- Bonds Extend Global Rout as Europe Stocks Slide, Dollar Weakens (BBG)
- Verizon Communications to Buy AOL for $4.4 Billion (BBG)
- Fresh Nepal earthquake kills dozens, triggers panic (Reuters)
- Sen. Shelby to Unveil Legislation Heightening Fed Scrutiny (WSJ)
- Bill Gross: The Amount of Money I'll Give Away 'Is Staggering, Even to Me' (BBG)
- U.S. rejects notion that Gulf rulers snubbing Obama summit (Reuters)... what about AIIB?
- In Asia, Debt Market Gets Tougher (WSJ)
- Iran’s Mahan airline defies sanctions in shadowy aircraft deal (FT)
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 as well as a bit of history that may hold clues as to what's next.
When it comes to Bund sell-offs, be careful what you wish for...
- 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)
The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.
The bad news: It will be much worse than that.
Battered by Bill Gross and Jeff Gundlach, SocGen warns that the current correction in 10Y Bunds remains atypical from a technical perspective and bears the characteristics of a panic selling.
No one stays on top forever, and to be sure, when Bill Gross' long reign at the top of the fixed income universe finally came to a sudden and rather unceremonious end last October, the race to lay claim to the inevitable outflows from PIMCO's Total Return Fund was on. Now, a winner has emerged — and it's not Jeff Gundlach.
It seems yet another hero of the recent cyclical bull market, resp. echo bubble, may be in danger of falling from grace. This has already happened to his predecessor Alan Greenspan, who has been gradually demoted from “Maestro” to “irresponsible bubble blower”. In this sense the somewhat less praise-laden verdicts that are lately emerging with respect to Ben Bernanke could be seen as an early warning sign.
“When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.” We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm.
10Y German bond yields hit 42.5bps today (almost a 10x move off their 4.9bps lows on April 17th - before Bill Gross and Jeff Gundlach unleashed their bearish theses). 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).
One of the biggest stories of the week has been the great German Bund route as everyone’s new favorite short has sold-off hard on what HSBC calls a “cascade of small events [which has] created a large splash in a structurally ever-thinner mkt, similar to UST flash crash of Oct. 15.” Amid the cacophony of explanations emanating from every credit and rates strategist on Wall Street, BNP is out with a simple suggestion: it’s all about the waxing and waning of supply.
- Marchers protest police violence in Baltimore, New York (Reuters)
- Majority of Financial Pros Now Say Greece Is Headed for Euro Exit (BBG)
- Greece signals concessions in crunch talks with lenders (Reuters)
- Greece, Euro-Area Partners Target Deal by Sunday (BBG)
- Iglesias Says EU Risking Right-Wing Backlash With Greek Pressure (BBG)
- Student-Loan Surge Undercuts Millennials’ Place in U.S. Economy (BBG)
- Majors’ Quandary: Why Drill for Oil When They Can Buy Somebody Else’s? (WSJ)
As first Bill Gross and then Jeff Gundlach suggest shorting German bonds, so it appears the message has sunk in that at 4.9bps 10 days ago, 10Y Bund yields were the short of a lifetime. Since then they have soared, with a dramatic doubling today from 14bps to over 29bps - the highest yield in 7 weeks. As Commerzbank warns, "a cascade of small events is creating a large splash in a structurally ever-thinner market," which has led to a plunge "similar to US Treasury flash crash of Oct. 15."
The "new" Bond King joins his predecessor on the bond throne in calling German Bunds a compelling short opportunity. Just as we said last week, "when you short negative yielding bonds you have a positive carry," so why not leverage your bet 100X and get paid to wait on rising yields?
"What is different this time? Central banks are driving all investment decisions, and what this implies is that they are in this trade so deeply that there is no obvious or practical exit.... This is a dangerous situation. The focus must return to the REAL economy; we cannot trade our way out of past mistakes."