Wow. Some Major Bond Managers Brace for Financial Storm! Advices Public to Hold Cash!

Well some bond managers haven’t been buying the Goldilocks scenario being portrayed by record stocks. Instead they are bracing for a financial storm.

One of Britain’s biggest bond managers, Fidelity, says it’s time to hold cash and gold

From the Telegraph: (bold mine) 

The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress.

Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, including the flagship Moneybuilder Income fund, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock.

“Systemic risk is in the system and as an investor you have to be aware of that,” he told Telegraph Money.

The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash”, an unusual suggestion from a mainstream fund manager.

His concern is that global debt – particularly mortgage debt – has been pumped up to record levels, made possible by exceptionally low interest rates that could soon end, and he is unsure how well banks could cope with the shocks that may await.

He pointed out that a saver was covered only up to £85,000 per bank under the Financial Services Compensation Scheme – which is effectively unfunded – and that the Government has said it will not rescue banks in future, hence his suggestion that some money should be held in physical cash.

He declined to predict the exact trigger but said it was more likely to happen in the next five years rather than 10. The current woes of Greece, which may crash out of the euro, already has many market watchers concerned.

The recommendation has been to hold not just cash but physical cash!

Perhaps Fidelity hasn't been aware that the establishment wants to ban cash transaction and hoarding.

Oh and it’s not just Fidelity, some US bond funds have also been talking and doing the same contingent measures. 

From Bloomberg: (bold mine)

TCW Group Inc. is taking the possibility of a bond-market selloff seriously. 

So seriously that the Los Angeles-based money manager, which oversees almost $140 billion of U.S. debt, has been accumulating more and more cash in its credit funds, with the proportion rising to the highest since the 2008 crisis.

“We never realize what the tipping point is until after it happens,” said Jerry Cudzil, TCW Group’s head of U.S. credit trading. “We’re as defensive as we’ve been since pre-crisis.” 

TCW isn’t alone: Bond funds are holding about 8 percent of their assets as cash-like securities, the highest proportion since at least 1999, according to FTN Financial, citing Investment Company Institute data.

Cudzil’s reasoning is that the Federal Reserve is moving toward its first interest-rate increase since 2006, and the end of record monetary stimulus will rattle the herds of investors who poured cash into risky debt to try and get some yield.

The shift in policy comes amid a global backdrop that’s not exactly rosy. The Chinese economy is slowing, the outlook for developing nations has grown cloudy, and the tone of Greece’s bailout talks changes daily.

Well it’s more than just the Fed, China and Greece,  bond managers have been antsy because they perceive markets as having been distorted…

Of course, U.S. central bankers are aiming to gently wean markets and companies off zero interest-rate policies. In their ideal scenario, borrowing costs would rise slowly and steadily, debt investors would calmly absorb losses and corporate America would easily adjust to debt that’s a little less cheap amid an improving economy.

That outcome seems less and less likely to Cudzil, as volatility in the bond market climbs.

“If you distort markets for long periods of time and then you remove those distortions, you’re subject to unanticipated volatility,” said Cudzil, who traded high-yield bonds at Morgan Stanley and Deutsche Bank AG before joining TCW in 2012. He declined to specify the exact amount of cash he’s holding in the funds he runs.

Price swings will also likely be magnified by investors’ inability to quickly trade bonds, he said. New regulations have made it less profitable for banks to grease the wheels of markets that are traded over the counter and, as a result, they’re devoting fewer traders and money to the operations.

To boot, record-low yields have prompted investors to pile into the same types of risky investors -- so it may be even more painful to get out with few potential buyers able to absorb mass selling.

Record stocks in the face of record imbalances at the precipice!

When Bond Yields Hurt the Stock Markets

The Canadian research outfit BCA Research seems to have second thoughts about the US bull market:  (bold mine)

The speed of the yield jump is unnerving for stock bulls. Bond yields are rising much faster than profit growth. The broad market has run into trouble whenever the growth in yields has surpassed the growth in earnings. More serious equity pullbacks have occurred when this differential is negative 10% or lower, as is currently the case. This scenario has historically been associated with too rapid an increase in inflation expectations, which spells valuation and monetary trouble ahead. The current signal from this indicator is negative, as the differential is at its widest level in more than 20 years. However, it should be noted that inflation expectations are not problematic at the moment, and the very low starting point in yields reduces the indicator’s efficacy. Still, this gauge has a reliable track record, underscoring that capital preservation should remain of paramount concern.

Yes, capital preservation should indeed be anyone's paramount goal.

And volatile bond markets marked by rising bond yields are likely to continue, because of the unintended consequences from the US Federal Reserve policies of inflating a global bond bubble

Writes Dr. Ed Yardeni

The sharp increase in yields caused by the QE tapering talk suggests that the Fed's bond purchases inflated a big bubble in the bond market. As I’ve noted previously, the 10-year yield normally tends to trade around the y/y growth rate in nominal GDP. The jump in yields is normalizing this relationship. The Fed’s tapering talk has caused investors around the world to taper their holdings of bonds. That’s starting to poke holes in other bubbles as well, particularly emerging market bonds, currencies, and stocks.

To add to the above, increases in bond yields (10 year USTs) has coincided with slowing economic growth. 

Also emerging markets and ASEAN markets are behaving like a periphery to the core dynamics.

The bond bubble has been underpinned by unsustainable accumulation of debt from government deficits, which I have been pointing out.

Writing at the Project Syndicate, economist, president emeritus of the National Bureau of Economic Research (NBER) Harvard professor Martin Feldstein warns of an upward trend of bond yields for the same reasons…

Although it is difficult to anticipate how high long-term interest rates will eventually rise, the large budget deficit and the rising level of the national debt suggest that the real rate will be higher than 2%. A higher rate of expected inflation would also cause the total nominal rate to be greater than 5%.

…as well as the risks of a comeback of price inflation

The greatest risk to bond holders is that inflation will rise again, pushing up the interest rate on long-term bonds. History shows that rising inflation is eventually followed by higher nominal interest rates. It may therefore be tempting to invest in inflation-indexed bonds, which adjust both principal and interest payments to offset the effects of changes in price growth. But the protection against inflation does not prevent a loss of value if real interest rates rise, depressing the value of the bonds.

Mr. Feldstein says that the current environment seems ripe for a crisis.

The relatively low interest rates on both short-term and long-term bonds are now causing both individual investors and institutional fund managers to assume duration risk and credit-quality risk in the hope of achieving higher returns. That was the same risk strategy that preceded the financial crisis in 2008. Investors need to recognize that reaching for yield could end very badly yet again.

Caveat emptor.

More Troubling Signs in the Charts of ASEAN Stock Markets; The Peso Carry Trade?

Two weeks back I showed of the troubling signs in the chart patterns of 3 of the 4 ASEAN equity markets[1].

This week the Thailand’s SET and the Phisix posted significant gains as well as a (somewhat) muted decline by the Indonesia’s benchmark.

But the weekly scores don’t tell of the real story. Extreme volatility has swamped ASEAN equity markets. The three ASEAN markets opened strong, only to see much of their gains or losses reduced by the end of the week.

Importantly the amplified volatility in the three ASEAN stocks led to a substantial deterioration in the chart patterns.

The Phisix has been bedecked by 3 “head and shoulder” patterns.

Stock market ‘bulls’ have mainly moored their sanguine readings by emphasizing on the bullish reverse head and shoulder pattern (green lines) formed during the last bear market strike in June.

But they have mostly been ignoring the older and larger 6 month toppish head and shoulder pattern (blue lines), which supposedly, as I previously pointed out, has a bigger chance of playing out.

This only shows that charts serve to fulfill the role of confirmation bias and as social talking points rather than objective assessment in the tradeoff of risks and rewards.

At the start of the week, some bulls prayed for the 200 day moving average (red trend line) to hold. And sure enough their supplications were answered. The Phisix stormed to a three day 3.8% advance. However the euphoria has abruptly been squelched by a huge drop in US stocks. The US influenced accrued Thursday and Friday losses in the Phisix chipped away half of the 3 day advances.

But this week’s botched advance has carved out another head and extended right shoulder (red lines). So does the new short term pattern offset or neutralize the earlier short term pattern? Does the new pattern reinforce the older and longer pattern?

One thing is sure, the motley of contradictory signals will reveal of the biases of analysts who, I expect, will continue to ignore signals that goes against their preferences.

Thailand’s SET seems to peculiarly share the same chart formation and even patterns with the Phsix, except that the toppish formation has been MORE pronounced.

Aside from the short (red) and mid-term (green) head and shoulder reversal pattern, the SET has now transcended into a supposedly bearish death cross where the 200 dma is above the 50 day dma (see blue oval).

Yet the death cross has likewise afflicted the Dow Jones Indonesia Stock Index (IDDOW).

Friday’s 3% decline has breached the short term support, which supposedly means that the momentum now runs in favor of the bears.

Yet I am not banking on charts.

As I previously said, the much advertised ‘strong’ fundamentals peddled by politicians and their lackeys will eventually be unmasked and reflected on charts. So far charts of these 3 major ASEAN benchmarks appear to already disagree with mainstream or consensus prognosis and expectations.

Yet if the market’s downshift deepens, then expect ‘fundamentals’ or future news to reflect on such downgrade.

As I previously wrote[2]

“Fundamentals” tend to flow along with the market, which is evidence of the reflexive actions of price signals and people’s actions. Boom today can easily be a recession tomorrow.

For me, for as long as the juggernaut of the bond vigilante prevails, it would be natural for these markets to respond to the fundamental changes being signaled by the markets.

And it would seem naïve to believe that history will mechanically repeat in the face of substantially changing conditions.

The Peso Carry Trade?

And one more thing, given the two year highs by yields of 10 year USTs, the spread between the Philippine and US counterparts have shrank to only 74.5 basis points or the smallest ever in history.

 

The Philippines has already bested not only ASEAN neighbors but even China and Australia in terms of treasury bond yields. 

While I previously discussed that such mispricing have been signs of a Philippine bond bubble[3], the incredibly low yield will not only reduce the incentives by foreigners to buy local assets or invest in the Philippines, such low yields may even induce foreigners, or even locals, to use the Philippine currency as funding currency for uncovered interest rate or currency carry trades[4].

Foreigners or even locals may borrow the Peso using such proceeds to buy into higher yielding ex-Peso assets. The internet now enables locals to access foreign markets. Borrowing Peso to fund a currency trade will only bloat on the swiftly growing loans in the banking system increasing credit risks as well as currency and interest rate risks. And by borrowing the Peso and converting them to foreign currency, the Peso carry will tend to temporarily weaken the local currency.

And given the prospects of reduced foreign buying from excessively low yields, this leaves locals representing a miniscule segment of the population as support for the domestic stock markets.

However the growth of local population participation on the domestic stock markets will hardly be significant in the same way how the domestic banking system has been unable to increase household participation due to excessive regulations.

Little of the above dynamics supports a return to a low interest rate dependent bullish backdrop. 

---

[1] See Charts of ASEAN Stock Markets: Troubling Signs August 13, 2013

[2] See Phisix: Don’t Ignore the Bear Market Warnings June 30, 2013

[3] See Phisix: The Impact of Slowing Banking Loans August 5, 2013

[4] Wikipedia.org Currency Carry (investment)

JGB Watch: Global Bond Markets Riot, Equities Hemorrhage

Back to my JGB-Japan debt crisis watch.

The Japanese financial markets are back into their natural state: stable instability.

The JGB yields of 5, 10, and 30 year maturities have all been trading higher as of this writing

I will not say that this has been due to the Bernanke 2014 taper.

Intraday 10 year JGB yields opened low (even when the US Treasury counterpart zoomed) and seesawed steeply between the .81+% and .85+% twice.

As of this writing 10 year yields are near the peak of the trading session.

The latest update on outstanding JGBs reveals of an increase of 5.3% to ¥969.12 trillion, with the Bank of Japan’s (BoJ) holdings hitting an all time high of ¥127.88 trillion at the end of March, up 43.8% from the previous year. (Japan Times) The BoJ’s share of total JGBs now accounts for 13.2% as against 12% in December 2012 as shown above as per Japan’s Ministry of Finance

The report also says that JGB holdings by overseas investors grew 6.5 percent to ¥81.55 trillion, also a record high as of the fiscal yearend, the BOJ said.

While foreign punters increased their JGB holdings, cash rich resident Japanese appear to be in a “capital flight” mode

From the Bloomberg,

Japan’s companies stockpile of cash reached a record in the first quarter as they poured investment abroad, underscoring Prime Minister Shinzo Abe’s challenge to boost the nation’s investment and wages.

Private companies’ cash and deposits rose 5.8 percent from a year before, to 225 trillion yen ($2.4 trillion) -- an amount in excess of the size of Italy’s economy or the liquid assets held by American firms, Bank of Japan data showed in Tokyo. Businesses held 55 trillion yen in direct investment abroad.

The cash and deposit holdings of Japan’s non-financial companies reached a record in the January-to-March period, according to BOJ figures dating back to 1979. The $2.4 trillion equivalent compares with the $1.8 trillion in liquid assets -- such as cash, deposits and money-market fund shares -- held by nonfinancial U.S. firms, according to Federal Reserve data.

So instead of domestic investments, in contravention to the desires of politicians, the Japanese are acting to preserve the purchasing power of their savings via overseas investments or placements. 

And without investments to spur productivity growth, there will hardly be sufficient sources of funding for the towering debt which the Japanese government continues to accumulate.

BoJ officials publicly exhibit "confidence" on the supposed success of Abenomics. But such confidence does not seem to be shared by the people within the institution as insiders appear to be apprehensive over the chances of success of Abenomics.

This report from the Wall Street Journal reveals of the cracks in the officialdom promoting Abenomics: (bold mine)

But for bank officials tasked with making sure the bond market operates smoothly, things have been anything but smooth over the past three months, as they scrambled to tame wild swings in bond yields triggered by the BOJ’s decision in April to double its already massive purchases of Japanese government bonds.

“They seem real desperate, asking us what they can do to contain the situation,” an official at a Japanese trust bank said recently.

“Mr. Kuroda comes across as being unfazed by the rises, but those at the Market Operations Division are determined to push them down,” added the official who declined to be identified, given the bank’s relationship with the BOJ.

The three-dozen officials at the BOJ’s Market Operations Division have suddenly found themselves in the spotlight after the bank, under Mr. Kuroda’s leadership, adopted bold monetary loosening measures in early April.

And anxious they should be.

Wild vacillation of the JGBs has also been reflected on the Nikkei which slumped 1.74% today.

Asian markets hemorrhaged badly today from a combo of interest rate risks factors seen via unstable JGBs, the spike in US treasury yields and the bedlam over at China’s credit markets

ASEAN bond markets likewise bled today. Today’s actions appears ominous to my recent warnings that the Philippine bond bubble is an accident waiting to happen

Europe’s stock markets as of this writing are also in deep red.

The French 10 year yield has also skyrocketed as of this writing.

Four of what I see as the very critical bond markets (Japan, France, China and the US) appear to be in  varying degree of seizure. 

And these has upset a broad spectrum of risk assets from stocks to commodities across the globe.

If the steep gyrations in the global bond markets are sustained, then the previous booms will metastasize into a global debt crisis sooner than later.  

China Bubble: Oops, China’s Debt Markets Suffers from Cash Squeeze

While clueless mainstream media and their experts continues to fixate on the so-called “FED tapering” and foreign money exodus, widening cracks in China’s property bubble appears to have percolated into her debt markets as the Chinese debt markets suffers from lack of funding. 

The consequence: higher interest rates

From Bloomberg: (bold mine)

China’s Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months owing to a cash squeeze, according to two traders at finance companies that participate in the sales.

The ministry sold 9.53 billion yuan ($1.55 billion) of 273-day bills, less than the 15 billion yuan target, they said. The seven-day repurchase rate, which measures interbank funding availability, has more than doubled in the past month to 6.81 percent, as banks hoard cash to meet quarter-end capital requirements.

The average yield at the sale was 3.76 percent, said the traders, who asked not to be identified. That compares with yesterday’s 3.14 percent rate for similar-maturity existing securities, according to data compiled by Chinabond, the nation’s biggest debt-clearing house. The ministry’s last failed auction was a sale of 182-day bills in July 2011.

More signs of the deepening credit strains worldwide.

Caveat emptor

BoE's Andy Haldane: Bursting of the biggest bond bubble in history is the biggest financial risk

So Bank of England’s Andy Haldane admits to the monster central bankers have spawned.

From the Telegraph.co.uk

Andy Haldane, the Bank of England's executive director for financial stability, believes the biggest risk to the global financial system is a "disorderly" bursting of the bond bubble created by quantitative easing. 

He told the Treasury Select Committee on Wednesday that bond market had seen “shades of that" in the spike in bond yields around the globe after the US Federal Reserve said it was looking to taper its massive stimulus. 

“We have intentionally blown the biggest government bond bubble in history,” he said at hearing on the reappointment of officials to the Financial Policy Committee, created to monitor broad risks to the financial system. 

If central bankers acknowledge that withdrawing stimulus would burst the bond bubble and trigger financial instability would they proceed with that? Hardly. 

But again continuing to inflate the unsustainable bond bubbles will produce an eventual bust. 

Long term US treasury yields, for instance, has been inching higher since the 2nd half of 2012 or even before the FED’s unlimited QE 3.0 as previously discussed. With the FED’s QE 3.0, the rate of increases of bond yields accelerated. So in order not to lose credibility, the FED had to put on the make up and blabber about “tapering” which media reasons backwards. 

So if QE today pushes up yields, and withdrawing QE will also drive up yields then both will end up with the same scenario: the bursting of the bond bubble. 

Damned if you, damned if you don’t 

And the initial hissing of the bond bubble has already been crushing many markets including ASEAN markets. What more of a full scale implosion?

How about the accountability of central bankers for the coming devastation?