I remember when a Chief Economist at a large Washington DC area housing finance entity said that the definition of a house price bubble is when house price growth exceeds household income growth. Sounds reasonable. But what that means is that most of the USA is mired in ANOTHER house price bubble.
SIFMA has an excellent chart documenting the explosion of debt issuance since 1998 that amped-up with The Fed’s intervention in 2008.
Despite the massive growth of long-term debt (with correspond high duration risk), the interest rate volatility cube is showing calm seas … except at the short-end of matures .. and now the long-end is starting to show more volatility.
Is it my imagination, or do those volatility spikes look like shark fins??
The Fed Funds Futures market is showing 1-2 Fed Funds rate cuts for the next two meetings.
And the expected future outcomes are pointing in the downward direction.
Even Austria is showing a steep decline in their 100-year bond yields.
While it is seemingly all quiet on the bonds front, volatility is emerging at both ends of the maturity curve. HEDGE!!!!
Despite Friday’s “strong” job report of 224,000 jobs added to the US economy and speculation that The Federal Reserve may actually NOT cuts rates at the next FOMC meeting, The Fed Funds futures market is still signaling an upcoming rate cut.
And the expected path of Fed rate cuts (orange dashed line) is still downward sloping,
The US dollar swaps curve, the OIS curve and the swaps SPREAD curve are all sagging at the short-end.
The interest rate volatility cube is still spiked at the short end (according to swaptions).
Let’s see if things change by Monday afternoon (my class meets at 4:30 PM EST).
Fed Chair Powell may have more free time to socialize if Trump has his way!!
The European Central Bank’s President, Mario Draghi, 8-year term is up in October … and Christine Lagarde of the International Monetary Fund has been chosen to replace him. Will Lagarde continue Draghi’s policies (yes) or change course (no)?
But Europe has been invaded by the bizarro legion.
Case in point. Both Germany and Denmark have negative sovereign yields out to 20 years. Germany, which has issued longer maturity sovereign debt, has slightly positive yields beyond 20 years.
And the German 10-year Bund yield is now below the ECB Main Refinancing Rate, ECB Deposit rate and the European Financial Stability Facility (EFSF) rate. How bizarre is that?
Yes, the monetary Bizarro legion has invaded earth (or at least Japan and Europe). And the US monetary policy has been bizarro since Alan Greenspan.
There are three prominent measures of volatility: VIX for the S&P 500 index, TYVIX for the 10-year Treasury Note, and MOVE (Ml Option Volatility Estimate Index). All three show an interesting pattern. The stable volatility patterns prior to the massive Fed intervention starting in Q4 2007. That never ended.
Here is the massive Fed intervention and the US Treasury 10Y-3M curve.
Nothing has been the same since the Q4 Fed (and other central bank) intervention to fight The Great Recession.
The most unaffordable counties, the reported noted, were in Los Angeles County, California; Cook County (Chicago), Illinois; Maricopa County (Phoenix), Arizona; San Diego County, California; and Orange County, California.
House price appreciation outpaced weekly wage growth in 40%, or 192 of the 480 counties, including Maricopa County (Phoenix), Arizona; Riverside County, California; San Bernardino County (Riverside), California; Tarrant County (Dallas-Fort Worth), Texas; and Wayne County (Detroit), Michigan.
For Americans who feel financially overwhelmed with unaffordable housing, the report does show 26%, or 127 counties examined, had affordable housing in Harris County (Houston), Texas; Wayne County (Detroit), Michigan; Philadelphia County, Pennsylvania; Cuyahoga County (Cleveland), Ohio; and Franklin County (Columbus), Ohio.
ATTOM calculated the affordability of each county by examining the amount of income needed to make monthly house payments (assume a 3% down payment and a 28% maximum “front-end” debt-to-income ratio) — including mortgage, property taxes, and insurance.
So much for MMT (modern monetary theory) where deficits and debt don’t matter. Size and quality of debt DOES matter. Just look at the interest rate risk of staggering debt loads, not to mention the credit risk!
(Bloomberg) — Investors riding easy-money policies are breeding a trillion-dollar monster in the bond market, the likes of which has never been seen in decades of history.
Wall Street will tell you it’s low risk for now — one that’s been hyped-up for years. But on the current trajectory, just a modest bump in yields near record lows could inflict a world of pain for traders all over the globe.
Dovish monetary bets, relentless demand for safe assets and conviction in the lowflation era are spurring money managers to gorge on long-maturity bonds, or duration risk.
One measure of the relative compensation investors receive to hold longer-dated obligations is a whisker away from a 58-year low. Over in Europe, they’re taking a century of risk for yields barely above 1% in order to escape a $13 trillion global stockpile of negative debt.
All that is leaving duration, a measure of sensitivity to interest-rate changes, near all-time highs across sovereign debt markets. As hopes rise of a U.S.-China breakthrough on trade, bond bulls could suddenly find themselves on the backfoot.
And the interest rate volatility cube seems to be giving the middle finger to investors.
Speaking of asset bubbles, the RCA CPPI commercial real estate index has over doubled since May 2010 (that is just over 9 years!). And the NAREIT all-equity index has over quadrupled since 2009. Notice the lack of volatility in the RCA CPPI index.
The S&P 500 Index has over tripled since 2009 and the Russell 2000 index has almost quadrupled since 2009.
The math is pretty simple. Real estate equity and stock market indices have doubled to quadrupled since 2009/2010.
Don’t panic. It is June. Mortgage purchase applications typically peak in May and it is generally downhill from there until the beginning of January.
Mortgage purchase applications dropped 5% for the week ending June 14. Mortgage refi applications dropped 3.5%.
Mortgage purchases applications have been trending down since 2007 until 2015 when they began rising again. Note that mortgage originations with FICO scores below 620 also plunged after 2007.
Mortgage purchase applications rose after the first of the year with declining mortgage rates, but that happens every year (even when rates rise!). But mortgage purchase application are remaining strong relative to previous years, likely due to declining mortgage rates.
Mortgage refi applications declined 3.5% WoW as mortgage rates were steady. But we are not seeing the surge in refi applications with a large decline in mortgage rates since the pool of eligible refi applications has shrunk.
So, don’t panic! The Fed is likely going to cut their target rate again in July.
(Bloomberg) — Government debt markets surged worldwide on Tuesday on the growing prospect of central-bank stimulus amid concern about dimming global growth. The move lost some steam on signs of apparent thawing in U.S.-China tensions.
Benchmark 10-year Treasury yields slid as much as 8 basis points to 2.01%, the lowest level since 2017, as comments from European Central Bank President Mario Draghi dragged down rates across Europe. French, Swedish, German and Austrian 10-year yields fell to unprecedented lows. The move in Treasuries was briefly reversed, in part, following news that the U.S. and Chinese presidents will meet at the upcoming Group-of-20 summit in Japan, assuaging some market concerns about the fractious relationship between the world’s two largest economies.
Federal Reserve officials, who are due to deliver a policy decision on Wednesday, are confronted by a market that is pricing in a quarter point interest-rate cut by July and around 62 basis points of easing by the end of this year. Comments from Draghi that additional stimulus may be needed if the economic outlook doesn’t improve added fuel to bets on ECB rate cuts, and in turn helped spur speculation that the U.S. central bank will act too. The 10-year yield was around 2.05%, down 4 basis points on the day, as of 11:48 a.m. in New York, while U.S. equities also climbed.
“Draghi’s comments were one more indication that one of the major central banks will likely begin another round” of monetary support, said Mark Grant, chief global strategist of fixed income at B. Riley FBR Inc. “This gives the Fed one more reason to consider cutting rates because the American rates are so much higher than those in Europe or Japan. U.S. 10-year yields are headed lower.”
The ECB is grappling with an economic slowdown and an inflation rate that remains entrenched below its goal. In the U.S., the Fed is faced with inflation running persistently below the Fed’s 2% target, falling inflation expectations and signs that the labor market is beginning to slow.
And the global stockpile of negative yield bonds is near $12.2 TRILLION.
Europe is really seeing plunging sovereign yields with Sweden now in negative yield territory at the 10-year maturity.
But negative interest rates don’t seem to be helping European economies.