Volatility Numbness As Central Banks Keep QE’ing

There are three prominent measures of volatility: VIX for the S&P 500 index, TYVIX for the 10-year Treasury Note, and MOVE (Ml Option Volatility Estimate Index). All three show an interesting pattern. The stable volatility patterns prior to the massive Fed intervention starting in Q4 2007. That never ended.

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Here is the massive Fed intervention and the US Treasury 10Y-3M curve.

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Nothing has been the same since the Q4 Fed (and other central bank) intervention to fight The Great Recession.

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And we are back to rate cutting (according to Fed Funds Futures data) despite the jawboning (or “Talk-talk” from Fed members).

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The expected path of interest rates (orange line) looks like a Viking ship.

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Simply Unaffordable! Median-Priced Homes Not Affordable for Average Wage Earners in 74 Percent of U.S. Housing Markets

US housing is simply unaffordable since home price appreciation outpacing wage growth in 40 percent of markets, according to Attom Data Solutions. And Median-Priced Homes are not affordable for average wage earners in 74% of U.S. housing markets 

The most unaffordable counties, the reported noted, were in Los Angeles County, California; Cook County (Chicago), Illinois; Maricopa County (Phoenix), Arizona; San Diego County, California; and Orange County, California.

House price appreciation outpaced weekly wage growth in 40%, or 192 of the 480 counties, including Maricopa County (Phoenix), Arizona; Riverside County, California; San Bernardino County (Riverside), California; Tarrant County (Dallas-Fort Worth), Texas; and Wayne County (Detroit), Michigan.

For Americans who feel financially overwhelmed with unaffordable housing, the report does show 26%, or 127 counties examined, had affordable housing in Harris County (Houston), Texas; Wayne County (Detroit), Michigan; Philadelphia County, Pennsylvania; Cuyahoga County (Cleveland), Ohio; and Franklin County (Columbus), Ohio.

ATTOM calculated the affordability of each county by examining the amount of income needed to make monthly house payments (assume a 3% down payment and a 28% maximum “front-end” debt-to-income ratio) — including mortgage, property taxes, and insurance.

 

Alarm! All US Curves Are Downward Sloping In The Short-end, Treasury Term Premium Stays Negative (Interest Rate Volatility Cube Remains Skewed)

Alarm! 

The US Treasury yield curve, the on-off the run curve, dollar swaps curve, and the overnight indexed swaps curve are ALL downward sloping at the short-end signaling turbulence.

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The US Treasury term premium remains negative.

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Term premium is the excess yield that investors require to commit to holding a long-term bond instead of a series of shorter-term bonds.

Like the yield, swaps and OIS curves, the interest rate volatility cube is skewed at the short-end (like 2 years).

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Alarm!

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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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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!

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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.

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

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

7 + 7 is …

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%.

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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.

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2-year Treasury Note.

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Fed Funds volatility surface?  Looks like a Tsunami!

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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.”

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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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Hackepeter! Deutsche Bank To Set Up €50 Billion ‘Bad Bank’ As Part Of Overhauls (Largely Long-dated Derivatives)

Like the Led Zeppelin song “Good times, Bad times,”  German mega bank Deutsche Bank is trying to save itself by splitting into a good bank and a bad bank.

Why is my former employee doing this? Deutsche Bank was a high-flyer back in May 2007 when it was trading at over $120 per share. It is now trading at an anemic $6.79 per share. And the trend is miserable.

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The good bank / bad band model had
been discussed widely during The Great Recession. In the US, Treasury and Congress decided to purchase troubled assets from bank balance sheet (TARP). This approach helped removed “toxic” assets from US banks’ balance sheets, so the US government became the bad bank.

But Deutsche Bank is doing this one their own, rather than having the German government and the European Central Bank

From Financial Times: Deutsche Bank is preparing a deep overhaul of its trading operations including the creation of a so-called bad bank to hold tens of billions of euros of assets as chief executive Christian Sewing shifts Germany’s biggest lender away from investment banking.

The plan would see the bad bank house or sell assets valued by the German lender in its accounts at up to €50bn after adjusting for risk.

Deutsche’s equity and rates trading businesses outside continental Europe will be severely shrunk or closed entirely as part of the revamp, although the final decision is pending, according to four people briefed on the plan. Managers are also set to unveil a new focus on transaction banking and private wealth management.

The proposed bad bank, which is known internally as the non-core asset unit, will comprise mainly of long-dated derivatives, the people said. 

Well, Deutsche Bank has been shrinking its derivatives liabilities from over 1 trillion to a more modest 316 billion. But apparently this amount will be unwound, partly using the non-core asset unit.

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Deutsche Bank represents a clear and present danger to the international banking system including US banks (and investment banks).

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Consider Deutsche Bank to be like the unappetizing German dish Hackepeter (raw pork) that even the European Union warns against. [I actually ate this dish thinking it was beef tartare like they serve in Paris].

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I wish Deutsche Bank all the best in its efforts to escape investment banking and return to core banking. Let’s see if Deutsche