Category Archives: FIXED INCOME

$5.5 TRILLION NEGATIVE YIELDING GOVT BONDS

# 5th February :  Above  Chart added reflecting negative Govt Bond Yields  across the yield curve notified by  The Daily Shot 

## Note Added 3rd Feb 2016:  Link to Bloomberg Quick Take on negative interest rates  – Link to Goldwatcher comment on the end of the long term debt cycle and negative interest rates

The total balance of government bonds with negative yields hit $5.5 trillion after the BOJ action on Friday according  to JPMorgan (via the Financial Times) and noted in The Daily Shot letter today

I posted a comment on www.thegoldwatcher.com   yesterday on approaching the end of the debt supercycle that started with the end of WW2 over seventy years ago. The comment addresses Ray Dalio’s warning that policy makers could find themselves pushing against a string.

Monetary policy works with a lag. When central banks were fighting inflation the analogy of pulling a stone with an elastic band was a popular way of explaining  the lag – you pull and pull and nothing happens ….. then the elastic tightens and wham,  the stone rockets back!

What happens when central banks find themselves pushing against a string?   Trillions of dollars and other currencies with negative yields?

 

 

 

 

10 QUICK TOPICS TO RUIN YOUR SUMMER Grantham

From  the GMO  Quarterly Letter

 1. Pressure on GDP growth in the U.S. and the balance of the developed world: count on 1.5% U.S. growth, not the old 3%

2. The age of plentiful, cheap resources is gone forever

3. Oil

4. Climate problems

5. Global food shortages

6. Income inequality

7. Trying to understand deficiencies in democracy and capitalism

8. Deficiencies in the Fed

9. Investment bubbles in a world that is, this time, interestingly different

10. Limitations of homo sapiens

 

LINKS TO COMMENT ON REMNINBI INTEREST RATE SURPRISE

# Content added 12th August:

China’s Latest Currency Actions Are Market Driven

by  Peterson Institute for International Economics

|China’s central bank took a potentially major step toward a more market-determined exchange rate on August 11, when it announced a revision in the process for fixing the central parity exchange rate, the starting point for daily trading of the renminbi (RMB) in the onshore market…China’s move is consistent with long-standing advice from the IMF and from the US Treasury, both of which have repeatedly called for China to adopt a more market-determined exchange rate policy. We should expect this to lead to greater volatility and two-way movement in the value of the RMB vis-a-vis the dollar.

Link to read Lardy article

#################################################

11th August posting:

Following this morning’s  fall in the Chinese Remninbi Anthony Doyle’s   Bond Vigilantes Quick Comment  is informative :

“The People’s Bank of China (PBoC) has announced this morning that it is improving the pricing mechanism of the daily fixing rate of the remninbi. It will do this by referencing the previous day’s closing rate and by taking into account “demand and supply conditions in the foreign exchange markets” as well as exchange rate movements of other major currencies. As a result, the USDCNY (US dollar to Chinese Yuan Renminbi rate) was fixed higher by 1.9% as a one-off adjustment and represents a record weakening of the Chinese currency. It is the first weakening in the exchange rate by the PBoC since 1994.”

Doyle concludes:

“…Any move to liberalise the determination of exchange rates should be viewed positively for the global economy. Given China’s level of importance as a key manufacturer of goods and its huge cache of foreign reserves, it is unsurprising that large moves in the exchange rate can have significant spillover effects for other economies and financial assets. Any further evolution of the determination of the daily fixing rate of the renminbi will continue to be closely watched, especially in an environment where the Chinese economic growth profile continues to be questioned.”

To read the Bond Vigilantes  article follow this link:

Link to Financial Times Q&A on Remninbi 

Link to Video of Fed Deputy Chairman Stanley Fischer Bloomberg interview yesterday where he mentions concerns with low US inflation and reservations on not moving interest rates until inflation “normalised.”

 

 

GRANTHAM ON MARKETS HEADING TO BUBBLELAND

While markets across the globe “aren’t in a bubble yet”  legendary investor Jeremy Grantham, told investors at a Morningstar conference on June 25th  most stock markets in the world are overpriced — “and the bond market is more overpriced that at any time in history.”  To break the march toward what he termed Bubbleland  “we’ll have to wait until merger activity reaches “more of a frenzy” and individuals “become crazy buyers… But for now, individuals are buying a normal amount of shares, and no bubble has ever broken until individuals pour into the market.”

Grantham suggests the trigger needed to stop the markets’ steady rise won’t come from an interest-rate increase.By artificially depressing interest rates the Fed had made it “desperately appealing” for corporations to borrow cheaply to buy their own stock back,  noting that capital expenditures are “dismal.”

Though “everyone is in a state of hysteria” over the thought of an interest-rate increase it won’t derail the markets’ climb  or break the march toward what he termed bubbleland. “The market went up all the time without missing a beat when the Fed raised rates eight times from early 2004 to early 2006…Markets will likely plod higher until at least the Presidential election.”

WSJ note  “Mr. Grantham’s calls are widely watched in part because the firm’s money managers don’t have a reputation for being perma-bulls or perma-bears. He was early in predicting the financial crisis and then reversed course before markets started rebounding in 2009.”

 

DISCLAIMER ON INVESTMENT ADVICE

1: This website is not advisory. Opinions, comment and analysis are provided for information, are not intended as investment advice and may not be used as investment advice.

2: Investors seeking advice should retain the services of a regulated and qualified adviser.

3: Opinions expressed in comment on this site have short sell by dates and may have past their sell by date when they are read.

RATES MUST RISE TO AVERT NEXT CRISIS

 Scott Minerd,  Chairman of Investing and  Global CIO Guggenheim Partners writes:

“Policymakers have created a Wicksellian dilemma where investment spurred by low interest rates is driving economic growth, but these inefficient investments support growth at the expense of lower productivity in the economy.

“In 1898, Swedish economist Knut Wicksell argued that there existed a “natural” rate of interest that balanced the supply and demand of credit, assuring the appropriate allocation of saving and investment.

“Should market interest rates remain below the natural rate for an extended period, investors will borrow excessively, allocating capital into less productive investments, and ultimately into purely speculative ones…  LINK TO ARTICLE

 A version of this article first appeared in the Financial Times

DISCLAIMER ON INVESTMENT ADVICE

1: This website is not advisory. Opinions, comment and analysis are provided for information, are not intended as investment advice and may not be used as investment advice.

2: Investors seeking advice should retain the services of a regulated and qualified adviser.

3: Opinions expressed in comment on this site have short sell by dates and may have past their sell by date when they are read.

PAUL McCULLEY ON INTEREST RATES & INVESTING OPPORTUNITIES

 

WealthTrack

The legendary Macroeconomist, Money Manager and Fed Watcher Paul McCulley is recognised as one of the world’s best informed commentators on global financial markets, interest rates and monetary policy.

In this Wealth Track interview recorded last week  McCulley explains, with  unmatched clarity,  the reasons for and the consequences of  interest rate suppression in The United States, Europe and elsewhere. He expects US interest rate rises to be fractional and  to remain ultra light for years- with target US Treasury 10 year bond rates a few years ahead of only 2%

Consuelo Mack  focuses the interview  on the questions we are all asking. The  reasons  for the ultra low  interest rate policies.  How long ultra low rates are likely to continue, and associated risks including asset bubbles and aggravated  unfair wealth distribution.

Outlining how investors can profit from opportunities McCulley makes a compelling case for European Equities with the currency risk hedged.