The economic data does not support a rate hike. Is the Fed really worried about something else?
How about an overheating junk bond market? An equity bubble? Room to cut later? Or does the Fed really think the economy is strong?
Regardless, a massive selloff in bonds in Japan and a two-day five-sigma event in German bunds may be the start of a significant rout.
Let’s investigate this through the eyes of various bond market dislocations.
Sizzling Hot
Bloomberg reports Red-Hot Market Spurs Risky Bonds That Allow Interest Delays.
The bond market is getting so hot that it’s fueling a surge in debt deals allowing companies to defer interest payments.
Just a week in, September is already on track to become the busiest month for so-called payment-in-kind toggle notes that let companies pay coupons with more debt, according to data compiled by Bloomberg. Ardagh Group SA, a Luxembourg-headquartered packaging company, sold $1.72 billion of the securities. German auto components maker Schaeffler AG is poised to sell 3.59 billion euros ($4.05 billion) of the notes on Thursday, more than 1 billion euros than initially planned, which would make it the largest PIK issue ever, Bloomberg data show.
PIK debt is often issued at the holding company level, which makes the notes riskier because they are one step removed from the operating company. Schaeffler is selling its notes through its holding company.
Extreme Sentiment Marks Tops
Buying bonds that allow interest to be paid back with still more bonds is crazy. Yet, there you have it. Can it get crazier? I don’t know.
Junk Bond Yields US. vs. Europe
Average yields on junk debt in euros dropped to a low of 3.76 percent in Europe, down from 5.17 percent at the start of the year, according to Bloomberg Barclays indexes. Globally, speculative-grade debt yields 5.79 percent, down from 8.12 percent at the start of the year. Equivalent debt in U.S. dollars yields 6.16 percent from 8.74 percent at the beginning of 2016.
PIK Bonds
Bond Market Cracks
Please consider Cracks Are Appearing in Bond Market That Led Record Global Rally.
Japan’s sovereign debt is suffering its worst rout in 13 years, handing investors bigger losses over the past two months than any other government bonds amid speculation the Bank of Japan plans to change its asset-purchase strategy. The reversal is spurring concern the second-largest debt market is the vanguard for a broader selloff. DoubleLine Capital Chief Investment Officer Jeffrey Gundlach said investors should prepare for bonds to fall.
“This is a big, big moment,” DoubleLine’s Gundlach said in a webcast Thursday. “Interest rates have bottomed. They may not rise in the near term as I’ve talked about for years. But I think it’s the beginning of something and you’re supposed to be defensive.”
Danger Signal
Five Sigma Event in 30-Year German Bonds
That ValueWalk Tweet needs a bit of perspective.
30-Year German Bund Yield
Percentage-wise the 2-day move was enormous, in absolute terms it looks ho-hum. The truth is likely somewhere in between. This could easily be the start of a major bond rout.
15% Loss on 40-Year Japanese Bonds
Humorous Flashback
Fed’s Bubble – Who Owns It – You Do
Equity Smash Coming Up?
Will the Fed hike into a bond rout? Do they want a bond rout to steepen the curve? That’s what the bank of Japan appears to want.
But who is in control? Is anyone in control?
The only question above I can answer is the last one. My answer is not encouraging: No central bank is in control. They are all guessing what they should do.
I cannot emphasize enough that if a global bond rout is on, equities are going to get hammered as well. Equities cheap compared to bonds? The concept is ludicrous, and in this case irrelevant even if it was true.
In case you missed it, please consider Eye on Social Mood: Stock Market Bubble Will Pop, Social Mood Will Get Extremely Ugly.
Feelin’ Lucky?
Mike “Mish” Shedlock
We all know it’s going to happen.
None of us know when.
And no, I’m not referring to a Fed rate increase.
I’m mean the bottom falling out of the markets. I view it like the tectonic plates that push up against one another that eventually result in a cataclysmic earthquake. For 8 years enormous economic pressure has been artificially built up with nothing to relieve it. The pressure was caused by kicking the can down the road to delay the inevitable. Sooner or later the chickens gotta come home to roost. And boy oh boy. Will they be a cacklin’ once they arrive.
They’ll try everything except letting zombie banks go under. Look at Japan. This has been going on for 25 years. These are central planners who believe in their own witch craft.
The fed doesn’t want to “normalize” interest rates to the 5-7% range, as in the olden days. They want to add 1-2% so they have room to lower in a burning crisis.
Every blogger and talking head predicts doom at the slightest sell off. How many times have we heard this? 1000? The rate hike last december caused a one month sell off that was swiftly erased. Just calm yourself.
Nothing matters until Pollyanna stops sailing the Bond Ocean. Until Bond Vigilantes rise like Rip Van Winkle, having fallen asleep in 1981, or like a horde of zombies in the Walking Dead, dollar liquidity can slosh back into any market it wishes.
First they floated the dollar free of any consistent mooring. Then bond yields began a 35 year decline during which borrowing (and issuing debt) was literally a wealth-creation engine. Government managers (Congress, in the USA) and corporate managers were freed from restraint and they behaved like 18 year old sailors on their first shore leave, set loose in a whorehouse with a no-limit MasterCard.
35 years and counting, during which all that “wealth” sloshed from one market to another. Now that there’s—what?— a quadrillion dollars in IOU’s in the Bond Ocean, how much wealth disappears if interest rates rise a percent? How about if they simply returned to historical averages?
Central banks pumped hydrogen gas (mostly dollar credit) into the world economy Hindenburg, but instead of inflating the gas bladder marked “consumer goods & wages” it all flowed into the bag marked “assets.” People felt richer, cheap junk from China kept CPI prices low and a flood of foreign workers kept wages from rising. Seemingly a win-win-win…until Americans woke up and discovered they were unemployed and a trip to the store looks like visiting one in Guadalajara or Hyderabad. Have we hit the spark yet?
If money leaves bonds and also stocks where does it go? Short term US treasuries. $USD? Gold is not looking too hot either and the COT positions are dreadful.
Oooooops! Well, there you go. *Clearly* can’t raise rates in this environment.
Served up on a platter. Merry Christmas, Janet & Hillary!
I’m terminally ill (cancer).
I’ve watched for years as the world’s central banks have conjured up trillion$ of counterfeit electronic money out of nothing to keep bankers and governments in business.
My one wish has been to live just long enough to see this entire edifice of central bank sponsored fraud collapse.
I may just get that wish…
Sorry to hear, Bob.
I’ve been operating on the assumption the collapse will take forever and a day … then all at once.
This cat has burned thru a few lives … but 9?
Things definitely feel rickety, though …
Enjoy every day to the fullest, Bob.
If it makes you feel any better we’re all terminal.
I’ve stopped predicting when the ball will drop. But I suspect it will begin overseas. Japan might suddenly get the sniffles, a cough, a cold and then a fever. A few days later Abe’s plan for prosperity is on life support. Then the contagion makes it’s way across the oceans. All it will take is one good-sized economy to go belly up and we’re all done.
But you never know. It might be the best thing that could ever happen to America. It might bring everyone back together as a family. The things that are really important in life may be restored. Big band music could make a comeback. Men will act like men and women like women. I know I’m asking for a lot – but I can dream too.
Good luck, my friend.
Unless you are a direct beneficiary of the 50+ year old racket, you’re not done at all. The bubble is largely one of valuation and ownership of stolen assets. Stolen from those best able to make use of them, for the benefit of those most likely to serve as useful sycophants for the illegitimate regime. It’s not like the former will suffer unduly from such a process being unwound.
Farmland will remain just as fertile, regardless of whether artificially pumped up and collateralized land prices “go down.” Ditto for factories making useful stuff, and the skills of those with any useful ones (as in, anyone with skills that go beyond simply skimming off the flood of fresh print and it’s direct effects.)
Just like the stupid Keynesian fallacy of falling “consumer” prices somehow being a bad thing is just that, stupid; so is the equally stupid fallacy of falling “asset” prices being bad. Falling prices for of everything is always good, as prices are simply a reflection degree of scarcity. Economic progress means increasing efficiency, hence reducing scarcity. If 40 Room mansions on a mile of pristine tropical beach were a buck a pop, everyone would be much “wealthier” in real terms, than they are commuting two hours in smog hell back to some rinky dink shoebox that is supposedly “worth” half a million.
The only ones systemically benefiting from the asset pumping, are those who start out asset rich, for whom prices rising faster than wages makes their relative wealthiness even greater; and those whose living is earned as some formed of commission tied to the prices of assets. And, given that simply printing money creates no actual wealth, since those two groups do get wealthier, simple arithmetic dictates that those not in those groups must inevitably get poorer.
I have assets (home, stocks, bonds) but started our pretty poor in life. Your viewpoint is overly simplistic.
Printing and pumping doesn’t prevent you from buying a house and some stocks and bonds. I’m sure the occasional straw hut gets erected in Zimbabwe as well.
What is inevitable is, compare to the base case of no printing and adherence to gold; if you started poor in ’71 (the year Nixon kneecapped the last vestige of accountability over government and bankster printing), and someone else started out rich, both of you doing the same work and saving equally; the rich guy’s share of America’s total purchasing power as of today versus your, is vastly, vastly higher than it would have been sans printing.
And; since putting Washington’s face on paper pieces generates no net new wealth at all, this means you are poorer than you would have been sans printing. At no fault of your own. And on no account of anything done by the rich guy. Just pure, simple theft.
And I’m being generous here, since not only does putting green ink on paper not generate any new wealth. It does, by distorting price signals people need to make the most optimal decisions and allocations, reduce output. In a compounding fashion. So, not do you, as a poor guy, end up with a lower share of total purchasing power, than in the non theft-by-debasement base case; the total share itself is shrinking. So, IOW, double whammy. For no other reason than to keep banksters, apparatchiks and others of that ilk, in unearned splendor.
The fact that some poor guy may have stumbled into a Vegas Casino and hit the jackpot, ending up rich, has precious little to do with anything.
My policy is I don’t solicit random cancer victims to contact me but if they fall into my lap my altar boy upbringing compels me to offer help. Here:
http://www.rntl.net/curcuminrecipe.htm
Is me prattling on about what I believe may be a viable treatment for cancer. Send an email inquiry to the company cited and the IT guy will forward it to me. I’ll reciprocate. I’m serious. You won’t be the first.
I’m really sorry to hear that. I’m praying for you and I know you’ll do great in the next world.
Cancer is easily treatable via changes to diet, both eliminations of certain things and addition of.
Hit the internet and cure yourself.
If you are waiting for medical professionals to cure you, you’re doomed.
Steve Jobs thought the same thing as you Joe. We all know what happened to him.
Which is not to say that some things are bad for you and some things are more healthy,
Look, everybody’s got to die sometime. In the end the grim reaper gets all of us. I’m a cancer survivor but recurrence is always a distinct possibility. Can we do things to reduce the possibility of a cancer onset or recurrence? Sure. Don’t smoke. Go light on the booze. Stay within a reasonable weight for your height and frame. Eat a balanced diet. Get a good night’s sleep. But the MAIN cause of cancer you cannot change: Your genes. None of us picked our parents or our genetic line. That is one of the unknown cards dealt to each and every one of us upon arrival into this world. Instead of focusing on getting an extra year or two from life – better to focus on making every year or two count while you’re here. A drunken driver could plow into any one of us while we had the green and send us into the afterlife. Doing what we can to stay alive is a good plan. But a better plan is making all your time here count for something. And if you happen to be a believer – make preparations for the next world.
I’m very sorry to hear that, Bob.
You have contributed many insightful comments here and elsewhere over the years.
Best wishes to you and your family.
That is very bad to hear, Vegas Bob. My prayers such as they are with you and your family. Hang in there with tenacity- don’t ever give up.
Are you saying keeping the fraud going is keeping you alive? Well, we’ll
just keep it going for your sake. Now we have a reason!
“This could easily be the start of a major bond rout.”
10yr treasury note yield will go to 1% … or lower.
Last Domino
Yes, we’re now being given a great opportunity to top up our Treasury portfolios.
People shorting 10-year Treasuries here will have their faces ripped off, most likely before the end of this year.
Ya’ll are prolly right. Might be time to take profits on the miners and go for the short term Tips? At least lighten up on the former? Been a good ride, but,,,,well, trees don’t grow to the sky.
Way I see this, the Fed won’t throw cold water on it until CPI is well into double digits, and the public demands they “Do Something.” That will take awhile. Sure, there might be a token fraction of a percent rate hike,,,,firing for effect, as it were. But the target is 7-9% nominal on all those .gov and union pensions.
I have long predicted (almost 10 years now!) that the 10Y would go sub-1%. The 30Y? I never thought it possible, but would now agree.
Obama and Hillary need to keep the plates spinning until the election.
Be prepared for all sorts financial intervention
Peddling fiction may come to reality in the financial markets.
Fed can’t raise rates for fear of causing stocks to crash. If they were to raise rates and the market tanked, everyone would blame them. That is the Feds greatest fear!
News flash: Markets and economies fluctuate
So, the Fed is using their credit card to pay their house payment. That would be a good way to explain it to my next door neighbor.
Spanish and Italian yields have formed a bottom and are starting to rise sharply. The “uh-oh” moment is starting.
Mish: Can you explain why equities would also go down? Wouldn’t equities go up if everyone is dumping their bonds and buying REIT’s, commodities, etc.? They can’t all leave it all in cash.
I will explain in a post later today
Thanks for the question
Mish: please include thoughts on miners short term. Hold or fold. Appreciate your work.
Hold – Buy if you don’t have any
Have some dry powder if priced go lower
Before central banks took over the markets, stocks and bonds traded in opposite directions. You went into stocks when you thought growth was starting. You went defensive into bonds when you thought a slowdown was coming.
Bonds yields are going lower and lower because nobody believes the strong economy narrative. Yet stocks are going up as well because central bank meddling. Most likely bond yields will continue lower, while stocks react to the level of fed meddling.
Normalcy will only return when the deleveraging is over. Decades if they keep kicking the can. Quickly if they let insolvent entities go bankrupt like they should.
Just read Eye on Social Mood and have an understanding of why equities are doomed. Now I’m depressed.
Mish missed it. You all missed it. ON THURSDAY the 30 year Treasury yield popped up above its 50 day moving average.
How can anyone expect what Draghi and Rosengren will say or do? That the market is all about what these lunatics say says a lot about the state of the markets today. Now that the market has tanked a bit, you can expect these termites to come rushing out of the woodwork (and you have quite a few lined up for monday) cooing the markets down.
I am waiting for the follow through! Now that the market has shown what happens if rates rise we can safely expect Bullard, Dudley and Fischer to run from a rate hike with their tails between their legs. And you expect such guys to do well for the country.
PIK Bond issuance always signals the credit market top. It’s like a ringing bell!
Hey. You’re right!
http://www.zerohedge.com/news/2016-09-09/pik-toggle
Here we go again.
2/10 of 1%. Meaningless. Who cares about the casino bets of bankers front running the printing press, and the nutty derivatives they wrote.
Bankers should go back to plain bread and butter banking. At least any bank that will demand a bailout should.
Is the Fed worried about something else? I think Peter Schiff is right on this one. They don’t want to admit that the data is lousy because that will help Donald Trump. So, they are looking for some excuse to not hike later this month.
Now, ask yourself, why would the Fed blow up TINA after all the redistribution efforts they have expended on the “Wealth Effect?”
Jawboning is the cheapest, and so far most effective tool in their bag of tricks.
As for the Feds economic condition readings, they are spot on if they are looking at the west coast. This thing is overheated here, with houses getting multiple bids over asking and contractors all saying they are booked a year out.
For once this has nothing to do with Central Banks. Yesterday the market woke up and realized that Trump will probably be President. All their assumptions about business as usual are now over. The market is a forecasting mechanism and is pointing to political upheaval that will have major unpredictable consequences. Central Banks are powerless in the face of civil unrest.
The Fed finances the MIC. Don’t think they are too worried about civil unrest. It just gives them another crisis to take advantage of.
Exactly.
I predicted months ago that the media would actively “tighten” the horse race (its good for their ratings/profits). I noticed that it started about 7-10 days ago (the recent Matt Lauer debacle being a good example). This tighter horse race will likely cause non-US money to exit stocks, bonds and currency thru September/October. If at some point it becomes clear that Clinton will win (or after she does win), money will flow back to US. If Trump wins – I expect major outflows.
I have a different theory about the sudden worry that the Fed will hike at the next meeting. The Fed wants everyone thinking a rate hike is coming so that when they don’t hike, the market will rocket well beyond the high of last month. It is another form of jawboning designed specifically to get Hillary!’s dead carcass over the finish line.
That’s a pretty good theory. Recommend buying some silver before the not-rate-hike announcement.