Morning Report: Trump pushes for negative interest rates

Vital Statistics:


Last Change
S&P futures 2983.5 5.25
Oil (WTI) 57.96 0.44
10 year government bond yield 1.73%
30 year fixed rate mortgage 3.85%


Stocks are up this morning on no real news. Bonds and MBS are flat.


We saw a big uptick in rates yesterday, with not much of a catalyst. It could just be position-squaring ahead of the expected stimulus announcements tomorrow from the ECB, although some pointed to the government bond auction. Regardless, these things happen. While the path of least resistance for interest rates clearly seems to be down, there will be inevitable retracements along the way – markets don’t go straight up or straight down.


Mortgage applications increased 2% last week as purchases rose 5% and refis increased about half a percent. “Mortgages rates continued to decline over the holiday-shortened week, with the 30-year fixed rate decreasing five basis points and remaining near three-year lows,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinances were essentially unchanged, up just 0.4 percent, but August overall was the strongest month of activity so far in 2019.”


Steve Mnuchin, Mark Calabria, and Ben Carson appeared before the Senate yesterday to discuss GSE reform. The discussion fell predictably along partisan lines, with the left fretting about affordable housing while the right wanted to reduce the government’s footprint and risk in the system.


Meanwhile, Trump called on the “boneheads” at the Fed to cut interest rates, even below 0% if necessary. Trump is arguing that we should lower rates considerably in order to refinance our government debt into longer term loans, say 50 or 100 years. Note that cutting interest rates to 0% will wreak havoc on the banking system, as Europe is finding out. Check out the chart of Deutsche Bank, which has been annihilated by negative interest rates.


Deutsche Bank


Mortgage fraud decreased in the second quarter, according to CoreLogic.


Morning Report: Negative yielding corporate debt.

Vital Statistics:


Last Change
S&P futures 3020 5.35
Oil (WTI) 60.39 0.19
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.13%


Stocks are higher as we kick off earnings season. Bonds and MBS are up.


The upcoming week will be dominated by bank earnings. The economic data is unlikely to be market-moving, however we will get some real-estate related data with housing starts and homebuilder sentiment. We will also get retail sales, industrial production and capacity utilization.


Citigroup reported earnings this morning that beat Street estimates. Mortgage banking revenues were down 2% QOQ and down 9% YOY.


Manufacturing activity in New York State rebounded last month, climbing out of negative territory. New Orders were flat, shipments improved, while employment hit the lowest level in 3 years.


Europe is used to negative yields on sovereign debt, with the German Bund yielding -29 basis points. In other words, you are paying 105.25 to get back 100 in 10 years, along with some interest. That is strange enough, in of itself, but how about this? Corporate bonds trading with negative yields. Don’t believe it? US jar maker Ball Corp, maker of the mason jar, trades at a yield of -20 basis points and matures in 18 months. Why would any investor buy that? Because the principal hit will be less than deposit rates of -40 basis points or 18 month German paper yielding -70 basis points. It is a fascinating study of the law of unintended consequences. The whole point of negative interest rates is to push investors to get out of safe haven sovereign debt and take some risk – specifically lending money to businesses that need it. The whole point of this exercise is to increase the amount of credit in the system in order to fuel economic growth. However, instead of providing financing to nascent businesses who could be the growth drivers of tomorrow, they are lending money to a company that makes jars (hardly emerging technology) instead.


A portfolio manager at Janus Capital explained it as follows: “A bond like Ball Corp’s is “a safe place to hang out,” [Janus Capital Portfolio Manager Tim] Winstone said. “And just because something is negative yielding, that doesn’t mean it can’t get more negative yielding.” In other words, we are in greater fool territory. Fun fact: around 2% of the European junk bond market trades at negative yields. In fact, Winstone says that about 24% of the European investment grade market trades at negative yields. It isn’t entirely irrational – money managers are making a bet on further central bank stimulus and are positioning themselves to reap capital gains on negative yielding paper, which means they could end up making a positive return despite a negative yield headwind.


euro corporates


John Maynard Keynes once advocated inflation as the “euthanasia of the rentier class.” In reality it may turn out that negative interest rates will do the job. Fascinating times we live in.