Fri, 29th April 2016

Anirudh Sethi Report


Archives of “bond yields” Tag

Short sales of eurozone bond ETFs surges

Investors have sharply escalated their use of exchange traded funds as they seek a new way to sell exposure to eurozone bonds beyond the traditional avenues of cash and futures markets.

The use of European bond ETFs for expressing a negative or short view on bond prices has surged past €500m in the first week of July.

This marks the first time activity has risen above this level and comes just a few months after short positions, which benefit from bond yields rising and prices falling, stood at just €100m, according to Markit data.

Simon Colvin at Markit said: “The growing demand to borrow highlights that the end usage of European ETFs continues to grow in sophistication as investors chose the asset class to express both long and short views on the bond market.”

The escalation in demand for selling exposure against bonds via ETFs comes in the wake of intense volatility for the eurozone debt marked by a sharp rise in yields from late April through to mid-June.

German bonds clock second ugly day

When he was visiting Washington in April for the semi-annual meeting of the International Monetary Fund German finance minister Wolfgang Schäuble dismissed the appeal of taking advantage of the country’s record low borrowing costs. He better be careful as that window might be closing.

After touching a record low of just under 0.08 per cent in April, the yield on the ten-year German bond finished up at almost 0.9 per cent on Wednesday.

Combined with Tuesday, the sell-off is the largest two-day move higher in ten-year German bond yields since 1998, according to Citi.

The yield, which moves in the opposite direction to the price of a bond, rose 17 basis points to 0.88 per cent.

Eurozone’s march to QE enters its final stages

Just with words, Mario Draghi, European Central Bank president, dazzled bond markets.

What will happen when he actually acts?

His announcement on January 22 of eurozone “quantitative easing” led to another big lurch down in government borrowing costs. Yields, which move inversely with prices, are now negative on German bonds with maturities of up to six years. Yields on 10-year Spanish and Italian bonds have fallen even faster than German equivalents.

This week’s ECB meeting in Cyprus will set the stage for QE implementation this month. So far Mr Draghi has been coy about details, even about exactly when asset purchases will start — with good reason: how the ECB manages its bond buying will largely determine where yields head next. In turn, that could prove crucial in determining whether his ambitious programme is perceived as succeeding and likely to pull the eurozone back from the brink of dangerous deflation.

CLSA-QE Cannot Prevent Collapse Of Emerging Markets

If QE is working, why is bank credit contracting?

q   Since May 2013 US bank credit has contracted at a 3% annualised rate. 
q   In Euroland, bank lending to the private sector is contracting at 3% this year. 
q   Lower exchange rates and higher interest rates spell lower growth in emerging 


QE has not made baby boomers borrow more and save less q   The ageing baby-boom generation (48-67) is saving more, borrowing less and 
    reducing debt as they head into retirement.

q   Under-48s have too much student debt; and with balance sheets damaged by 
    falling property prices, they cannot gear up to offset the baby boomers’ delevering. 
q   Real personal disposable-income growth is at levels associated with recessions, 
    bond yields are rising and inflation falling. Read More 

How Much Have Expectations Changed on Fed Bond Buying?

The Federal Reserve’s decision Wednesday to continue its $85 billion monthly bond buying program at full speed shook up investors’ expectations for how long the central bank would keep up its easy money policies, but a survey of Wall Street analysts raises some questions of how much has really changed.

The Wall Street Journal conducted a quick survey, asking Fed watchers on Wall Street how big they expected the Fed’s balance sheet to become now, after Wednesday’s decision to keep buying, compared to June, when the Fed signaled it planned to slowly wind the program down by mid-2014.

The Fed had total assets of $3.722 trillion as of September 18, according to its weekly release of details about its balance sheet. As of June, when Fed Chairman Ben Bernanke said the Fed expected to wind down its program by mid-2014, analysts on average expected the Fed to finish the program with assets totaling $4.06 trillion. That’s based on eight responses received from Fed watchers at big banks and research firms likeGoldman SachsJ.P. Morgan and Macroeconomic Advisers. After Wednesday decision to keep the bond buying program going, and play down the earlier guidance of an end by mid-2014, analysts expect the balance sheet to grow to $4.27 trillion.

Analysts, in effect, expect the Fed to buy $218 billion more in Treasury and mortgage debt than they had expected before, which is another way of saying they expect the program to go about two and a half months longer than before. This is a lot of money to most people, but a fraction of the Fed’s already large holdings. And it’s not clear that it will get the Fed all that much, in terms of economic stimulus. One rule of thumb is that every $100 billion that the Fed adds to its balance sheet reduces long-term bond yields by 0.03 percentage point. Using this analysis, an extra 2.5 months of buying reduces bond yields by 0.654 percentage points. That’s meaningful but not monumental. Read More 

Summers relief rally won’t last long

Larry Summers’ abrupt exit from the race to chair the US central bank has sparked a relief rally in Asian markets but domestic economic challenges and the upcoming tapering of Federal Reserve stimulus raise questions over the sustainability of the gains, according to analysts.

Bullish spirits were raised across equities and currencies on Monday as investors bet that ultra-loose monetary policy would now live longer. Mr Summers was seen as the candidate more likely to call a quick end to the Fed’s quantitative easing, expected to trigger a reversal in the floods of hot money that have flowed into emerging markets in search of better returns.

“It’s a sigh of relief here,” said Frederic Neumann, co-head of Asian economic research at HSBC. “But in two days this will blow over because Asia has bigger problems. The Fed will taper in accordance with economic data and Asia has to do its homework to prepare for a rising rate environment.” Read More 

Lessons from Lehman: ‘Don’t Panic’

WEEKEND-READINGWarren Buffett is not called the ‘Oracle of Omaha’ for nothing.

‘Be fearful when others are greedy, and be greedy when others are fearful’ is good investment advice looking back at the turmoil of September 2008.

The demise of Lehman Brothers five years ago marked the start of a truly fearful six months for investors. Only in March 2009 had risky asset prices fallen far enough for bargain-hunting buyers to begin picking up equities and lower-quality bonds.

On the anniversary this weekend of Lehman’s collapse, those investors who stayed the course in equities and junk bonds can afford a smile. The S&P 500 index has gained 50 per cent.

They have done well, though alternative bets made in 2008, such as buying a New York City taxicab medallion, have done even better. Read More 

Bank of Japan August 7 – 8 meeting minutes released

  • Many members said they hope the government steadily promotes fiscal reform
  • Credibility of fiscal management must be restored to keep intrest rates stable
  • Many members said BOJ’s huge buying is keeping yields low even as economy recovers
  • One member said bond yields may rise and erode the effect of BOJ easing if the government efforts on fiscal reform weaken
  • Many said price rises being observed across large range of itmes
  • A few projected Japan CPI to rise through summer then pause thereafter

Link to full text of the minutes:

Minutes of the
Monetary Policy Meeting
on August 7 and 8, 2013

Albert Edwards Storms Out Of The Gate With Calls For 450 On The S&P, Sub-1% 10 Year, And $10,000 GOld

It has been a while since Albert Edwards updated the world on his macro and market thoughts. He finally does so today with a tour de force on the crash in the emerging markets, which for him exposes the “idiocy of one of the key investment themes since the 2008 Great Recession – namely that with developed economies burdened with excessive debt and in the throes of multi-year deleveraging, investing in emerging markets would not only produce superior returns but was also less risky. Regular readers will know we have long railed against this idea, having dubbed the BRIC story a Bloody Ridiculous Investment Concept.

He links what is happening now to his “call at the end of last year that the EMs were heading for a balance of payments crisis and would see a currency debacle similar to 1997 was met with total indifference. We still find the same disregard to our call for a renminbi  devaluation.”

Continuing the litany of vindication, Edwards next observes that the “global economy and markets have been far, far more vulnerable to a resumption of the 2008 crisis than the happy-clappy consensus would have us believe. At the moment, investors think that problems are isolated to a few EM countries that have allowed their current account deficits to get out of hand. I see this as the beginning of a process where the most wobbly domino falls and topples the whole precarious, rotten, risk-loving edifice that our policymakers have built.”

Naturally no crash prediction will be complete without some fond reminiscences on the most historic crash of all: 1987. Read More 

Banks: Where’s The Book?

RBI has made SOE banks’ book value more opaque by allowing banks to transfer bonds to HTM at historical prices – Given the sharp increase in interest rates since 15th July 2013, banks (especially SOE banks) were sitting on big MTM losses on their government bond books. RBI has now allowed banks to do the following:

1. It has allowed banks to keep SLR bonds in HTM at 24.5% of net liabilities (NDTL) until further notice (against earlier requirement of 23% over time).

2. Banks will be allowed to shift SLR bonds to HTM (up to 24.5% of NDTL) from AFS as a one time measure. Moreover, banks can shift these bonds at prices as of 15th July – the date of first RBI action.

3. Moreover, if banks have any losses on remaining AFS bonds, they can spread it over next 3 quarters. RBI was likely concerned by the hit on capital SOE banks would have had to take – SOE banks were likely sitting on meaningful bond losses (~Rs.175bn for our coverage SoE banks – ~40bps of risk weighted assets). This would have taken out a lot of equity from the already capital starved SOE banks sector. This move by the RBI is an attempt to reduce the capital hit. Read More