Bond

Hilsenrath Spots "The 2016 Problem" Facing The Fed

As we warned here exactly one month ago, the tapering discussion may be merely a "sideshow to a previously undiscussed main event: the Fed's first forecast of 2016 interest rates." Now, the Fed's mouthpiece-at-large has decided we can handle the truth and the WSJ's John Hilsenrath explains the dilemma - The Fed's updated economic projections could show an economy that appears back to normal by 2016, but their projections of where short-term interest rates will be could show rates still quite low by then. Their challenge: How to justify the low interest-rate plan when their own estimates suggest an economy regaining its health. Crucially, Hilsenrath adds, as the economy improves, the Fed is trying to shift its emphasis from bond buying, which has uncertain costs and benefits, to the low-rate pledge. How will the Fed square an economy near full employment with a federal funds rate that remains historically low? "There is an inconsistency there," said John Taylor - apparently confirming what Rick Santelli asked before - "What is the Fed afraid of?"

"Financial Innovation" Next Stop: China

Last week, we presented a table showing what 26 centuries of global financial innovation, which incidentally is the main reason why the Fed is now stuck in a corner and forced to keep the system from collapsing using every possible means, looked like. The source of the table, Deutsche Bank, had this to say: "financial innovation is a major positive driver of the money multiplier as it determines, among other things, the amount of leverage the banking system runs." It is indeed a positive driver until the point when the leverage in the system becomes unsustainable, and in the absense of yet another paradigm step function in innovation, leads to such catastrophic events as the Great Financial Crisis of 2008, whose aftermath is still very tangible today, five years later.  We concluded our post with a question directed to readers: "we ask: what is the next, perhaps final, can-kicking "financially innovative" milestone? If any." Overnight the answer appears to have presented itself.

China.

Frontrunning: September 16

  • Summers Quit Fed Quest After Democrats Spurned Obama Favorite (BBG)
  • Geithner Still Not Interested in Fed Chair Slot (WSJ)
  • Gross’s Trade Sours as Bonds Lose Faith in Fed Guidance (BBG)
  • Bob Diamond calls for bank rules shake-up (FT)
  • Russia says may be time to force Assad's foes to talk peace (Reuters)
  • Iran Dials Up Syria Presence (WSJ)
  • Kerry Seeks to Sell Syria Deal (WSJ)
  • Shutdown of Japan’s Last Nuclear Reactor Raises Power Concerns (BBG)
  • Emerging Stocks Rise to 3-Month High as Bonds Gain on Fed (BBG)
  • Bernanke’s Maradona swerve hits bonds (FT)

More Official Reactions To Summers' Stunner

"This is a good move by Larry. This is a short-term plus for the bond market.".... "If it's almost anybody but Larry, I think bonds will rally." ...  "I do think there will be less for investors to worry about as there will be more policy continuity at the Fed." ...  "Larry Summers' past decisions to deregulate Wall Street and do the bidding of corporate America has made the lives of millions of Americans more acrimonious. He would have been an awful Fed Chair. President Obama should appoint someone to lead the Fed who has not accepted millions in payments from Wall Street, and who will prioritize an economy that works for the little guy above further enrichment for the big guy."

Summers Over - Citi's Take: 10-15 bps In 10Year Downside

"Market response - will add to downward pressure on bond yields and may be worth another 10-15bps on the downside. FX terms - hard to see it as anything but USD negative for now. Main buying opportunities probably high current account deficit EM, AUD,and JPY. Discussion of waning Summers odds had been in market last week so we would see impact on JPY in 0.5-1.0 percent range. Whether this puts Yellen in driver's seat is unclear, so this Wednesday tapering and FOMC forward guidance are still the focus.  We still think tapering schedule rather than FOMC language will be the main market driver."

Marc To Market's picture

US Fed's exit plan poses a critical dilemma and underscores important contradictions.  The calendar says Europe should be talking about exits too--as aid packages for Spanish banks, and Ireland and Portugal are to wind down in the coming year--yet more rather than less assistance may be neeed.  

El-Erian: What's Happening To Bonds And Why?

To say that bonds are under pressure would be an understatement. Over the last few months, sentiment about fixed income has flipped dramatically: from a favored investment destination that is deemed to benefit from exceptional support from central banks, to an asset class experiencing large outflows, negative returns and reduced standing as an anchor of a well-diversified asset allocation. Similar to prior periods, history will regard the ongoing phase of dislocations in the bond market as a transitional period of adjustment triggered by changing expectations about policy, the economy and asset preferences – all of which have been significantly turbocharged by a set of temporary and ultimately reversible technical factors. By contrast, history is unlikely to record a change in the important role that fixed income plays over time in prudent asset allocations and diversified investment portfolios – in generating returns, reducing volatility and lowering the risk of severe capital loss. Understanding well what created this change is critical to how investors may think about the future.

PIIGS Bonds Get Slaughtered At Close

Portuguese and Italian sovereign bond spreads have risen for four weeks in a row now (with Portugal +29bps this week alone and near 2013 wides) but the close today was unusual in its agression. Portugal had been blowing wider since yesterday, but minutes before the close today, Spain and Italy were slammed higher in yield/spread and lower in price (BMPS unwinding?) Of course European stocks didn't care - Greece up 5.6% on the week, Spain +3.3%, Italy +3%... "fixed"

 

Consumer Confidence Collapses - Biggest Miss On Record

This is the first consecutive monthly drop in 14 months and the largest miss vs expectations on record. Printing at 76.8 (against an expectation of 82.0), this is the lowest in 5 months and points to the picture we have been painting of a consumer increasingly affected by rising rates and soaring gas prices amid stagnant incomes. As Citi notes below, this is the exact same pattern we have seen play out in the last 2 cycles and suggest significant downside risk to US equities. The economic outlook sub-index collapsed to its lowest since January.

 

Frontrunning: September 13

  • U.S., Russia to push for new Syria peace talks (Reuters)
  • Elite Syrian Unit Scatters Chemical Arms Stockpile (WSJ)
  • Obama to nominate Summers as Fed chief: Nikkei (Reuters)
  • Boehner Wants Joint Talks on Debt, Budget (WSJ)
  • House Republicans go for broke in fiscal battles (Reuters)
  • Pimco, BlackRock Together Received More Than a Quarter of Verizon's $49 Billion Bond Deal (WSJ)
  • Insane financial system lives post-Lehman (Gillian Tett)
  • JPM to add $2.5 billion to its litigation reserves in the second half of the year (WSJ)
  • Goldman’s Zurich offices visited over working-hours complaint (FT)

Friday 13th Markets Jolted By News Summers Appointment Coming As Early As Next Week

Overnight asset classes got a jolt following a report by Nikkei that Obama was moving toward naming Summers the next Fed chairman, citing “several close US sources,”  pushing stocks modestly lower in Europe, with bond yields higher. According to the report, Obama is to name Summers as next Fed chairman as early as late next week, after the Federal Open Market Committee meeting. Otherwise, risk is still digesting the news of the confidential Twitter IPO, as it is becoming quite clear that some of the largest names (Hilton also announced yesterday) are seeking to cash out in the public markets. Is this the top?