Fire! Templeton Deepens Short Duration Bet To -2.21 in $34 Billion Bond Fund

Negative duration bets? Financial markets are coming undone.

(Bloomberg) — Average duration in Templeton Global Bond Fund shortened to -2.21 years by end of first quarter, from – 1.6 years at end of 2018, according to latest filing.

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Builds up Mexico position to 13% from 12.6% at end of 2018, making the country the biggest portfolio holding

Brazil and U.S. remain in top three country holdings with at least 11%

Other top 10 exposures include India, Indonesia, South Korea, Argentina, Ghana
Retains short position on euro, yen, Australian dollar

Increases cash to 32.2% from 24.9% at end of 2018

Total net assets increase to $33.8b from $33.5b

NOTE: fund, run by Michael Hasenstab and Calvin Ho, has returned 3.5% in past year, outperforming 58% of peers, according to data compiled by Bloomberg.

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Templeton’s negative duration bet comes as The Federal Reserve announced that they may need to buy more government bonds than it did before the 2008 financial crisis and conduct other money-market operations to implement its current approach to managing U.S. interest rates.

Or as Arthur Brown sang, “We are the Gods of hellfire,  and we bring you … FIRE!”

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Financialization And New York City Rents (Rent Bubble????)

Financialization refers to the increase in size and importance of a country’s financial sector relative to its overall economy.  And the center of US financialization is … New York City with its investment banks like Goldman Sachs.

While west coast housing prices are cooling (but still uber-expensive on the coast). NYC rents are still hot.

Rents climbed to a first-quarter record in Manhattan, and to all-time highs in Brooklyn and Queens, data from StreetEasy show. At the same time, purchases declined and almost a fifth of home-sellers in the three boroughs were forced to cut their prices.

Many New Yorkers, weary of bargaining with owners whose list prices are still out of touch with a slowing market, are choosing to remain renters until they find the perfect deal. That’s given landlords power to raise rates and offer fewer lease sweeteners, said Grant Long, senior economist at StreetEasy.

Central Park South was Manhattan’s costliest neighborhood in the first quarter, with a median asking rent of $7,200. Landlords sought $3,785 in Greenwich Village, $3,995 in Chelsea and $2,900 on the Upper East Side. Borough-wide, rents rose 2.6 percent from a year earlier, the biggest annual increase since 2016, according to a StreetEasy index.

Owners listed apartments for a median of $3,035 in the Long Island City neighborhood of Queens, and $2,995 in Brooklyn’s Williamsburg.

The Flatiron district is no slouch at $4,615 median rent. This trendy area has numerous millionaires and billionaires (as Bernie Sanders loves to say).

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But since the advent of financialization in the 1980s, the wealth distribution in the US has become the most skewed since the 1930s.

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And much of the skew is about the consolidation of financial power in New York City (and regulation of the 0.1% resides in Washington DC.

Yes, The Federal Reserve, the hell hound for Wall Street, has helped inflate asset bubbles and keep them frothy, benefitting the 0.1%.

At the national level, home price growth YoY, while slowing, still exceeds average hourly earnings for the majority of US workers as well as core inflation.

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So, are we in a housing bubble? Previously, “economists” have said that a housing bubble is when home price growth exceeds wage growth. But when I speak to the Five Star Government forum on housing on Tuesday, I will be the only one that says the word “bubble.”

Mentioning a bubble in the 5 Star gathering is like including Carolina Reaper 2,200,000 SHU peppers in the spice mix.

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Initial Jobless Claims Lowest Since 1969 As Wage Growth Hits 3.5% YoY (Phillips Curve Resurfaces!!)

The initial jobless claims for March beat expectations and is at the lowest level since 1969.  Coupled with wage growth hitting 3.5% YoY (the highest since 2010), it appears that the Phillips Curve has resurfaced.

The Phillips Curve is the relationship between the unemployment rate and wage growth.

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The Phillips Curve has been MIA (missing in action) for a long time, but has resurfaced in the form of initial jobless claims and wage growth. While Core Inflation YoY is a tepid 1.79%, wage growth is climbing to almost 3.5% YoY.

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If you believe the Taylor Rule (Mankiw specification), The Fed should continue to raise its target rate.

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Wage growth at around 2x core inflation? Over, under, sideways, down.

Liquifying The S&P 500! Central Bank Money Printing Sends S&P 500 Skyrocketing

So much for market discipline.  In fact, central bank intervention kills-off market discipline, a vital component of free markets.

However central banks are not concerned with market discipline. They are concerned with perpetuating asset bubbles.

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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

 

Broken Arrow! U.S. Treasury Yield Curve Inverts for First Time Since 2007

Since an inverted Treasury curve occurs before a recession, the Federal Reserve may have to expend all remaining policy tools.

The US Treasury 10-year yield declined 10 bps today which is a large pop.

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The Federal Reserve finally achieved an inverted Treasury yield curve for the first time since 2007.

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The Federal Reserve, in the past, has reacted aggressively when the yield curve slope breached 0 slope. Aka, Snake and Nape (Snake Eye Missiles and Napalm).

It’s been a lovely *%*$#$$  non-recovery from the last recession. Just asset bubbles.

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Fed’s Powell Turns Dove And Throws In The Towel As Yield/OIS Curves Remain Kinked

With a projected slowing economy and core inflation still under 2%, Fed Chair Jerome Powell officially threw in the towel on monetary normalization yesterday by announcing  no more rate increases this year and balance sheet reduction will cease in September.

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The US Treasury Actives curve remains kinked from 6 months to 10 years reflecting economic slowdown. The overnight indexed swap curve is hyper-kinked.

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A closer look at the US  Overnight Indexed Swap rate flattened after The Fed’s last rate hike, signaling that there be no more in the short run.

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One can view Powell as Mean Mr. Mustard (and Yellen as Polythene Pam), the surrender on monetary normalization is welcome by equity markets and mortgage lenders.

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Fed Sees No 2019 Hike, Plans September End to Asset Drawdown (Big, Bad Jay!)

“Big Bad Jay” Powell today announced today that there would be no more rate cuts in 2019 and balance sheet shrinking would halt in September.

Federal Reserve officials scaled back their projected interest-rate increases this year to zero and said they would end the drawdown of central bank bond holdings in September sending benchmark Treasury yields to the lowest level in more than a year and bolstering market bets on a rate cut in 2019.

The median rate projection of Fed officials compared with two hikes in the December forecasts, which spooked investors at the time. In its statement following a two-day meeting in Washington, the Federal Open Market Committee repeated January language that it will be “patient” amid “global economic and financial developments and muted inflation pressures.”

“Patient means that we see no need to rush to judgment,” Fed Chairman Jerome Powell said in a press conference after Wednesday’s decision. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.”

The Fed’s signal that it will keep interest rates on hold for the full year reflects concerns that economic growth is slowing, lower energy prices are weighing on inflation and risks from abroad are dimming the outlook. The projections go further than the one-hike forecast analysis.

Here is today’s FOMC Dot Plot.

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Here is yesterday’s FOMC Dots Plot.

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On the announcement, 10-year US T-Notes yields dropped 7+ basis points.

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And the 2-year and 5-year Treasury Note yields are BELOW The Fed Funds Target Rate!

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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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Did The Federal Reserve Kill Off 10-Year Swaption Volatility? (Lowest Since 2005)

10-year Swaption volatility has sunk to the lowest level since 2005. Did The Federal Reserve provide too much liquidity for too long, effectively drowning bond volatility?

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The Fed’s lingering Target Rate near zero and its three rounds of asset purchases helped kill of bond volatiilty. And with rising Fed Target rate and balance sheet unwind (removing liquidity from markets) has pushed bond volatility to 2006-2007 levels.

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So, the answer is … YES!

(Vol has been) shot through the heart and The Fed’s to blame! The Fed gives central banks a.bad name.