bond purchases set a floor for risk assets and helped valuations rebound from their pandemic-induced lows.

Speaking of setting floors on risk assets, does that apply to ETF or residential housing too? How about municipal bonds debt like Chicago’s??

Fed Chair Jerome Powell channeling Thurston The Great Magician!

St. Louis Fed researchers say negative interest rates may be needed for economic recovery (L-shaped recovery and the mortgage market?)

Market Watch: Federal Reserve officials from Chair Jerome Powell on down have been pretty consistent in their scorn toward negative interest rates, even as the market briefly priced in the expectation that U.S. rates would fall below zero.

That criticism takes two forms — one, Fed officials say evidence doesn’t show much effectiveness where they have been tried, and two, negative interest rates might throw markets, such as those for money markets, into turmoil.

So it’s notable, if not a signal of future intention, that a publication from the St. Louis Fed argues in favor of negative interest rates.

Like Rudebusch’s -13.52% Fed Funds target rate?

But don’t get your hopes up for negative mortgage rates. At best, 30-year mortgage rates will shadow the already low 10-year Treasury yield. It really depends on how the 10-year Treasury yield responds.

Lowering the Fed Funds Target rate to negative territory may simply steepen the US Treasury yield curve. Or flatten it like in Japan. Note that the Japanese 10-year sovereign yield is .01% and Japan mortgage rates are around 0.440%.

Ignoring the damage done to savers (how low will CDs and deposit rates drop?), the US will likely not see actual negative mortgages.

Fed Chair Jerome Powell will resist negative target rates.

Stimulypto! Atlanta Fed GDPNow For Q2 Plunges To -51.2 Percent As Stimulus Boosts Incomes But Not Spending

Fed Chair Powell Participates in Virtual Discussion
* Powell says Fed ‘days away’ from Main Street lending
* Negative not ‘appropriate’ for U.S., he says
* A second virus wave would undermine confidence
* Fed works in ‘strictly nonpolitical way’

The massive stimulus known as the CARE Act (and massive Fed stimulus) did not work as hoped. Consumer spending in April declined by 13.6% MoM.

Personal income rose 10.5% MoM as intended, but personal spending did not work as planned.

The Atlanta Fed GDPNow forecast for Q2 US GDP is now below 50% at -51.2%.

And speaking of Powell’s proclamation that negative rates are not appropriate for the US, the Rudebusch (SF Fed) specification of the Taylor Rule says that the Fed Funds target rate should be -13.52%.

NY, NJ Lead USA In Mortgage Forbearance (Forbearance Is NOT Forgiveness)

Forbearance allows troubled mortgage borrowers to delay payments.

If you have a federally-backed mortgage, you simply need to contact your lender and let them know you won’t be able to pay your mortgage bill due to the current public health crisis. Lenders are required to approve forbearances regardless of your delinquency status.

Additionally, you won’t need to provide documentation such as costly medical bills or evidence of a job loss to prove your hardship when you apply, although you will want to demonstrate it later.

Through the CARES Act, you have the right to request forbearance for up to 180 days, with the possibility of another 180 days if you’re still under financial distress. As part of the relief program, you will also be given a mortgage payment reduction option, where future make-up payments will be spread out over 12 months or added to your mortgage payment once the reduction period is over.

As of March 18, the law also includes a foreclosure moratorium of at least 60 days which prohibits lenders and services from taking foreclosure-related eviction action during this period.

WHERE is forbearance prevalent? New York and New Jersey, of course. They lead the nation in COVID-19 cases as well.

Forbearance is NOT forgiveness, just a temporary restructuring of mortgage debt.

The face of forbearance, NY governor Andrew Cuomo (former HUD Secretary under Clinton).

Mortgage Purchase Applications Rise 9% YoY Even With COVID-19!

According to the Mortgage Bankers Association, the Refinance Index decreased 0.2 percent from the previous week and was 176 percent higher than the same week one year agoThe seasonally adjusted Purchase Index increased 9 percent from one week earlier. The unadjusted Purchase Index increased 7 percent compared with the previous week and was 9 percent higher than the same week one year ago.

Mortgage refinancing applications declined slightly by -.23% despite near historic low mortgage rates.

Take that, COVID-19!

My Kuroda! A 0.0000148% Yield on Bond Sale in Japan Is Exciting Investors (Student Loan Bonds)

Its a sad state of the world where investors get “excited” about a zero percent bond.

(Bloomberg) — A 0.0000148% yield drew strong demand for a bond offering in Japan, as investors clamor for safe debt amid the pandemic even if it pays them next to nothing.

Japan Student Services Organization priced 30 billion yen ($278 million) of two-year social bonds on Friday with a coupon of 0.001% and a price of 100.002 yen, which equates to the near-zero yield. Orders totaled about 2.5 times the amount sold, according to people familiar with the matter.

Japan has long been home to striking examples of how investors will grab at whatever yield they can find on safer securities, a trend that has gone global and been intensified by monetary easing to cushion economies from the economic damage caused by the Covid-19 pandemic. The securities from Jasso, an independent administrative agency that offers student loans, are rated AA+ by Rating & Investment Information.

Jasso’s bonds drew strong demand from investors who are raising their holdings of environmental, social and governance assets. Buyers ranged from pension funds, banks, shinkin banks and foreign investors, according to the people familiar, who asked not to be identified as the details are private.

The organization has a history of notable debt deals. It priced Japan’s first minus-yield agency bond last year, when it sold a note with a coupon of 0.001% and a price of 100.003 yen, working out to a yield of around minus 0.0005%. 

It is not that surprising since 2-year Japanese Government Bond yields remain in negative territory, as do JGB of maturities of 10-years or less.

My Kuroda!

US Existing Home Sales Plunge 17.8% In April, Worst Since 2010 (Lower-end Housing Hit The Worst)

According to the National Association of Realtors (NAR), US existing home sales in April plunged 17.8% from March, the largest drop since 2010.

Existing homes sales MoM is the white line, the Mortgage Bankers Association 30-year rate is the blue line.

Given how unemployment is differentially hurting lower-wage workers, it is not surprising that existing home sales in the $0-$100,000 range fell 33% in April.

While $500k-$750k home sales fell by “only” 12.2%.

Existing home sales inventory remains low while median home price of existing home sales rose 2% from March to April.

US Housing Starts Crash In April Thanks To COVID-19 Lockdown (Despite Declining Mortgage Rates)

US housing starts in April crashed to their lowest level since 2015 despite near-record low mortgage rates.

housingstartsomg

1-unit starts declined 25.4% from March to April. But it is the 5+ unit starts (apartment) that suffered a 40.31% MoM decline.

aprilstats

It appears that The Fed’s snake juice isn’t working.

snakejuice