Morning Report: Bond yields flirting with 2016 lows

Vital Statistics:

 

Last Change
S&P futures 3251 -88.25
Oil (WTI) 51.16 -2.19
10 year government bond yield 1.38%
30 year fixed rate mortgage 3.63%

 

Stocks are lower this morning on overseas weakness, as investors continue to fret about Coronavirus, which is spreading beyond Asia. Bonds and MBS are up (yields down) on the flight to safety trade.

 

The 10-year Treasury is trading just off the lows of 2016, where it hit 1.36%. FWIW, that is a modern historical low – long term rates never fell below 2% even in the Great Depression. How low can rates go? The thing about bubbles is that they on longer and further than anyone expects. How many people are talking about a sovereign debt bubble? It hasn’t even registered yet.

 

Existing Home Sales fell 1.3% MOM in January to an annualized rate of 5.46 million. Lawrence Yun, NAR’s chief economist, finds the outlook for 2020 home sales promising despite the drop in January. “Existing-home sales are off to a strong start at 5.46 million.” Yun said. “The trend line for housing starts is increasing and showing steady improvement, which should ultimately lead to more home sales.” The median existing home price was $266,300 up 6.8% from a year ago. The first time homebuyer accounted for 32% of sales.

 

Fannie and Freddie will be freed with “limited and tailored” government backstops, according to US Treasury Secretary Steve Mnuchin. SIFMA has warned that removing the explicit government guarantee from Fannie and Freddie’s MBS would have a devastating impact on the market. Remember during the crisis, a trial balloon was floated about removing the government guarantee, and Bill Gross shot it down with a howitzer. No mention was made of what will happen to current stockholders.

 

Wells agreed to pay $3 billion to settle DOJ and SEC cases over the fake accounts scandal. Whether this will permit the company to begin growing again remains to be seen. The Fed has restricted growth in Well’s balance sheet since 2017.

Morning Report: Trump’s tariff tweet send bond yields lower

Vital Statistics:

 

Last Change
S&P futures 2941 -11.5
Oil (WTI) 55.51 1.04
10 year government bond yield 1.90%
30 year fixed rate mortgage 3.96%

 

Stocks are lower after yesterday’s Trump Trade Tweet. Bonds and MBS are up.

 

Donald Trump sent bonds higher yesterday afternoon with this tweet saying that trade talks had broken down between the US and China, and he was therefore imposing an additional 10% tariff on $300 billion in goods from China. This sent stocks reeling, and the 10 year bond yield down about 10 basis points. MBS were slow to react, however we did have some reprices late in the day. If you look at the box scores above, you’ll see we finally have a 3 handle on the 30 year fixed rate mortgage. Commodities were also slammed, with oil down 8%.

 

The escalation in the tariff wars caused some strategists to bump up their probabilities of a September rate cut. Goldman’s Jan Hatzius sees a 70% chance of 25bps, 10% of 50, and 20% of no change at the FOMC meeting next month. This was mirrored in the Fed funds futures market, however the 50 basis point cut looks unlikely. They Sep futures are pricing in an 85% chance of another 25 bps. They were pricing in a 56% chance of a rate cut before the tweet came out.

 

Some of the rally in bonds yesterday was almost certainly due to convexity-related buying, which means hedge adjustment activity. This sort of buying is invariably violent and temporary, which means mortgage backed securities will probably lag the move for a day or two. That said, the path of least resistance for rates remains down, especially since overseas bond yields followed along. The German Bund now yields negative 48 basis points. In fact, their longest term bond – 29 years – is now negative. Think of it: tying your money up for 29 years to get…. absolutely nothing. This is the fixed-income equivalent of buying Salon.com stock at 1000x pageviews in 1999.

 

bund

 

Jobs report data dump:

  • Nonfarm payrolls up 164k (in line with expectations)
  • Unemployment rate 3.%
  • Average hourly earnings up 0.3% MOM / 3.2% YOY (better than expectations)
  • Labor force participation rate 63%
  • Employment / population ratio 60.7%

Overall a good report, and now stock bullish given the Fed’s new posture. Wage growth is picking up and average hourly earnings keep trending upward despite PCE inflation that is stuck in the high teens.

 

average hourly earnings

Morning Report: German bonds set a record streak of negative yields

Vital Statistics:

 

Last Change
S&P futures 3023 1.5
Oil (WTI) 56.79 0.84
10 year government bond yield 2.07%
30 year fixed rate mortgage 4.04%

 

Stocks are flat as we await earnings from market heavyweights like Amazon and Alphabet. Facebook’s numbers beat the street, while Tesla disappointed. Bonds and MBS are down small.

 

New home sales came in weaker than expected, but at least exhibited positive growth. In June, we saw new home sales of 646,000, which was up 7% MOM and 5% YOY. New home inventory 338k units, which represents a 6.3 month supply.

 

Durable Goods orders rose 2% in June, according to Census. Ex-transportation, they rose 1.2%, and ex-transportation and defense they rose 3.1%. Non-defense capital goods orders (ex-aircraft) rose 1.9%, which shows that businesses are expanding capacity.

 

In other economic news, initial jobless claims fell 13k to 206,000.

 

The ECB opened the door to future stimulus this morning, saying they saw rates lower over the next 12 months. The German Bund is slightly stronger, however we are still close to record low yields at negative 37 basis points. The Bund set a record for the longest streak of days in negative territory – now 79. This eclipses the record set in 2016. What exactly does “negative yield” mean? It means the German 0s of ’29 is trading at 103.66. It is a zero coupon bond, meaning it pays no periodic interest. You pay 103.66 and on August 15, 2029, you will get back 100.

 

german bund yield

 

To get an idea of how much things have changed in Europe, remember the PIIGS? The PIIGS were an acronym for Portugal, Italy, Ireland, Greece, and Spain – all high-yielding sovereign debt that had fiscal issues. Where are they now? All yielding less than the US 10 year, with Greece at 1.95%, Portugal at 38 basis points, Ireland at 11 basis points, Italy at 1.48% and Spain at 33 basis points. Don’t forget, a huge swath of the European corporate sector trades with negative yields.

 

Most (if not all) of these countries have debt-to-GDP ratios well over 1, so we are seeing a real-time test of the hypothesis that government debt levels don’t matter. The granddaddy of debt to GDP ratios is Japan, sitting at 2.4x and its 10 year bond yields negative 15 basis points. Who knows how all this ends up, but we have a global sovereign debt bubble of epic proportions.

 

Bill Gross used to call the US the “cleanest dirty shirt” in the world. Indeed. For all the handwringing over debt to GDP ratios, the US debt to GDP ratio sits at just over 1, and a good chunk of that is owned by the Fed. Essentially, the low yields overseas cannot help but act as an anchor for US yields, which means unless the bubble overseas pops, I can’t see an impetus to push rates dramatically higher. And the first rule of bubbles is that they go on longer and go further than anyone expects.