My Kuroda! A 0.0000148% Yield on Bond Sale in Japan Is Exciting Investors (Student Loan Bonds)

Its a sad state of the world where investors get “excited” about a zero percent bond.

(Bloomberg) — A 0.0000148% yield drew strong demand for a bond offering in Japan, as investors clamor for safe debt amid the pandemic even if it pays them next to nothing.

Japan Student Services Organization priced 30 billion yen ($278 million) of two-year social bonds on Friday with a coupon of 0.001% and a price of 100.002 yen, which equates to the near-zero yield. Orders totaled about 2.5 times the amount sold, according to people familiar with the matter.

Japan has long been home to striking examples of how investors will grab at whatever yield they can find on safer securities, a trend that has gone global and been intensified by monetary easing to cushion economies from the economic damage caused by the Covid-19 pandemic. The securities from Jasso, an independent administrative agency that offers student loans, are rated AA+ by Rating & Investment Information.

Jasso’s bonds drew strong demand from investors who are raising their holdings of environmental, social and governance assets. Buyers ranged from pension funds, banks, shinkin banks and foreign investors, according to the people familiar, who asked not to be identified as the details are private.

The organization has a history of notable debt deals. It priced Japan’s first minus-yield agency bond last year, when it sold a note with a coupon of 0.001% and a price of 100.003 yen, working out to a yield of around minus 0.0005%. 

It is not that surprising since 2-year Japanese Government Bond yields remain in negative territory, as do JGB of maturities of 10-years or less.

My Kuroda!

US Housing Starts Crash In April Thanks To COVID-19 Lockdown (Despite Declining Mortgage Rates)

US housing starts in April crashed to their lowest level since 2015 despite near-record low mortgage rates.

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1-unit starts declined 25.4% from March to April. But it is the 5+ unit starts (apartment) that suffered a 40.31% MoM decline.

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It appears that The Fed’s snake juice isn’t working.

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Limbo Rock! Fed Funds Futures Imply Negative Futures US Interest Rates

Fed’s Jerome Powell is watching how low interest rates will go.

Despite Chairman Powell’s claims that the US will never go negative, The Fed Funds Futures rates are signaling YES.

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Negative interests rates are appearing in US Treasury Strips (both coupon and principal strips).

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The short-end of the Treasury curve is flirting with negative yields while the TIPs curve is profoundly negative beyond 3 years.

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How low will interest rates go?

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Shutdown! Dallas Fed Manufacturing Outlook Crashes To -73.7% (Help Me, Fauci!)

The government shutdown of the US economy is having devastating effects. For example, the Dallas Fed Manufacturing Outlook Level Of General Business Activity » (SA, % Balance/Diffusion Index) has crashed to its lowest level since before The Great Recession.

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Not surprisingly, Case-Shiller home prices in the Dallas TX area are pretty steady and seemingly immune to Dallas area unemployment rates. So far.

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Help us Fauci! End the economic lockdown.

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US Banks Brace For Surge In Loan Losses (S&P 500 Bank / S&P 500 Index Back To Early 2009 Levels)

Here we go again?

With the economic shutdown thanks to the Wuhan virus, the Big Banks are in the US are preparing to be over, under, sideways, down.

(Financial Times) — Loan loss charges at six big American banks reached a total of $25.4bn in the first quarter. This marks a 350 per cent surge in collective provisions across Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley versus a year earlier, as charges soared to levels not seen since the financial crisis.

The change illustrates how banks are ramping up reserves to deal with anticipated loan problems among their clients, as top economists warn that the world economy has already fallen into recession. 

The provisions are additions to reserves so banks have enough in their rainy day fund to cover future losses.

Since the start of the year, US banks have been operating under a new accounting standard, dubbed “current expected credit losses”. It has changed how they calculate loan loss provisions, making it hard to compare the most recent charges with past performance. 

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Previously banks had to ensure reserves were enough to cover ‘incurred losses’, which meant they made provisions for loan losses only when customers actually missed payments.

Under the new accounting standard, banks have to make provisions based on a loan’s lifetime value. In practice, this amounts to predicting the future — a difficult task at the best of times, and nigh on impossible in the current environment, which bank executives describe as the most uncertain they have ever seen. 

It is little wonder that the S&P 500 banks index as a percentage of the S&P 500 index is back near its lowest level since early 2009.

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Despite The Fed’s massive intervention in the financial markets starting in late 2007,  but continues in force.

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The Fed couldn’t get the S&P Bank index / S&P index back to early 2007 levels with massive stimulus?

Fed Chairs Janet Yellen and Jerome Powell pose for recent Fed Chairs painting.

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10Y Treasury Yield Hits Lowest Level In Modern History (Kocherlakota Calls For 25-50 Basis Point Cut)

Mac! Mac! Mac! 

While the US Treasury 10-year has just hit modern history lows, the Freddie Mac 30-year survey rate is CLOSE to its all-time low rate!!

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Meanwhile, former Minneapolis Fed President Narayana Kocherlakota is calling for The Fed to cut rates immediately!

The Fed’s rate-setting Federal Open Market Committee holds its next meeting on March 17-18. I don’t think that the FOMC should wait that long to deal with this clear and pressing danger. I would urge an immediate cut of at least 25 basis points and arguably 50 basis points. That’s a cheap insurance policy for the economy that the Fed shouldn’t pass up.

US Existing Home Sales RISE 9.64% YoY As Mortgage Rates Plunge, Inventory Remains MIA

Today’s headlines scream “Existing home sales decline 1.3% MoM in January!!” True, but on a YoY basis, US existing home sales are up 9.64%.

A big reason? The 30-year mortgage rate plunged faster than a paralyzed falcon. Mostly due to slow global economy and the Corona-virus fears.

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Now look at the median sales of existing homes. It continues to be low helping drive up existing home prices.

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Notice that EHS inventory increased with median price during the housing bubble, but after 2012, they went their own ways.

I hope the housing market remains Corona-virus-proof!

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Dollar Bop! US Dollar Index Approaches 100 (Golden Cross) As Coronavirus Fears Mount (Gold Rising Too!)

The US is experiencing the Dollar Bop!

The Dollar Index looks poised for a run at the 100 level for the first time since 2017 as investors seek out the safety of American assets amid the ongoing coronavirus spread.

The U.S. currency has benefited this week from a narrowing in haven options, with the yen slumping to a nine-month low on fears the outbreak could push an already struggling Japanese economy into recession. In contrast, U.S. stocks closed at a fresh record Wednesday, Treasuries are seeing continued demand and a bullish golden cross pattern is set to form in the dollar gauge, suggesting further upside is possible.

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The golden cross is a candlestick pattern that is a bullish signal in which a relatively short-term moving average crosses above a long-term moving average. The golden cross is a bullish breakout pattern formed from a crossover involving a security’s short-term moving average (such as the 15-day moving average) breaking above its long-term moving average (such as the 50-day moving average) or resistance level.

The US dollar index follows President Trump’s approval rating. Or is it that Trump’s approval rating mirrors the US economy?

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Gold is also flashing a technical buy!

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Gold surpassed $1,600 an ounce this week and its climb may not be over yet. The GTI Vera Convergence Divergence Indicator, a technical measure which detects trend exhaustion, triggered a buy signal on Tuesday, its first since the end of January. Growing concern over the potential impact of the coronavirus on the global economy is boosting haven demand for the metal, which is now closing in on a seven-year high.

70% Chance Of Recession In Next Six Months (According To MIT and State Street Study)

According to a new study by MIT and State Street, there is a 70% chance of recession in next six months.

The researchers created an index comprised of four factors and then used the Mahalanobis distance — a measure initially used to analyze human skulls — to determine how current market conditions compare to prior recessions.

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Using this principle, the researchers analyzed four market factors — industrial production, nonfarm payrolls, stock market return and the slope of the yield curve — on a monthly basis. They then measured how the current relationship between the four metrics compares to historical readings.

This recession measure is at odds with other recession probability forecasts which forecast a recession in the next twelve months at only 28% or less.

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Recession is defined as two consecutive  quarters of negative GDP growth.  Well, it is possible that the coronavirus will damage China GDP and maybe US GDP, but the MIT/State Street study is based on Industrial Production, Non-farm payrolls, the stock market and the yield curve slope. Only the yield curve slope (orange line) and Industrial Production (yellow dashed line) are showing recession-like trends. 

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Unless of course, MIT/State Street are saying there is a stock market bubble that will burst.

Here is a visualization of the impending recession and Mahalanobis skull measure.

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