Global equity markets remain complacent even as the rampaging bond vigilantes have been prompting for mounting losses on the vastly larger interest rate and related (even derivatives) markets.
Last night the US and Euro based bond markets endured a massive selloff as manifested by substantial spikes in bond yields.
The contagion appears to have spread to Asian markets as of this writing.
Yields of 10 year US treasuries have fast been approaching 3%.
10 year UK bond yields pierced the 3% level and now has been at 2 year highs
Yields of German 10 year bonds are at one year highs
French 10 year bond yields soar past June highs and now also has been at 1 year highs.
Italian bonds seem as catching up.
And so with the yields of Spanish bond equivalent.
Yields of Japan’s 10 year bonds appear to be making a reversal.
China’s bond markets has also been reflecting on the global contagion where yields are at 2 year highs.
Mainstream media and the bulls say that we should “move along nothing to see here” promulgating a continuation of a risk on environment because rising bond yields are signs of “normalization”.
But there hardly seems anything "normal" with the unprecedented scaling up of debt levels as shown by government debt.
Government external debt levels and the average government debt as % of GDP seen from another perspective. Have you seen anything “normal”?
The only “normal” I can see has been one of an exploding global debt build-up amidst a low interest rate environment. The latter environment is facing a radical change as manifested by the actions in the global bond markets.
The broad increases of bond yields now effectively covers almost the entire spectrum of the US $ 99 trillion global bond markets where government bonds account for 43% share.
Global interconnectivity or interdependence (financial globalization) serves as transmission mechanism that would imply relative rising interest rates across the world.
And as I previously pointed out
This means that changes in global bond yields will also influence all these dynamics. That’s unless the Philippines operates in a vacuum or an imaginary world where prices have been stuck in a stasis.The bottom line is that changes in global bond markets, especially by the bond markets covering the big 4, will also influence domestic bond markets as well as interest rates.
When interest rates soar or when the cost of debt servicing grow faster than the ability of debtors to pay them, watch out.
The Wile E. Coyote moment is upon us. Expect the unexpected.
This week Aggregate Credit, AGG, traded 0.70% lower, as the Interest Rate on the US Ten Year Note, ^TNX, traded higher from 2.75% to 2.94%.
ReplyDeleteLisa Abramowicz and Liz Capo McCormick of Bloomgerg report “The worst losses in U.S. debt in at least 37 years are being magnified by investors exiting the market at the same time new regulations prompt Wall Street firms to cut back on trading corporate bonds. Bank of America Merrill Lynch’s U.S. Broad Market Index is on pace to drop 4.41%, the biggest annual loss since at least 1976. Investors pulled $123 billion from bond funds since May, according to TrimTabs. Trading in corporate fixed income securities is the lowest ever as a proportion of outstanding debt, and volumes in Treasuries are little changed from 2007 levels even though the market has almost tripled to $11.5 trillion, Financial Industry Regulatory Authority and ICAP Plc data show. Bonds are getting riskier even with inflation at bay and corporate profits hitting new highs. ‘When bond investors start to meaningfully divest themselves of their positions, it will be analogous to yelling fire in a crowded theater,’ Michael Underhill, the chief investment officer at Capital Innovations LLC, which manages $1.5 billion, said”
Brian Chappatta of Bloomberg reports “The biggest losses since 1999 for municipal debt signal that Detroit’s bankruptcy and 14 weeks of withdrawals from mutual funds are overwhelming historical trends pointing to a rebound in the $3.7 trillion market. Local debt lost 1.6% in August, the steepest drop for the month in 14 years. It marked just the second time in 25 years that the obligations fell in both July and August, a period in which the market usually rallies as investors get cash from coupon and principal payments while issuance dwindles. Benchmark yields are the highest since 2011 and exceed those on Treasuries and AAA company debt by the most in at least 20 months”
Sean McLain and I Made Sentana of the WSJ report on the failure of Liberalism credit scheme of Dollarization “Companies across Asia are facing a debt repayment crunch as plunging local currencies make it more costly to repay foreign loans, a situation that is exacerbating stresses on the region's economies. Asian companies took out sizable foreign loans in recent years as the U.S. Federal Reserve kept interest rates low and printed money. For firms in nations like India and Indonesia, rates on U.S.-denominated debt were more attractive than local borrowing costs. But the current exodus of capital from emerging markets, amid expectations the Fed will end its period of extraordinary monetary stimulus later this year, has changed that equation. Foreign funds are pulling out of Asian bonds and other assets amid expectations U.S. rates will rise further. That is pushing currencies in Asia sharply lower and raising the cost of repaying U.S. denominated borrowings.”
Ben Bland of the Financial Times reports “The gloom surrounding Indonesia continued to deepen on Monday after southeast Asia’s biggest economy posted a record monthly trade deficit and inflation climbed to a four-year high. The trade deficit jumped to $2.3bn, much higher than expected, in July as imports remained strong while exports fell because of the slowdown in China and ongoing troubles in Europe and the US. Annual consumer price inflation rose to 8.8% in August, from 8.6% one month earlier, with economists predicting that inflation may reach double digits by the end of the year, putting pressure on the central bank to continue hiking interest rates. Indonesia has been hit hard by the recent sell-off, which has also ensnared other emerging markets with large current account deficits and a need for foreign financing like Brazil, India, South Africa and Turkey.”