US home buyers are benefitting from European economic misery (particularly Germany and fiscal-stressed Italy). I call this the Blitzkrieg Bop.
On the other side of the interest rate barbell is China (and Japan). So while the USA is growing, Germany and Japan are not doing so well, causing their Central Banks to push rates to zero .,.. or lower. Even China’s Central Bank is buying everything in sight in fear of a recession.
Hence, US mortgage lenders and potential homebuyers benefit is terms of dropping interest rates.
You can see the downward plunge in the Treasury Volatility Curve (MOVE – TYVIX) as Central Banks become active in 2008 and 2009. The 30-year mortgage rate has been declining thanks to hyper-intrusion of global central banks, killing off bond volatility.
Allegedly, The Federal Reserve is ceasing its raising of their target rate and will stop shrinking their balance sheet in September.
Mortgage purchase applications (NSA) are in their third phase and doing quite nicely, helped along recently by the barbell slowdowns overseas.
Much like the Three Stooges bit “Raw Oyster Stew”, using Central Banks to stimulate a structurally flawed economy is like Curly trying to eat the raw oyster.
(Reuters) – Bank of Japan Governor Haruhiko Kuroda told CNBC that there is room for reducing long-term and short-term interest rates.
“I think there (is) still some room for further monetary easing if needed,” he said, adding that it isn’t necessary at this stage.
Kuroda also said that the Japanese economy has “slightly slowed down”, partly because Japan’s exports to China have become “somewhat” weak.
Yes, Kuroda can try to push Japanese sovereign rates lower. The benchmark for low interest rates is … Switzerland. (Aka, The Swiss Miss!)
Swaps? Yen versus Franc swap rates:
So, Kuroda is suggesting a Swiss put on rates. Or a Swiss Miss!
As I wrote at the beginning of The Fed’s quantitative easing (QE) ventures back in 2008, The Fed will never be able to “normalize” monetary policy. As we have seen, The Fed has all but quit rate hikes and has annoucned end an to QT (quanitative tightening) in the Fall.
In celebration of the eternal Central Bank monetary stimulus, S&P500 volality (VIX) is collapsing … again as VIX Futures open interest is shrinking. Accordingly, the SMART Money Flow Index is rallying as investors see Central Bank surrender.
The global Central Bank asset purchase bonanza!!
Coupled with low rates.
The Fed and other Central Banks are contuning to run their bubble machines!
Here is a video of The Federal Reserve.
The Citi Economic Surprise Indices measure data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected.
Unfortunately for the USA, it has a negative economic surprise measure, followed closely by the Eurozone (also negative). The “leader” in the Economic Surprise Derby is … Emerging Markets. ALSO negative.
As a sign of meh economic growth, market implied policy rates are 2.38% for the USA, -0.40% for the Eurozone and -0.06% for Japan.
The expected Fed Funds target rates are trending downwards.
Eurozone expected target rates are negative.
Even Australia is downward trending. Like an overcooked shrimp on the barby.
True, the lofty expectations for the US economy are not being met.
The global economy is in a rollercoaster pattern.
And unfortunately the G10, US and Emerging nations are on the downward side.
This might explain Larry Kudlow’s call for a 50 bps drop in the Fed Funds Target Rate. At least Trump’s nominee for The Fed’s Board of Governors was previously the President of the Kansas City Federal Reserve. And CEO of Godfathers Pizza! Conditional on the US Senate approving his appointment, “Welcome to the party, pal!”
It’s the same all over the world.
The US Treasury actives curve and dollar swaps curves are markedly sagged (or kinked).
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.
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.
And the SAG award goes to … the USA for short-term SAG.
The permanent SAG award goes to …. Nicolas Maduro and Venezuela.
Europe is slippin’ into darkness.
Evidence? 10-year German sovereign yields are lower than the major global low-yield leader, Japan.
Of course, the European Central Bank is doubling down on its failed monetary policy.
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.
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.
(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.
As the ECB continues to repress interest rates, incentive remains in. Europe (and the US) to continue to issue corporate bonds .. and CoCos.
European bond volatility (according to the Merrill Lynch 3-month EUR option volatility estimate) has plunged to the lowest level on record.
A similar chart for the US bond market is the Merrill Lynch Option Volatility Estimate for 3-months shows exactly the same thing. The US bond market is grinding to a halt.
Note that the US MOVE 3-month estimate hit a low in May 2007, just ahead of The Great Recession of 2007-2009.
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).
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.
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.
So, yield curve inversion is the same all over the world. The US seems to be on track to invert as well.