It is not surprising that the REAL German Pfandbriefe 10-year rate is negative, since the NOMINAL rate is also negative. Especially since the NOMINAL German sovereign yield is negative.
When we subtract German inflation from the Pfandbriefe 10-year rate, we get a REAL Pfandbriefe rate of 2.365%.
A Pfandbriefe is a type of covered bond. A covered bond is a debt security that is common in Europe. It issued by a bank or mortgage institution and collateralized against a pool of assets that, in case of default of the issuer, can cover claims at any point of time.
On the short end of maturity, the REAL 1-2 year Pfandbriefe rate is -2.55.
Then we have negative REAL 30-year mortgage rates in the US.
Housing prices? Germany looks positively tame in terms of house price growth compared to the US, although the Eurostat data for German house price growth is lagged behind the already lagged Case-Shiller data.
Like the US, there is a considerable gap between house price growth and income growth.
Here is a chart for the US pointing to unsustainable house price growth.
How is the ECB impacting German house prices? Much like the USA.
Normally, we see the US Treasury yield curve slope rise dramatically after a recession. Except for after the shortest recession (2 months) in US history. Why?
With the Covid outbreak in early 2020, The Fed chose to repress interest rates with a vengeance by lowering their target rate to 25 basis points (yellow line) and massively expanding their Treasury and Agency MBS purchases (orange dotted line). As a result, the US Treasury yield curve slope had an anemic post-recession surge and has declined again to 103.39.
Oddly, The Federal Reserve overstimulated their balance sheet for the Covid epidemic which created the shortest recession in US history. .
But the stimulus remains. As does inflation and home price growth and rents.
This is indeed monetary Stimulypto.
Will this be acknowledged at The KC Fed’s Jackson Hole Monetary conference?
Here is my concern that I mentioned in Benzinga. When home prices are growing at record highs (+16.61% YoY) and hourly wage growth is a paltry +2.28% YoY), were have serious affordability problems. That will eventually lead to a slowdown in home price growth.
The spread between home price growth an hourly earnings for workers is also at an all-time high.
How hot is the US housing market? All 20 metro areas in Case-Shiller’s 20 index are in double digits. Chicago is the slowest at +11.1% YoY. Phoenix AZ is the hottest at +25.9% YoY.
Here is Fed Chair Powell trying to tame home price growth at the Jackson Hole meetings.
(Bloomberg) — Applications for U.S. state unemployment insurance fell last week to a fresh pandemic low, indicating that dismissals are easing as business conditions improve and firms look to increase headcounts.
Initial claims in regular state programs decreased by 26,000 to 360,000 in the week ended July 10, Labor Department data showed Thursday. The median estimate in a Bloomberg survey of economists called for 350,000 initial applications.
Federal Reserve Bank of St. Louis President James Bullard said the central bank has met its goal of achieving “substantial further progress” on both inflation and employment, urging policy makers to move forward in reducing stimulus.
On the other hand, Federal Reserve Chair Jerome Powell said it was still too soon to scale back the central bank’s aggressive support for the U.S. economy, while acknowledging that inflation has risen faster than expected.
Let’s hope Bullard convinces Powell to begin tapering, given the surge in inflation and today’s import and export price figures.
Today’s capacity utilization numbers rose, but show a disturbing trend that The Fed can’t fix. Capacity utilization is lower (75.38%) than the near 85% back in the 1990s. Capacity utilization has fallen with labor force participation and M2 Money Velocity in a general downward trend since the 1990s.
And in the world of commodities, only gold, silver and iron (Fool’s Gold?) are up today. Everything else is down.
Inflation keeps rising and wage earners continue to suffer.
Today’s inflation print shows headline CPI YoY at 5.4% and core CPI YoY are 4.5%, the highest since 1991.
The problem is that real average hourly earnings printed at -1.7% YoY.
0.9% June inflation x 12 months = 10.8% Run Rate Inflation.
If we look at REAL house prices (FHFA HPI Purchase Only YoY – Headline CPI YoY) and REAL US average hourly earnings YoY, we can see a real problem created by excessive Fed money printing and Federal government spending. It is the proverbial “Devil In Disguise.”
Then we have the CPI Owners Equivalent Rent of Residences YoY printing at 2.3%. This compares with home prices growing at 15.7% YoY.
(Bloomberg) — For years, David Horowitz at Agilon Capital was a rare breed in the bond market: a quant in a notoriously old-school business where prices were a call rather than a click away.
Sixteen months of the pandemic is changing all that.
The work-from-home era is fueling a surge in electronic bond trading that gives the likes of Horowitz conviction a long-augured quant revolution is finally ready to sweep the debt world.
Long credit positions held by quants have doubled since 2018 according to Man Group data, outpacing the 20% growth for other asset managers as systematic players seize on the rapid market modernization — like they did in stocks years ago.
“Credit is going through a similar evolution,” said Horowitz, who led the pioneering systematic credit team at BlackRock Inc. before starting his own$290 million fund. “As we become more electronified we should expect the same sorts of forces to come into play.”
Quants have been saying that for years of course, only to have their math-based models frustrated by the cumbersome and complex debt world. The difference now is that they may have a market liquid and transparent enough to accommodate their constant churn.
Electronic venues like MarketAxess and TradeWeb accounted for 37% of investment-grade and 26% of high-yield trading in May, 8 percentage points higher than the year before, Coalition Greenwich data show.
That sets up a virtuous circle, where banks roll out more algorithms to price more bonds. Throw in a year of record flows into credit exchange-traded funds, and a broad swath of securities is becoming easier to trade — vital for a cohort which typically holds hundreds of positions and trades more often than an average fund.
“It’s helped answer the question of ‘will we be able to trade this tomorrow?’” said Paul Kamenski, co-head of credit at the quant firm Man Numeric.
Liquidity in the bond market has long been fragmented by its very nature — companies generally issue multiple bonds. That means quants might see their models spit out a dream portfolio but have to adjust it based on what can actually be traded, Kamenski said.
“We had to try to do things that were less natural in quant strategies,” such as trading in larger sizes or catering to dealer inventories, he said. “It’s still hard today, but it’s become more manageable.”
That doesn’t necessarily mean the whole market is suddenly highly liquid — gripes about how hard it is to offload large blocks are everywhere.
But it’s become easier to move smaller sizes and figure out where each bond is trading, which helps detect signals and cut transaction costs, Horowitz said.
Over at banks’ trading desks, Asita Anche at Barclays Plc has seen a jump in algo usage, especially to execute small trades. But she stresses that humans are still essential in fixed income since liquidity is more fragmented than in equities and it’s harder to manage risk.
“The future is not algos taking flows away from humans,” said the head of systematic market making and data science. “It’s humans enhanced by algos and automation.”
With that in mind, Anche is building algos and data analytics for voice traders, and even a recommendation engine akin to Netflix’s that finds similar securities to what a client wants to trade.
Bond quants remain a tiny minority — those long positions total around $23 billion, Man Group says, versus $537 billion for other managers. And the systematic bunch operates a range of strategies, from equity-style factors like value or momentum to arbitrage or trades based on moves in an issuer’s stock.
That all makes performance hard to judge and data is scarce. A Premialab index of systematic credit strategies built by investment banks lost 5% over the past three years of rising markets and gained nearly 3% in 2021. Among global bond mutual funds, quants trailed other investors on a three-year horizon, eVestment data show.
Nonetheless, the rise of electronic trading in equities minted billions for quants and reordered the market. Many bond players are predicting a similar trajectory for their asset class, with the bonus pitch that the kind of crowding that has undermined stock strategies is a long way off.
“I’ve been doing this for 20-odd years and for most of that, doing this type of systematic credit — people wouldn’t even know what I’m talking about,” said Horowitz at Agilon. “Credit is still very much in its early innings.”
With massive Federal spending, Federal debt issuance is going to continue to explode. As will agency MBS.
Ever since 2008 and the dramatically increased presence of The Federal Reserve in markets, and particularly since the March 2020 Covid outbreak, we have seen record increases YoY in corporate debt, US public debt (aka, Treasury debt) and agency mortgage-backed securities.
Corporate debt issuance was negligible since the housing bubble years of 2002-2007, but has been relatively constant since Q4 2007 and surged to over 10% in Q2 2020.
With continued zero interest rate policies from The Fed, debt issuance will continue at break-neck speeds. It is only logical that bond quant strategies and electronic credit trading grow.
Speaking of corporate bonds, here is a graph of US corporate bond yields against modified duration.
And here is US corporate bond yield against duration sorted by bond coupon.
The People’s Bank Of China announced it is cutting its Required Reserve Ratio by 0.5% for most banks, a move that will unleash about 1 trillion yuan ($154BN) of long-term liquidity into the economy and will be effective July 15. The announcement reduces the amount of cash most banks must hold in reserve in order to boost lending to the economy as growth has sharply waned, and is expected to prop up China’s slowing economy, their Caixin Service PMI drop to the lowest level since the covid crisis, badly missing expectations.
Bear in mind that the cut in the reserve ratio is from 12.5% to 12%.
How about North, Central and South America? Brazil has the highest 2-year sovereign yield while Argentina and Venezuela has 0% yields (denominated in US Dollars). Panama has negative 2-year sovereign yields.
How about Asia where Japan has a negative sovereign yield on its 2-year of 0.-124%. China’s 2Y sovereign yield is 2.529% compared to the USA 2-year Treasury Note yield of 0.205%.
Many nations have moved to either negative of near zero 2-year sovereign yields.
The headlines scream “850,000 jobs added.” The Federal Reserve Open Market Committee (FOMC) members are probably saying “Oh no! We might have to raise rates and cut asset purchases!!!”
Despite the 850,000 jobs added in June, there are so not so great aspects to the jobs report. Like Labor Force Participation remains the same in June as it was in May … and remains considerably lower than pre-Covid crash figures.
The unemployment rate actually increased to 5.9% in June. Average hourly earnings MoM fell while YoY it rose.
The UNDERemployment rate fell to 9.8%. But that is only back to mid-Obama levels and considerably below pre-Covid levels.
More than half of all job gains were bartenders and teachers.
On the interest rate and Fed taper front, (Dow Jones) — Good day. Count Federal Reserve Bank of Philadelphia President Patrick Harker among the Fed officials who think it would be a good idea for the U.S. central bank to start paring its $120 billion a month in bond buying stimulus. “I would like to see tapering begin,” he told The Wall Street Journal in an interview. “I’d like to see it happen sooner rather than later.” Meanwhile, Sen. Patrick Toomey (R., Pa.) says the Atlanta, Boston, Minneapolis and San Francisco Fed banks are ignoring his requests for information about their work on racial economic justice and climate issues, in a dispute highlighting the limits of congressional oversight over the regional institutions.
So what will the FOMC do with these good news / bad news labor reports?
Yesterday, I talked about negative real mortgage rates and BB corporate yields. Now we have this little diddy: SKEW just surged.
The SKEW index is a measure of potential risk in financial markets. The SKEW index can be a proxy for investor sentiment and volatility. The Skew Index measures perceived tail-risk in the S&P 500. Tail-risk is a change in the price of the S&P 500 or a stock that would place it on either of the tail ends, or the far edges of the normal distribution curve.
And it is the highest since 1990.
Historically wild government spending and Fed monetary policies have created a “fear” scenario for investors.
Today’s inflation numbers, particularly the Fed’s favorite inflation indicator Core PCE Deflator, rose 3.39% YoY and the overall PCE Price index rose 3.91%
I love to throw in home prices, as housing in typically the largest item in a household’s consumption bundle. The last Case-Shiller national home price index was up 13.19% YoY while M2 Money has “slowed” to 13.94% YoY.
Here is a picture of The Fed’s System Open Market Account holdings of T-Notes, Bonds and Agency MBS along with the slosh (excess temporary cash in the banking system). That’s a whole lot of slosh in the banking system!!