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 New Home Sales Decline 6.2% YoY In April Despite Near-Record Low Mortgage Rates (Case-Shiller Home Price Index STILL Rising)

According to the US Census Bureau, sales of new homes fell 6.2% YoY in April.

No, it does not look like new home sales from the housing bubble burst of the ALT-A, private label MBS years.

Yes, near record low mortgage rates are helping to mitigate the horrid effects of the COVID-19 fiasco.

Home prices in March, according to the lagged Case-Shiller national home price index rose 4.4% YoY. COVID-19 epicenters Seattle and New York City both managed to see YoY gains in home prices in March. (Phoenix AZ is leading the nation in YoY home price growth at 8.2%, nearly twice the national average).

So far the COVID-19 epidemic does not look like the notorious housing bubble burst of the second half of the 2000-2010 decade of The Big Short frame. But the CMBX BBB- index of commercial mortgage-backed securities is getting crushed by retail, hotel and office losses.

Although this has nothing to do with real estate, this Bloomberg headline grabbed my attention: “Macron Pledges $9 Billion in Stimulus to Help French Carmakers.” Hey Macron, how about telling Renault, Citroën and Peugeot to make cars that buyers in US want to buy!

Gold And Silver: Silver Outperforming Gold Over Past Month

Its Gold and Silver time!

Silver, the beautiful metal so beloved in the Southwest US and in Mexico, is starting to gain against its more expensive cousin gold over the past month.

Short positions on silver (and gold) are near their lowest levels in years.

And the price ration of gold to silver is declining.

It appears that silver is playing “catch-up” behind gold. Thanks to Jesse!

To paraphrase Jackie DeShannon, “Put A Little Silver in Your Portfolio.”

US Existing Home Sales Plunge 17.8% In April, Worst Since 2010 (Lower-end Housing Hit The Worst)

According to the National Association of Realtors (NAR), US existing home sales in April plunged 17.8% from March, the largest drop since 2010.

Existing homes sales MoM is the white line, the Mortgage Bankers Association 30-year rate is the blue line.

Given how unemployment is differentially hurting lower-wage workers, it is not surprising that existing home sales in the $0-$100,000 range fell 33% in April.

While $500k-$750k home sales fell by “only” 12.2%.

Existing home sales inventory remains low while median home price of existing home sales rose 2% from March to April.

First Auction of 20-year Treasury Bonds Since 1986 Has High Yield Of 1.220% (Slightly Higher Than Savings Series I Bonds At 1.06%, But Lower Than a 1Y CD)

The US Treasury, desperate for revenue with the COVID-19 shutdown crushing the economy and tax receipts, has reintroduced something that hasn’t been seen since 1986: the 20-year US Treasury bond.

Today’s auction led to a 1.220% high yield rate, only slightly higher than Series I savings bonds.

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And around 1.35% for a bank certificate of deposit (CD).

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The Martin Luther King Series I savings bond at 1.06% composite rate (the composite rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the 30-year life of the bond, and the semiannual inflation rate).

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Taylor Rule Calls For Negative Rates Of -10%, Powell Says No

Fed Chair Jerome Powell is adamant that the US will not go where other Central Banks have gone before … to negative rates.

Even though the Mankiw specification of the Taylor Rule model says that The Fed Funds Target rate should be -10.01% based on the surge in unemployment (14.70%) and the lack of core inflation (1.70%). The Fed Funds Target rate remains at 0.25%.

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As unemployment surges (green line) with the lockdown, banks are expecting a tsunami of loan delinquencies and defaults. Hence, bank excess reserves have spiked as well (white line fever).

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Hopefully with states opening up again, this is simply temporary.

Instead of losing my blues, Powell is giving me the blues.

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U-6 Unemployment Rate Spikes To 22.8% As Average Hourly Earnings Spikes To 7.9% YoY

A sign of the times. As governments around the globe shut down economies to prevent the spread of the Covid-19 condition.

The US unemployment rate rose to 14.7% in April, up from 4.4% in March.

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Yes, 20.5 millions jobs were lost in April.

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The U-6 unemployment rate (or full-time plus partial unemployment rate) rose to an astronomic 22.8%!

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Average hourly earnings YoY rose to 7.9% YoY.

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But look at the US employment total in labor force. Covid-19 / gov’t shutdown has wiped out labor force gains since 1999 and The Clinton Administration.

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I wish I knew a place that was open in Virginia, but I don’t.

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S&P 500 Implied Correlation Remains Elevated (70.56) As Volatility Subsides

March was truly a horrific month for employment and markets. But S&P 500 volatility is subsiding while the components of the S&P 500 remain at increased levels of implied correlation.

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Not surprisingly, JPMChase and Blackrock are highly correlated.

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The CBOE S&P 500 Implied Correlation Index measures the expected average correlation of price returns of S&P 500 Index components, implied through SPX option prices and prices of single- stock options on the 50 largest components of SPX.

Fed Chair Powell has upwards of $11.6 million invested with BlackRock, the firm that will manage a $750 billion corporate bond bailout program for the Fed.

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Alarm! US Personal Spending Tanks -7.5% MoM In March (Durable Spending Tanks 15.1% MoM)

Alarm! 

US personal spending tanked -7.5% MoM, exceeded only by durable goods spending that tanked -15.1% MoM in March.

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Personal income dropped by “only” -2% MoM.

An additional 3.8 million filed for jobless claims.

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Pending home sales tanked -14.5% YoY for March.

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Alarm!

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BlackRock, Voya Revive TALF Trade That Returned Double-Digits

Memories of the housing crash and financial crisis of 2008-2009. A Federal Reserve program to allow some to borrow cheap from The Fed and buy distressed assets that earn double-digit returns.

(Bloomberg) — Money managers are reviving one of the most profitable credit trades of 2009, thanks to the Federal Reserve.

Dozens of firms, from BlackRock Inc. and Voya Financial Inc. to credit specialists Palmer Square Capital Management and Varadero Capital, are raising funds to deploy into a central bank lending program that’s being resurrected to support the flow of consumer credit, according to people with knowledge of the matter.

They’re seeking to replicate the windfalls many enjoyed in the aftermath of the financial crisis when, by taking advantage of low-cost loans via the Term Asset-Backed Securities Loan Facility, they were able to notch double-digit returns purchasing top-rated ABS as the economy recovered.

It’s the latest example of how credit managers who spent much of the past decade battling low yields are now raising cash to seize on deep discounts created by the economic fallout from the coronavirus pandemic.

Investors, for their part, have been happy to oblige, piling billions of dollars into funds targeting distressed and dislocated securities as they aim to make up for steep losses elsewhere.

“If you look at what you’re getting an opportunity to invest in, it’s AAA rated paper that’s offering really healthy yields for the risk,” said Chris Long, president and founder of Palmer Square. “This go around, the TALF program is a bit more of a known entity. The fact that TALF proved so successful in 2009 really bodes well for demand.”

Still, some market watchers are already warning that replicating the gains of the last crisis may prove easier said than done.
On the heels of the U.S. housing collapse, asset-backed securities looked a lot more fragile in early 2009 than they do today. Average risk premiums on AAA rated ABS deals reached nearly 8%, according to Bloomberg Barclays index data. This year, they peaked around 3% in March and have since fallen to about 1.4%.

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“You’re not going to get 20% to 25% returns like you did in 2009,” said Greg Leonberger, director of research at investment consulting firm Marquette Associates. “The return potential is lower because spreads are lower.”

An example of the availability of distressed assets available is the TRACE number of distressed bonds traded.

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Here is the latest TALF term sheet.

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