“The Sag” In The US Sovereign And Dollar Swaps Curve Continues, But Germany, UK And Japan Curves Are Sagging Too!

It’s the same all over the world.

The US Treasury actives curve and dollar swaps curves are markedly sagged (or kinked).

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But other countries are experiencing curve sags as well, but just not as pronounced. Germany, Japan, UK and France are all sagging, but less notably.

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Numerous risks abound in the global economy such as Brexit, China trade disagreement, etc.

On the other hand, there is Venezuela which has entered a seemingly permanent sag.

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And the SAG award goes to … the USA for short-term SAG.

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The permanent SAG award goes to …. Nicolas Maduro and Venezuela.

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Evidence That Europe Is Slippin’ Into Darkness: 10Y German Sovereign Yields Lower Than Japan’s 10Y Sovereign Yields

Europe is slippin’ into darkness.

Evidence? 10-year German sovereign yields are lower than the major global low-yield leader, Japan.

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Of course, the European Central Bank is doubling down on its failed monetary policy.

Killer Bees: Banks And Other Corporations Still Feasting On BBB-Rated Debt

One of the byproducts of Central Banks low-rate policies (and corporate asset purchases) is the glut of BBB-rate debt (largely by energy companies such as Mexico’s PEMEX and the US energy company EPD). Banks also populate the B-rated bond list.

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Of course, one of the more interesting bond types is the contingent convertible bond or CoCo (also known as an enhanced capital note (ECN) is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs). Banca Santander is a Spanish bank that issues CoCo bonds.

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(Bloomberg) — The market for bank capital debt was shaken last month when Banco Santander SA defied precedent and declined the option to call a bond. Keep an eye on the next securities due to be called.

Santander skipped an option to call 1.5 billion euros ($1.7 billion) of perpetual contingent-convertible notes, or CoCos. The rationale was that current market-funding costs meant it could be cheaper to extend the existing notes than redeem them and sell new ones.

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As the ECB continues to repress interest rates, incentive remains in. Europe (and the US) to continue to issue corporate bonds .. and CoCos.

Inverted US Treasury Yield Curve: Signal Of Impending Recession Or The Fed Raising Its Target Rate Too Quickly?

The US Treasury Yield Curve inverted on Friday for the first time since 2007. The talking heads were stumbling and mumbling about its meaning.

Here is my explanation. It is a combination of an overzealous Federal Reserve AND a slowing US (and European) economy.

In short, The Federal Reserve has been raising its target rate relatively quickly (driving the 3-month Treasury bill yield up) as the 10-year Treasury note yield has been falling (particularly since November 2018). They met on Friday and passed each other. This view of the inverted Treasury yield curve is more about The Fed raising its target rate despite a declining 10-year yield.

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But another interpretation of the inverted curve is it is signal of an impending recession, the same way that household net worth (as a percentage of disposable personal income) peaks then falls prior to a recession (a tip of the hat to Jesse’s Cafe Americain!)

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So, it is really a combination of the two: an overzealous Fed and a slowing global economy

 

Deutsche Bank + Commerzbank = Ogre Zombie Bank (Nothing Plus Nothing = Nothing)

What do you get when you merge German zombie Deutsche Bank and zombie Commerzbank? An ogre zombie bank!

Or as Billy Preston almost sang, “Nothing Plus Nothing Equals Nothing.”

Both Deutsche Bank and Commerzbank are trading at under $10 or 10 Euros per share. This is down from over $100 per share for Deutsche Bank in the 2000s and Commerzbank was trading at over 200 Euros as well. How the once mighty have fallen.

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Earning per share for Deutsche Bank have plummeted despite efforts to revamp their business model.

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The same goes for Commerzbank.

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While Commerzbank hasn’t issued any contingent collateral (CoCo) bonds, Deutsche Bank has issued 4 CoCo bonds. Here is the 6% CoCo bond. The good news? Both CDS and the yield to maturity (YTM) have been declining in 2019, likely reflecting the expected merger of the two.

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The downside? Merging two large zombie banks creates an “Ogre Zombie” bank. One that the ECB and German government cannot permit to fail.

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An Occurrence At The Federal Reserve: Increased SMART Money & Equity Volatility, Crushed Bond Volatility

Ambrose Bierce wrote a short story about a man being hanged during the American Civil War and what went through his mind in his final moments. It is called “An Occurrence At Owl Creek Bridge.” Hauntingly similar to today’s plight: overoptimistic expectations before being hung, then …. snap.

In summary., Ben Bernanke and The Federal Reserve entered the markets in 2008 in force. The Fed Funds Target rate was raised once during President Obama’s two terms as President, but eight times since President Trump’s election as President. Plus, The Fed’s Quantitative Tightening (in terms of its balance sheet) begin in earnest in 2019.

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Once The Fed hurled its monetary weight at the economy in 2008, the stock market had an amazing run. but since The Fed started to raise rates and began their balance sheet unwind, the S&P 500 index has increased in volatility as has the SMART Money Flow Index.

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The bond market volatility indices have gotten crushed by central banks.

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On the real estate front, equity REITs, like the small cap Russell equity indices, seemed to be benefit greatly from The Fed’s Zero Interest Rate Policy and QE. Mortgage REITs, on the other hand, kind of died with the financial crisis and never recovered. The RCA CPPI commercial real estate index too off like a missile.

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Like in the Ambrose Bierce short story “An Occurrence At Owl Creek Bridge,” The Fed and other central banks are quitting any attempts at rate normalization (for fear that they might hear that dreaded “snap” at the end of the monetary rope].

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The Mummy Returns! ECB’s Draghi Raises Their TLTRO Program From The Dead To Combat Weak Euro Area Growth

The ECB’s Mario Draghi has decided to raise the dead (as in Modern Monetary Theory) by reviving the ECB’s Targeted Longer-Term Refinancing Operations.

Mario Draghi revealed the biggest cut in the European Central Bank’s economic outlook since the advent of its quantitative-easing program as policy makers delivered a new round of stimulus to shore up growth. The ECB president said the euro-zone economy will expand just 1.1 percent this year, 0.6 percentage point less than forecast in December. 

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The central bank will revive its Targeted Longer-Term Refinancing Operations to encourage banks to provide credit to businesses and consumers, and will hold interest rates at current record-low levels at least through the end of the year, several months later than previously indicated.

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The Euro declined on Draghi’s announcement.

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And most Euro area 10 year sovereign yields are down 5 basis points or more.

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Draghi must not read from the Modern Monetary Theory (MMT) book!

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Global Yield Curve Inversion (Same All Over The World)

An interesting chart of the 30-year sovereign yields less Fed Funds rate reveals that much of the world is in a state of global yield curve inversion. (Graph courtesy of the great folks at Crescat Capital).

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While the US is not in a state of yield curve inversion (except for the 1-5 segment), the US remains (for the moment) is positive territory.

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I prefer using the 10-year Treasury Note for curve analysis rather than the 30-year Treasury Bond.

One might observe that Treasury volatility measures are quite low … again.

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So, yield curve inversion is the same all over the world. The US seems to be on track to invert as well.

Fed Vice Chair Clarida Notes That Yield Curve Is Getting Flatter (But Inverted From 1 Year To 5 Years)

Former Columbia University economic professor and curret Fed Vice President Richard Clarida made one obvious point at a Dallas Fed meeting, and one half-truth.

(Bloomberg) — Federal Reserve Vice Chairman Richard Clarida said that when rates on shorter-dated bonds move above rates on longer-dated bonds, it can be a signal that an economic slowdown is coming.

“Historically in the U.S., inverted yield curves are actually pretty rare — they aren’t black swans, but they don’t happen a lot, and when they do happen that is typically a signal that the economy is either slowing sharply or could even go into a recession,” Clarida said Monday at an event at the Dallas Fed.

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Clarida drew a distinction between flat and actually inverted curves.

“Right now the yield curve in the U.S. is not inverted” but “it is getting flatter,” Clarida said. He noted that the Fed pays a lot of attention to whether the curve is flattening because of a fall in inflation expectations. And he said that monitoring the curve is complicated by the fact that U.S. markets are impacted by global demand for safe assets. “What happens in Europe and Asia can have an impact on our Treasury market, too.”

Well Professor Clarida, your statement is only partially correct. The US Treasury yield curve (green) is actually inverted from 1 year – 5 years. THEN upward sloping after 5 years. The US Dollar Swaps curve is inverted from 3 months to 4 years then upward sloping.

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Now, if you want to talk about a downward sloping yield curve, take Venezuela. Please!

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Another curve that is shaped like a rollercoast at King’s Dominion is the US Dollar Overnight Indexed Swaps curve.

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So Professor Clarida is only semi-correct about curve shapes. There is inversion from 1 year to 5 years, possibly signalling a slowdown (or recession) in the 1-5 year period.