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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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.”

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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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