And on the hope of more Federal stimulus (with the usual nonsense add-ons that a politically-motivated), the Dow rose over 300 points on the addition of more sugar. Yes, fiscal and monetary stimulus acts like an enormous block of sugar, that will be followed by an enormous sugar crash requiring even more blocks of sugar (fiscal + monetary).
Of course, Pelosi (D-CA) and Mnuchin / House Republicans will play games as people suffer.
But how low can The Fed go with interest rates? Well, real interest rates have fallen for 700 years, so I doubt if rising interest rates for the long-term are in the cards.
Recent US history shows that we are still in negative 10-year Treasury yield territory.
And the US is still in a house price bubble as home price growth continues to exceed earnings growth.
Now, the earnings was YoY in above chart. But MoM is -0.9%.
Will the US economy and financial markets ever return to normal without continue fiscal and monetary stimulus?
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2020 is 19.6 percent on August 3, up from 11.9 percent on July 31.
After this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management and the construction spending report from the U.S. Census Bureau, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 14.4 percent and -1.7 percent, respectively, to 22.4 percent and 11.1 percent, respectively. Also, the nowcast of third-quarter real government spending growth increased from 5.7 percent to 6.8 percent.
New orders skyrocketed!
As a lagged indicator, US bankruptcy filings rose the most since 2009.
Many thought that a housing price crash and another financial crisis was a long shot. Until Q2 GDP crashed by 32.9%. And it turns out that the FHFA purchase-only house price index declined by -0.3% in May.
On the commercial real estate side, multifamily and hotel (both hit hard by the Covid-19 shutdown) are in CMBX series 9 while CMBX series 6 has a large share of retail properties.
While CMBX BBB- S9 is ad 79.360, CMBX BBB- S6 is down to 67.310. March and Covid were a disaster.
There is no doubt that The Federal Reserve panicked over Covid-19 by setting interest rates near zero and printed money like there is no tomorrow. The TED spread is now at 13.92, about where it was pre-Covid breakout.
(Wikipedia)The TED spread is an indicator of perceived credit risk in the general economy, since T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. Interbank lenders, therefore, demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases. Boudt, Paulus, and Rosenthal show that a TED spread above 48 basis points is indicative of economic crisis.
Well, the TED 3-month spread is only 13.29 which is far below the 48 basis point spread indicative of an economic crisis.
But The Fed hasn’t killed gold speculation. In fact, The Fed is likely scaring everyone into buying gold and silver.
The world’s major central banks aren’t purchasing debt fast enough, leaving almost $1 trillion of new sovereign bonds looking for buyers in the months ahead. The flood of fresh debt, sold by governments to fund pandemic-rescue packages, threatens to dwarf central-bank buying and swamp markets in many countries, according to Bloomberg calculations. By contrast, most of Europe is set to benefit from the European Central Bank’s purchases and may offer the best shelter for investors worried about a potential surge in bond yields.
The Treasuries market alone could see more than $1 trillion in net bond supply in the six months through Dec. 31, and strategists are predicting sales will comprise fewer bills and more longer-dated notes.
So far, domestic buyers have supported U.S. debt. But some of the market’s most loyal investors appear to be stepping away just when they’re needed most. Pension funds typically buy Treasuries to match their long-term liabilities, yet a proxy for their purchases of longer-maturity bonds — holdings of so-called stripped Treasuries — has fallen consistently since February.
With Senator Schumer (D-NY), Nancy Pelosi (D-CA) and Presidential hopeful Joe Biden (D-DE) all screaming for trillions in spending, this will only get worse.
As of June 23, As of June 23, 4.68 million homeowners are in forbearance plans, representing 8.8% of all active mortgages, up from 8.7% last week. Together, they represent just over $1 trillion in unpaid principal ($1,025B)., up from 8.7% last week. Together, they represent just over $1 trillion in unpaid principal ($1,025B).
Fannie Mae and Freddie Mac lead in terms of loans in forbearance.
What is forbearance you ask? Forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause paying your mortgage. You will have to pay the payment reduction or the paused payments back later.
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
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.
Thecentral 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!
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).