Sat, 30th July 2016

Anirudh Sethi Report


Archives of “government debt” Tag

India unlikely to slip on FY17 fiscal deficit target: DBS

Even though the country reached 43 per cent of its fiscal deficit target in the first two months of 2016-17 itself, Singaporean brokerage DBS on July 29 said it does not see a slippage for the full year.

“For this year, we don’t see a fiscal slippage, even as quality of adjustment is questionable,” it said in a note released after official data said that fiscal deficit reached 43 per cent of the yearly target in May.

In the past, there have been voices, including from the central bank, which have suggested looking at the “quality” of the deficit, or whether the borrowings are used for more productive purposes.

Conceding that the 43 per cent number looks “precarious”, the brokerage said the start of a new fiscal year experiences slower revenue collections on the direct taxation front but there is front-loading of expenditure.

It said over the course of the year, revenues will get a leg up through the expected higher indirect tax collections, but underlined that non-tax receipts targets through spectrum sales and divestment at 1 per cent of GDP are “ambitious”.

Wait till next time, BOJ says

The Bank of Japan’s small expansion of monetary easing Friday could be the warmup for a bold offensive next time around in concert with fiscal policy moves.

The central bank’s statement on the “enhancement of monetary easing” drew attention not so much for its immediate impact, as for the pledge to “conduct a comprehensive assessment” of economic and price developments when the policy board next meets. This is aimed at hitting the target of 2% price growth “at the earliest possible time” — phrasing that inevitably calls to mind the possibility of further easing. BOJ Gov. Haruhiko Kuroda, for his part, did not rule out that interpretation when speaking to media after the meeting.

 The governor emphasized the importance of a healthy mix of fiscal and monetary measures. Most likely, any expanded easing will complement whatever large-scale stimulus the government has in store.

On its own, bold fiscal spending funded by Japanese government bonds would put upward pressure on long-term interest rates by sucking up capital from the private sector. Adding stronger monetary easing to the mix combats that pressure, maximizing the impact of stimulus. Such a combination also would likely be easier for the BOJ to swallow than bolstering the economy with monetary policy alone.

Getting cozy

The central bank’s policy board will next meet for two days starting Sept. 20 — good timing in relation to fiscal policy mileposts. Prime Minister Shinzo Abe’s government will unveil its stimulus package Tuesday. By the end of August, government ministries and agencies will have put in funding requests for the fiscal 2017 budget. Another supplementary budget for this fiscal year will be brought before the Diet when an extraordinary session convenes in September.

ALERT : S&P downgrades Australia’s AAA outlook to negative

The Australian dollar has slid and shares have pared gains after Standard & Poor’s downgraded its outlook on Australia’s AAA credit rating to “negative”.

Australia’s sovereign debt still holds the top rating from all three major ratings agencies, but S&P now warns the country needs to take drastic action to remedy its budget, lest it potentially suffer a ratings downgrade

S&P said:

The negative outlook on Australia reflects our view that without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement. Ongoing budget deficits may become incompatible with Australia’s high level of external indebtedness and therefore inconsistent with a ‘AAA’ rating.

Owing to the deadlocked outcome of the July 2 general election that has yet to hand either of the major parties an outright majority in either the upper or lower houses of parliament, the agency said it believes “fiscal consolidation may be further postponed.”

US 10 and 30 year Treasury yields hit new low

Here’s a quick round-up of the new record lows set on Wednesday:

  • US 10-year: 1.3180%
  • US 30-year: 2.0984%
  • UK 10-year: 0.729%
  • German 10-year: -0.205%
  • Japan 10-year: -0.282%
  • Switzerland 10-year: -0.629
  • France 10-year: 0.1005%
  • Sweden 10-year: 0.0745%
  • Denmark 10-year: -0.0059%

What do investors want? Top tier government bonds!

When do they want it? Now!

Risk aversion is dictating the mood in the market for a third straight day on Wednesday, with equity markets coming under pressure and demand for haven assets pushing yields on US government bonds to fresh record lows.

The yield on the benchmark 10-year Treasury note fell by nearly another six basis points to 1.3180 per cent during early morning trading in the US, breaking the previous intraday low of 1.3549 per cent set just yesterday.

It was a similar story for the 30-year Treasury note, with yield hitting a new low of 2.0984 per cent in early trading, easily beating the record intraday low of 2.1294 per cent set just a day earlier.

Gilts at new highs; Brexit adds $1.2 Trillion to negative yields club

As the government bond rally soars to new heights, yields on a further $1.2tn worth of debt have turned negative since the UK’s referendum on EU membership, according to Citi. True to form, UK government bonds have also hit new highs today.

Citi says 10 countries are now seeing more than half of their government bonds trading with negative yields, and puts the total negative yielding universe at $7.5tn, 

A large chunk of debt is on the verge of entering negative yield territory, with the 10-year yields of Denmark and the Netherlands just a few basis points above zero.

Bank of England financial stability report: key points

You can read the report from the BoE on its website here. But if you’re short on time…

If you hadn’t noticed, markets have been shaky.

Since the December 2015 Report, global financial markets have experienced significant volatility. Equity indices have fallen substantially in some markets. Sterling and euro-denominated investment-grade corporate bond spreads have risen, and ten-year government bond yields have fallen by between 50 and 90 basis points. A substantial element of these moves occurred after the referendum, indicating that the United Kingdom’s decision to leave the European Union was seen as affecting the outlook for the global economy, particularly in the euro area.

European Central Bank stimulus facing € 984 bn bond headache

The Brexit-charged race to the bottom for government bond yields is posing a new headache for the European Central Bank.

Nearly €1 trillion of eurozone government debt has now fallen below the eligibility criteria for the ECB’s quantitative easing scheme, accelerating by €253bn in the last two weeks of June

That means nearly 18 per cent of the entire €5.8tn market for outstanding eurozone government debt is yielding under the minus 0.4 per cent limit imposed by the ECB – underscoring the supply constraints facing eurozone policymakers in their bid to stimulate growth and inflation through mass bond-buying.

In total, ineligible debt amounts to €984bn of government paper with maturities between two and 30 years, according to data compiled by Tradeweb.

Meanwhile, more than half of the entire universe of euro-denominated sovereign debt (55 per cent) has also fallen into sub zero territory, amounting to €3.14tn.

Considered a haven assets in times of financial stress, government bonds have been on a turbo-charged rally in June, and have been given an additional fillip by the UK’s momentous decision to quit the EU. This has raised even more concerns about the state of insipid global growth, raising expectations for yet more central bank stimulus.

UK Gilt yields hit 1% for first time ever

UK 10-year Gilt yields have fallen to 1 per cent for the first time in history as the reverberations of Britain’s vote to leave the EU spur investors to seek out the safety of haven government bonds.

In spite of warnings that the UK faces a credit rating downgrade as the result of last week’s referendum, UK government bonds are still considered a haven from wider market turbulence, helping to push the government borrowing rates to new lows

Economists argue that low yields reflect investor belief that the Bank of England will be forced to keep interest rates low or cut them lower given the country’s weak economic prospects – bad news for pension funds and insurance companies that rely on the securities to meet future liabiltiies and are struggling to deal with lower returns.

Moody’s changes outlook on UK sovereign rating to negative from stable, affirms Aa1 rating- Full Text

Moody’s Investors Service has today changed the outlook on the UK’s long term issuer and debt ratings to negative from stable. Both ratings are affirmed at Aa1.

Today’s rating action reflects the following key drivers:

1. The majority vote in favour of leaving the European Union (EU) (Aaa, Stable) in the referendum held on 23 June will herald a prolonged period of uncertainty for the UK, with negative implications for the country’s medium-term growth outlook. During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth. Over the longer term, should the UK not be able to secure a favourable alternative trade arrangement with the EU and other countries, the UK’s growth prospects would be materially weaker than currently expected.

2. While the UK’s institutional framework will not change, Moody’s considers that policy predictability and effectiveness of economic policy-making — an important aspect of institutional strength – might be somewhat diminished as a consequence of the vote. The UK government will not only need to negotiate the UK’s departure from the EU but will likely also aim to embark on significant changes to the UK’s immigration policy, broader trade policies and regulatory policies. While we consider the UK’s institutional strength to be very high, the challenges for policymakers and officials will be substantial.

Long rates in global decline as growth hopes fade

Long-term interest rates, one of the most closely watched economic vital signs, are falling worldwide as yields on nearly half of the world’s stock of government bonds sink below zero.

Amid depressed corporate expectations for growth, investment remains sluggish despite ultralow borrowing costs. Central banks’ exertions at the levers of monetary policy are doing little to move the needle on the economic speedometer.

 Japan’s benchmark 10-year government bond yield plumbed an all-time low of minus 0.155% on Friday, breaking a record set April 21. Prices of government debt around the globe rose on a tide of buying driven by concern over a possible British exit from the European Union. Yields on nearly 80% of outstanding Japanese government bonds have sunk into negative territory.

Worldwide, the average yield on government debt fell to a new low of 0.73%, according to Barclays index data.

In Germany, the yield on 10-year Bunds has fallen to a record low just a few basis points above zero. Benchmark short-term rates have turned negative in France, Italy and elsewhere in Europe.

Even in the U.S., which is one rate hike into a tightening cycle, the 10-year Treasury yield has retreated to a four-month low of above 1.6%.

Waiting to ‘explode’