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 GDP Forecast To Decline -34.9% QoQ (S&P 500 Sez “Meh”)

Now ain’t this a kick in the head. The Covid-19 and the government shutdown response is leading to a crushing decline in US GDP for Q2 2020 of … -34.9% QoQ.

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The recent dismal wholesale trade report sent forecast Q2 GDP down -34.9% QoQ.

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The reaction to the declining US GDP? Meh.

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The good news? NMHC rent payment tracker finds 80.2% of apartment households paid rent as of May 6.

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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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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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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The Fed’s Bigger Boat! Is The Fed’s Cure Worse Than the Covid-19 Virus?

Apparently, The Federal Reserve and US Treasury think they need a bigger boat!

(Bloomberg) — The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus.  Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. 

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.

PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.

TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.

SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.

MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position.

What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

Here is part of the mayhem The Fed/Treasury are trying to mitigate. The CitiMortgage Alternative Loan Trust 2007-A4 asset-backed security.

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Yes, the US Treasury curve is now below 0.75% from 10 years in, including negative yields on most Treasury bills.

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The US Treasury actives curve and On/off the run curves are under 1% at 15 years and in.

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Welcome to Amity Island, in a shutdown over the Corona-19 virus.

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Mortgage Bonds Rattle Wall Street Anew With Invesco Joining Pain (Fannie Spread To Gov’t SOARS)

Margin calls, the focus of books and movies like Margin Call, The Big Short, etc., during the financial crisis, are back!!

(Bloomberg) — The $16 trillion U.S. mortgage market — epicenter of the last global financial crisis — is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Federal Reserve to intervene.

Unlike last time, risky mortgages aren’t the cause. Instead, the coronavirus pandemic is threatening to make good loans go bad — and simultaneously sapping the market’s funding. There are fears that government efforts to shore up borrowers and financing won’t be enough and that mortgage and property investors again face massive losses.

Measures to slow the spread of the deadly disease are slamming the brakes on commerce, threatening to prevent companies from making payments on their leases and commercial mortgages. Companies are also firing employees, who won’t be able to keep up on their own rents and home loans. Mortgage industry veterans warn of a cascade of defaults.

At the same time, holders of mortgage-backed securities are fielding redemption requests from clients, margin calls from jittery counterparties and drops in their valuations, forcing the funds to solicit offers on billions in assets in emergency sales over the weekend. The pain continued Tuesday with Invesco Mortgage Capital Inc., a real estate investment trust that invests in mortgage-backed securities, also saying it’s no longer able to fund margin calls. If forced sales accelerate, bond prices could fall and put pressure on other investors to mark down or sell their holdings too.

Yes, Invesco Mortgage Capital is getting slaughtered, plunging from $18 on February 20th to $2.64 today.

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The Fannie Mae to Gov’t 10 year has exploded indicating a troubled mortgage market.

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Margin calls … they’re ba-ack!

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Fed Tears Through 2008 Playbook to Counter Economic Hit of Virus

(Bloomberg) — The Federal Reserve has sped through a litany of tools from its playbook during the 2008 financial crisis to support the economy. While they have rolled out several forceful measures, they still have tools and may consider brand new approaches.

Here’s the list of tools the Fed has used in the past two weeks and what could come next:

Cutting Rates to Zero?
Check.
The Fed announced a rare, emergency interest rate cut on March 3 in between its regularly scheduled meetings and then on Sunday, slashed them again to near zero.

Outcome-Based Forward Guidance
Under consideration.

The Federal Open Market Committee’s statement Sunday that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The guidance could be strengthened with language that suggests they will hold rates near zero for a long time, or until the economy achieves a numerical benchmark on inflation or employment. Outcome-based forward guidance was used during the financial crisis and has been discussed by Fed officials in recent months.
The market expects the Fed to maintain rates near zero through the end of 2021.

Quantitative Easing?
Check.
The central bank said in its statement Sunday that “over the coming months” it will buy at least $500 million of U.S. Treasury securities and $200 billion in mortgage-backed securities. That language left the door open to even more purchases, and potentially for a monthly amount as they did in previous rounds of QE.

Yield Curve Control?
Still possible.
This idea was floated by some officials during their debate over strategy and tools over the past several months. The idea is to cap longer-term yields with purchases to reinforce the central bank’s intent to hold rates low for a considerable period.

“The committee would commit to capping rates out the yield curve for a period consistent with its expectation for the duration of the outcome-based forward guidance,” Fed Governor Lael Brainard explained in a Feb. 21 speech. Ten-year Treasury yields jumped to over 1%, from a record low of 0.31% the week before, as the government considers massive stimulus that will force the Treasury to issue more debt.

Negative Interest Rates?
Probably not happening.
Unlike its European counterparts, the Federal Reserve has for the past several years pushed back from negative interest rates saying the tool wouldn’t be well suited to the U.S. economy which has more market-based finance than other countries. “We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” Federal Reserve Chairman Jerome Powell said at his Sunday press conference.

Now, they have gone to Plan D!

AAA rated CLOs, CDOs and CMBS are among the collateral types eligible to be pledged by top banks and broker-dealers in order to access the Federal Reserve’s emergency lending program for primary dealers.

The Fed’s so-called Primary Dealer Credit Facility “will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020,” the central bank said in a Tuesday statement announcing the countermeasure to the funding squeeze caused by the coronavirus crisis

It allows for short-term lending and will be available for at least six months at an interest rate equal to the discount rate, which was lowered to 0.25% on Sunday as part of the central bank’s emergency action
Facility resurrects a program the Fed rolled out in the depths of the financial crisis in October 2008

In addition to AAA rated CLOs, other eligible securities that can be used as collateral include IG corporate debt, international agency securities, IG commercial paper, municipal securities, MBS, and equities (with the exception of ETFs, unit investment trusts, mutual funds, rights and warrants)

CLO spreads are blowing out in secondary trading and the acceptance of CLO AAA tranches by the Fed’s facility could provide some relief. The PDCF program may help the market find an acceptable pricing level amid the volatility in secondary pricing, according to market participants

CLO AAA spreads are at post-crisis wides of 180bp for short weighted average life (WAL) and 230bp for long-WAL profiles.

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West Texas Intermediate crude fell another 16%.

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Meanwhile, the Dow is down another 7%.

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The Fed is going to plan D … which is BUY EVERYTHING!!!

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The Morning After! US Treasuries Surge, Mortgage Rate Spread Highest Since Q4 2008

It is the morning after the Fed panicked and lowered its lower bound for The Fed Funds Target rate to … 0%. Here is Fed Chair Jerome Powell calling to The Fed to take evasive action!

The result? US Treasuries yields are falling like a rock. US Treasury 10Y yields are down around 20 basis points this morning.

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And unless lenders lower their 30-year mortgage rates, the spread between Bankrate’s 30 year average mortgage rate and the 10 year Treasury yield is at its highest level since Q4 2008, the epicenter of the financial crisis.

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This morning before the US equities markets open, Europe is already down around 7% – 8%.

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Here is Fed Chair Jerome Powell wishing us all the best!

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Another Trading Day, Another Trading Halt (NASDAQ Opens Down 7%, Europe Down 9%, Brazil Down 11.65%)

Another trading day, another trading halt as NASDSAQ opens down 7%.

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Europe is a sea of red as is Brazil.

Here are the circuit breakers thresholds and time durations:

Level 1 halt (7% decline in S&P 500 index)

  • Trading will halt for 15 minutes if drop occurs before 3:25 p.m.
    At or after 3:25 p.m.—trading will continue, unless there is a Level 3 halt.

Level 2 halt (13% decline in S&P 500 index)

  • Trading will halt for 15 minutes if drop occurs before 3:25 p.m.
    At or after 3:25 p.m.—trading will continue, unless there is a Level 3 halt.

Level 3 halt (20% decline in S&P 500 index)

  • At any time during the trading day—trading will halt for the remainder of the trading day.

Trading has resumed in America. As of 10am EST, Europe keeps crashing (down 10%).

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High yield CDX gets crushed!

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Gold is down 3.82%, silver is down 5.40% and Brent crude is down 6.43%.

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UPDATE:

Dow down >2,000. Eurozone stocks crushed like an oversteamed bratwurst!

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Get to the choppa!

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