Act (Un)Naturally! ECB’s Draghi Warns of Bubble Risk (Including Real Estate) in the Euro Zone (17 European Nations Have Negative 2-year Sovereign Yields)

Slowing European economic growth coupled with massive, unnatural Central Bank policies has led to a massive bubble in stocks and real estate. All the ECB did was “act (un)naturally.”

WASHINGTON (Reuters) – There are “mild signs” of overvaluation in the euro zone financial and property markets, creating a risk for stability at a time when the economy is slowing, the European Central Bank’s President Mario Draghi said on Friday.

“The financial stability environment remains challenging, as the global economic outlook has deteriorated,” Draghi told fellow policymakers on the International Monetary and Financial Committee in Washington.

“There are mild signs of overstretched valuations in the euro area in some riskier segments of the financial markets, as well as in real estate markets, with marked differences across regions.”

The ECB has acted unnaturally since the financial crisis of 2007-2009 by dropping their main refinancing rate to 0% and rapidly expanding their balance sheet.

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In addition, the ECB’s M3 money growth continues to grow.

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And 17 European nations now have negative 2-year sovereign yields.

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The heartland of Euro (meaning Germany, France and Austria) oppose more QE (asset purchases by the ECB) while peripheral counties (Spain, Italy and Greece) want to keep on expanding the ECB’s balance sheet.

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Of course, none of this Central Bank interference is natural and sets the stage for a bubble burst.

ECB’s Draghi is a regular “buckaroo.”

Draghis.

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The Reasonabilists? Negative-yielding Debt Exceeds $17 TRILLION With Japan And France Leading In Negative-yield Issuance (Danish 10-year Fixed Mortgage Rates At -0.5%!)

It has been over 100 years since The Federal Reserve System was created by Congress in December 1913 and then signed into law by President Woodrow Wilson. Since its creation, the purchasing power of the US dollar for consumers has gone from $3.32 in December 1913 to $0.13 today.

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Virtually even nation has a central bank and together they have helped push down sovereign yields into negative territory in the amount of > $17 TRILLION.

The global stock of negative-yielding debt is now in excess of $17 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally.

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Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.

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France is the leader in Europe at $2.3 trillion in negative-yielding sovereign debt. France’s 10-year sovereign debt bears a coupon of 0.50% at €109.004 and a yield of -0.408%.

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Japan, of course, is the global leader in negative-yielding debt at $7.3 TRILLION.

Mortgage rates can be negative as well. Just ask the Danish bank Jyske Bank. Jyske is offering a 10-year fixed-rate mortgage (FRM) at … -0.5%.  Finland’s Nordea Bank is offering a 20-year FRM in Denmark at … 0%.

But wait! Who on earth would buy negative interest rate mortgage bonds? PIMCO, that’s who! 

But are negative mortgage rates reasonable? Or is Zorp the Surveyor approaching?

Zorp the surveyor.

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Shakin’ All Over! German Yield Curve Completely Negative Yield As Germany Issues €869M Zero-coupon Bonds At -0.11% (Tried To Sell €2B)

Things are getting crazy in Europe, particularly in Germany and Denmark,

As Brexit approaches, Germany is desperately trying to save their economy (or at least their banking system) by borrowing at negative rates for 30-years.

The German government sold 869 million euros of 30-year bonds with a negative yield, for the first time ever, adding to the world’s growing $15 trillion in existing negative yielding debt.

The bund, set to mature in 2050, has a zero coupon, meaning it pays no interest. Germany offered 2 billion euros worth of 30-year bunds, and investors were willing to buy less than half of it, with a yield of minus 0.11%.

Here are the German sovereign yield curve (blue) and the Danish sovereign curve (green).

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Of course, the US Treasury curve has the same “bucket” shape as Germany and Denmark (as well as numerous other nations).

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The US Treasury 10Y-3M curve slope is now -40 BPS.

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While not totally submerged, Sweden, France and the UK all have the bucket shape.

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Just so we understand, it’s not just Europe that is slowing. China is slowing too (and before the tariff war).

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Sovereign yield curves are Shakin’ all over.

Beyond The Sea! Boston Fed’s Rosengren’s Plea To Not Cut Rates While Europe Slows (17 European Nations Have Negative 2Y Yields, 13 European Nations Have Negative 10Y Yields)

What a difference 10+ years make in financial markets.

Here is the US Treasury yield curve at the height of the housing bubble (2005) compared to today. Back on July 1, 2005, the yield curve was upward sloping whereas today the curve is inverted at tenors of 5 years or less, then upward sloping.

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At the ten year maturity, both Canada and the US are below 2% in terms of yield (Venezuela is at a whopping 55%!). Chile, in USD, is just about 2%.

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Beyond the sea (Atlantic), there are 13 nations will negative 10-year sovereign yields. Plus the European Financial Stability Facility is at -0.357%.

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At the two-year maturity, Europe has 17 nations with negative yields. And tanking.

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The Boston Fed’s Rosengren is arguing against further rate cuts from an effective Fed Funds rate of 2.1250% while the European Central Bank (ECB) target rate is … -0.40%. That is quite a spread!

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(Bloomberg) — Federal Reserve Bank of Boston President Eric Rosengren continued to push back against further interest-rate cuts by the central bank, arguing he’s not convinced that slowing trade and global growth will significantly dent the U.S. economy.

Meantime, President Donald Trump urged the Fed to cut by a full percentage point to aid U.S. and global growth while complaining the “dollar is so strong that it is sadly hurting other parts of the world”

The German government is getting ready to act to shore up Europe’s largest economy, preparing fiscal stimulus measures that could be triggered by a deep recession, according to two people with direct knowledge of the matter.

Rosengren’s point is that the US economy is still growing with low unemployment while Europe is grinding to a halt. Germany is at 0.40% YoY, Italy is at 0% YoY and France is at 1.30%. The US is at 2.3% YoY. This is, in part, Rosengren’s point.

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While the US economy is humming along at 2.3% YoY growth, Treasury is considering issuing 50- and 100-year bonds. Both will have huge duration and convexity risk.

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So, economic slowdowns beyond the (Atlantic) sea may spill over to the US.

President Trump needs a Dream Lover to enact his rate cuts. Otherwise, markets will be splishy-splashy.