For over 30 years, sovereign nations, particularly in the West have been buying votes by offering social payments in the form of welfare, Medicare, social security, and the like.
Based on the most mainstream of mainstream overbought/oversold indicators (a 14-day RSI), the 30Y Treasury bond has not been this oversold since June 2007 - 9 years ago and a very memorable peak in yields. Over the next month, the yield had fallen 16 basis points. Over the next 3 months, the yield had fallen 61 basis points, 6 months, 74 basis points. Finally, this big movement culminated in about a year and a half, as the yield had fallen 280 basis points to the financial crisis low of 2.55% on 12/18/2008.
Last week we revealed that the Swiss National Bank is the proud owner of an equity portofilio that sums to $100 billion, or around 15% of Switzerland's GDP. Courtesy of the bank's latest SEC filing, we now know just what the Swiss were buying in Q1...
If there is one thing more worrisome for the world's central planners than a stock sell-off, it is a bond rout 'proving' that they have lost control. The overnight carnage across global bond markets appears to have triggered someone (or someones) to step in - in dramatic size - to rescue bonds and save the world once again.
An interesting article has neatly encapsulated the global (but primarily Western) “bond bubble”:
Overnight "manic-selling" in global bond markets (and turmoil in stock markets) has been met - suddenly - this morning by "panic-buying" as mysteriously liquid buyers lift stocks back into the green and send bond yields plunging (right after Euronext breaks)... As one trader noted, the market is in a mode of “high volatility with no dealer liquidity and easy excuses."
The politicians like the bankers and the central bankers, are happy to kick the can down the road and let their successors and future generations pick up the tab and pay for the economic mess that they refuse to address.
- Fed’s Yellen: Stock Valuations ‘Generally Are Quite High’ (WSJ)
- Britain's dead-heat election 'down to the wire' on polling day (Reuters)
- European Markets Roiled by U.S. Fed Chief Janet Yellen’s Comments (WSJ)
- Stocks Drop With German Bonds to Extend $2 Trillion Global Loss (BBG)
- Oil heads toward 2015 highs despite ample supply (Reuters)
- Wary of bond 'cliff,' Fed plans cautious cuts to portfolio (Reuters)
- Saudi Arabia mulling land operations on Yemen border (Reuters)
BOND SELLOFF DEEPENS; GERMAN 10-YR YIELD JUMPS 17 BPS TO 0.76%
SPANISH 10-YEAR BOND YIELD CLIMBS TO 2%; HIGHEST SINCE NOV. 24
ITALIAN 10-YEAR BOND YIELD CLIMBS ABOVE 2%; 1ST TIME THIS YEAR
10Y TREASURY YIELD CLIMBS 6BPS TO 2.31%, HIGHEST SINCE DEC. 8
U.K. 10-YR BOND YIELD CLIMBS 8 BPS TO 2.06%; MOST SINCE NOV. 24
JAPAN 10Y YIELD UP 7.5 BPS, SET FOR BIGGEST RISE SINCE MAY 2013
In the eight years that the Fed has issued GDP forecasts in the prior Fall, only once, in 2010, did the actual economic performance come in the range of its expectations. A more sinister possibility is that the Fed is not really forecasting at all but cheerleading. By forecasting strong growth, the Fed may be hoping to engender optimism, with more spending and hiring hopefully to follow. Kind of like a field of dreams recovery -- if the Fed forecasts it; it will come. Based on what we have seen thus far in the year, fantasies about a 2015 recovery should be evaporating.
As Japanese markets re-open after Golden Week, the bond market is extremely active (which in itself is unusual given its total lack of liquidity). Playing catch up to the rest of the world's igniting bond markets, 10Y JGB yields are up over 6bps (and even the 20Y is trading). The last few days have seen yields spike from 28bps to 43bps - a colossal move only seen before in May 2013 (after the initial euphoria of QQE).
As a result of constant jawboning that the PBOC may not only cut rates even more but proceed to launch QE (which it will ultimately, just not for a while), both the Shanghai Composite has been trading at multi-year highs and oil has found a bid strong enough that in the past two months it has surged by some 50% on hopes that Chinese demand will finally come back once the local economy is so weak it leaves the PBOC no other choice. However, two things suggest that the great "reflation" trade is ending.
Liquidity is plentiful when you don't care about it and scarce when you need it most