Bond yields in 'tilt' mode, forever blowing bubbles

In Summary

• G7 Government Bond Yields have sunk to record lows. 

Tullow Oil drilling equipment.
Tullow Oil drilling equipment.
Image: FILE

G7 Government Bond Yields have sunk to record lows. The iconic German Bund [10 Year German Bond] sank to -0.21%. The German Finance Ministry receives 20 Cents per 100 euros of debt as a gift from the investors when they sell 10 Year Bunds, In fact Switzerland is experiencing Negative Bond Yields through 20 Years, Germany, Japan, Denmark, Netherlands through 10 years, Austria, France, Finland through 8 years, Sweden, and Belgium 7 years,  Ireland and Slovakia 6 years,  Spain, Portugal, Slovenia 5 years and even Italy's 6 month Bills are negative. 

Of course Japan was the first G7 market to enter ''tilt'' territory and its JGB [Japan 10 Year Bond] remains at -0.10%. This macro gale force level move has pulled US 10-Yr Treasuries to a 20-month low of 2.15% [Last November it was at 3.24%]. Rate markets in the US have now priced in close to 85bp cumulatively of easing by the end of 2020. (via JPM).

The US Curve has inverted and typically curve inversions are harbingers of recession. Markets and prices exhibit patterns of correlation and essentially my perspective is that it is the correlation that has exerted a ''Pull'' Effect on US Yields and that therefore the ''recessionary'' Signalling of the Yield Curve should be discounted. There has been a Strong ''Safe Haven'' Demand develop over the last few sessions which has lifted Government Bond Prices, Gold and the Yen. And there is a correlation element to recent Yen strength, Japanese Bond Yields were already negative therefore in the comparison Japanese Yields have become more attractive and given further muscle to the Yen. 

 

It was not too long ago that everyone was predicting a Weimar Republic outcome or if you are looking for a more recent vintage then dial up Caracas, Khartoum or Harare. Classical Economic Theory predicted that if lashings and lashings of freshly printed money were injected intravenously into the Patient, then the value of money should devalue and inflation run off the charts. Clearly this has not happened. In fact Inflation Gauges are slumping and Inflation is ''Like a patient etherized upon a table'' Trump's Tariff War has spiked earlier ''high jinks'', stock markets have lost ground and Investors have continued to run for cover and ''safe havens'' You will recall Ben Bernanke's riposte when asked why Investors buy Gold People hold Gold "As protection against what we call tail risks: really, really bad outcomes." Gold crossed $1,300+ on Friday.

Crude Oil got crushed -5.34% Friday capping a -15.87% retreat over the last 4 weeks. Crude Oil is an interesting proxy because its been a Tug of War between sharpened Geopolitical Risk [particularly in the matter of Tehran which sent prices higher] versus concerns around Global Growth and the latter has now overwhelmed the Former.

It has turned out that it was not April that was the cruellest month [breeding lilacs out of the dead land, mixing memory and desire, stirring dull roots with spring rain] but May. The Trade War  intensified through May and its intensification is best perceived through the Linguistics.

What we also know is that you don't stand in front of a Runaway Freight Train. The Question we need to ask ourselves is how much further this move may run? My sense is that the G7 Bond Markets are now in nose-bleed territory. Whilst I accept that its a 20/80 [US Consumer absorbs 20%, China will have to absorb 80%] of the Tariff Price increase, nevertheless even 20% of a 100 is inflationary. The US Rates and Bond Market looks seriously overcooked to me.

However, what we also know is that Markets can stay irrational longer than anyone can stay solvent. Therefore, I would be tentatively selling 85bp of cumulative US easing through 2020 as per JPM. Last week we saw positive EM and Frontier market divergence, which was noteworthy.

Lusaka is in unprecedented Territory and the forced nationalisation of Mr. Agarwal's Copper mines might well be a cashew nut moment for President Lungu. Zambian $ Eurobond Yields are at 22%. Thats ''whack'' Let me end with the Madaraka Day Masterstroke announcement. I am sure the Central Bank has visibility on how much Cash is not in circulation.

The Announcement might be a catalyst for s short term stimulus as Owners of the ''Jirongos'' try and dispose them. I would have thought the discount is already 20% at the very least. Demonitisation is a very neat Solution. Mohamed Wehliye tweeted 1. It is a one time tax on black money 2. Counterfeiting of 1k down3. CBK liabilities of Ksh down as a certain percentage of the demonetised 1k will be extinguished - not come back 4. Cash to GDP ratio will go down - 5. % of big denomination re money in circulation down its a very clever move and I noticed the President was rather amused by its cleverness.