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Bursting Bund Bubble: 2 Charts And Some Lessons From History
On Thursday we witnessed the culmination of what has been a weeks-long German Bund rout. At one point yesterday, yields on German 10s hit 77bps, up from below 10 in mid-April. The severity of the move has taken some (but certainly not us) off guard. For instance, Bill Gross — whose “short of a lifetime” call might have ironically been the catalyst for the sell-off — appears to have underestimated just how illiquid the market has become, because as we reported on Thursday, the Janus Unconstrained Bond Fund had taken a few rather large positions by the end of March which seemed to indicate that Gross was not anticipating his ‘big short’ call to play out so quickly. As we noted, all of this is the inevitable consequence of central bank actions which have quite literally broken the markets, meaning the last vestiges of “efficiency” went out the window a long time ago. His Deutsche Bank’s Jim Reid with more:
A few weeks ago it was interesting to hear Jamie Dimon's remarks about last year's flash crash in US treasuries being a ‘1 in every 3 billion years or so’ event. Well on his abacus the moves in bunds yesterday couldn't have been too far away from this. We closed pretty much where we opened at 0.588% but this masked a big lurch higher in yield to 0.775% intra-day. Indeed, 3 weeks ago 10 year bunds hit a low of 0.048% intra-day with the vast majority thinking it only a matter of time before they'd cross through zero. The scale of the move yesterday will likely add to the debate about liquidity in a regulation heavy post crisis world as there was little fundamentally to justify such volatility.
So, as investors and traders ponder what’s next for the financial world’s safe haven asset par excellence, and as everyone from the world’s most famous bond traders to the ECB tries to comprehend how the market could have possibly become so thin so fast, we bring you a bit more in the way of visual proof that central planners have become the world’s greatest bubble blowers.
Charts: Investir
Here's a bit more color from Barclays:
Since 20 April (ZH: the day before Gross' short call), the German bund yield has jumped nearly 50bp, one of the sharpest two-week rises in history. In the past 15 years, a rise in yields of this size has only happened twice – in mid-1999 and again in late-2011, as the ECB began to shore up bank funding issues in the midst of the eurozone crisis. Given that roughly less than 5% of participants in our last Global Macro Survey expected bund yields above 50bp by the end of June (we are at 54bp today; nearly one third of the survey expected bund yields below zero), it is likely this bund rally has caused a great deal of dislocation for fixed income investors.
And as we noted just four days ago, we've seen something a bit like this before:
While Draghi keeps buying, the move over the last week is 'almost' unprecedented in bond market history. We says 'almost' because we have seen this before - a sovereign issuer with an extremely low yielding bond suddenly see their bond market collapse... Japan 2003 (when Greenspan cut rates less than expected).
Barclays also sees a possible parallel:
While any comparison to history must be viewed with caution, the bund sell-off does bear some resemblance to a similar episode in the JGB market in June 2003. To start, the pattern of yield changes before and after the bottom looks strikingly similar (Figure 1). Moreover, in June 2003, the JGB yield was touching an all-time low – 45bp at the time (it hit a new all-time low of 20bp this past January). Just ahead of the current rally, bund yields hit a record low of 5bp in mid-April. As in 2003, the current German bund sell-off served as a reminder of how tightly linked global fixed income markets can be, especially at the longer end of the curve (Figure 2). While a poor auction for longer-dated JGBs initially triggered the global fixed income sell-off in 2003, the main fundamental driver is believed to be a less dovish Fed statement a few weeks later. This time around, more hawkish Bank of England minutes initially triggered the global bond market sell-off, although the sell-off has been very much bund-led ever since. Meanwhile, as in 2003, today the Fed is signalling to markets that an end to ultra-accommodative monetary policy is not far off. Finally, both the 2003 and 2015 episodes were preceded by periods of unusually low volatility in fixed income markets, which almost certainly exacerbated the turn in the trend.
If history is indeed repeating itself in global fixed income markets – and we would emphasize this is not a conclusion we’d be willing to make with an analysis this simple – then there is good and bad news for global investors. Let’s start with the bad news. Within six months of the bottom in June 2003, JGB yields had jumped 110bp and losses on the 7-10yr sector of JGB market were nearly 8% – the largest cumulative loss in longer-dated JGBs in the past 15 years. Moreover, for those hoping the euro’s recent rally is just a pause in a longer-run downtrend, the June 2003 JGB bottom also marked a local bottom for the trade-weighted yen – it rallied 8% in the following 3-4 months (Figure 3). The good news is that risk assets saw the 2003 global fixed income sell-off as a correction from excessively low yields, rather than something more menacing. Indeed, despite the 8% loss on JGBs, Japanese equities rallied some 40% over the following year (Figure 4). For asset allocators, perhaps the most important lesson from 2003 is that ultra-low bond yields should eventually trigger flows out of fixed income and into equity. Indeed, there are signs this is happening already: the relative outperformance of equities vs. bonds is by far the biggest asset allocation theme of 2015 thus far (Figure 5).
Bear in mind that just five days before this historic sell-off began, Mario Draghi claimed to see "no evidence" of a bond market bubble, proving yet again that when it comes to asset bubbles, central bankers are never, ever, capable of identifying them ahead of time, even when they've adopted policies that are explicity aimed at inflating them.
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lesson #1. anyone who says "this time it's different" has learned nothing from history
Time to make Bill Gross the "financial Chuck Norris", meme away and tweet it with #BillGross http://memegenerator.net/Bill-Chuck-Norris-Gross
The veneer of US growth and normalcy has worn paper thin...all dependent on an outrageous, obvious off-shore treasury buying scheme through a handful of locations...
http://econimica.blogspot.com/2015/05/veneer-of-us-growth-normalcy-has-worn.html
This time it is different, it is worse...
SPEED UP! buy silver to stop the banksters!
scorecard:
central banks 666
bears 0
tribe of one...
Tsk...
https://www.youtube.com/watch?feature=player_detailpage&v=BXsusJ787sU
show me volume in the bund cash market and I'll believe this theory. otherwise it's just another futures market manipulation while volumes remain depressed in the cash market (indicating that there was little in the way of actual liquidations).
A dream come true...
Does this not solve the ECB's QE problem of nothing left for them to buy? ZH has been saying that there is nothing left for them to buy. So as everyone is selling they can buy.
Oh, please! The criminal central bankers absolutely know the bubbles exist. Admitting the bubbles exist is akin to admitting failure. That simply isn't going to happen now is it?
"this time it's different" IT IS DIFFERENT people.... this time the bad guys will win and enslave the entire world..
http://www.thedailyobserver.ca/2015/04/27/usury-once-in-control-will-wreck-any-nation
In 1935 William Lyon Mackenzie King warned Canadians that "Once a nation parts with the control of its currency and credit, it matters not who makes the nation's laws. Usury, once in control, will wreck any nation." According to the lawsuit, the Trudeau government's 1974 decision has resulted in the payment of $1 trillion dollars in interest to private domestic and international financial institutions. These interest payments have given banks enormous risk-free profits for over 40 years.
It is important to realize that fiat currencies such as the Canadian dollar are not backed by anything tangible like gold. Rather, they are created out of thin air whenever a loan is made. As admitted by the Bank of England in March of 2014, "Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created."
Give yourself a moment to let this sink in. Banks do not need to attract deposits first in order to make loans. When you are borrowing money from the bank, you are not borrowing money deposited by someone else. Instead, it is your own borrowing that is creating the money that is being lent and which you will be expected to pay back (with interest).
When the Bank of Canada was obliged to lend money to Canadian governments, money was similarly created but at least the loans were held as assets by the Bank of Canada. Under the current arrangement, however, every loan made to individuals, businesses and governments serves to increase the wealth and power of the commercial banking system. So long as the world uses fiat currencies, and so long as the power to create fiat currency is held by private banks, these banks have every incentive to, as William Lyon Mackenzie King put it, 'wreck any nation' in order to preserve their power.
http://rabble.ca/columnists/2015/04/can-courts-liberate-bank-canad
The Bank of Canada was established as a private bank in 1935 under private ownership but in 1938, recognizing that money should be created in the public interest, the government amended the Bank Act and turned the Bank into a public institution. The Bank was almost immediately harnessed to finance not only Canada's war effort (we ranked fourth in production of allied war materiel) but a long list of infrastructure projects including the Trans-Canada highway, the St. Lawrence Seaway, and over the decades, hospitals and universities across the country. It was mandated to lend not only to the federal government but to provinces and municipalities as well, with a limit of one-third of the federal budget and one-quarter of a province's.
It also created a subsidiary, the Industrial Development Bank, helping create the industrial base that recent Liberal and Conservative governments have all but destroyed through trade and investment agreements. The list goes on and on -- and includes social programs like the Old Age Security Act and programs to assist WW2 veterans with vocational training and subsidized farm land. The interest on its loans, of course, simply went back into government coffers.
But after nearly 40 years of this incredibly productive use of publicly created credit, unprecedented economic growth and increasing income equality, international finance got its chance to launch the free market counter-revolution against democratic governance. Stagflation -- simultaneous stagnation, unemployment and inflation -- was one of the first launching pads for Milton Friedman's radical free-market ideas: putting the creation of credit into private hands and creating debt burdens which would restrict the potential for democratic governance.
Freidman argued that stagflation was the direct result of irresponsible governments issuing too much money or borrowing recklessly from their central banks and sparking inflation. His radical free-market ideology was shared by the Bank for International Settlements (the bank of central bankers) and in 1974 it established a new committee, the Basel Committee, to establish global monetary and financial stability. Canada -- that is the Pierre Trudeau Liberals -- joined in the deliberations. The committee's solution was to encourage governments to borrow from private lenders and end the practice of borrowing interest-free from their own central banks. The rationale was thin from the start: central bank borrowing was and is no more inflationary than borrowing through the private banks. The only difference was that private banks were given the legal right to fleece Canadians. The effect of the change was to effectively take a powerful economic tool out of the hands of democratic governments.
Just let me say, history has nothing to do with what's happening today!
put that in your pipe and smoke it