Connect with us

Investing

Analysis: Debt-laden world, rising bond yields – a toxic taper tantrum combo

Published

on

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 9

By Dhara Ranasinghe and Karin Strohecker

LONDON (Reuters) – In May 2013, bond investors threw a tantrum after hints the U.S. Federal Reserve might slow the money-printing presses. A similar selloff now, with another $70 trillion added to global debt, could prove to be far more vicious.

A 2013-style “taper tantrum” was named as one of the top market risks in BofA’s February poll of fund managers who fear a pick-up in inflation expectations might soon persuade central banks to start withdrawing or “tapering” stimulus.

Some like former U.S. Treasury Secretary Larry Summers even predict this will happen sooner than anticipated if huge government spending sparks runaway inflation.

Such fears drove U.S. 10-year borrowing costs to near-one year highs on Tuesday. Equities slipped off record peaks; long-dormant gauges of Treasury market volatility flickered into life.

“Higher rates means higher rates volatility, means higher spreads and market selloffs as we saw back in 2013,” said Kaspar Hense, portfolio manager at BlueBay Asset Management who has pared exposure to Treasuries, expecting their 30-40 bps year-to-date yield rise to continue.

“There is no doubt the risks are greater this time around than 2013 because of the high leverage in the system.”

Global debt today stands at $281 trillion, according to the Institute of International Finance, versus $210 trillion in 2013. Companies and households too owe significantly more.

Economic growth and inflation can whittle away debt. Yet the very policies put in place to aid recovery can encourage more borrowing.

Debt is keeping central banks in “a loop of never-ending provision of liquidity and of very low interest rates,” said Steve Ellis, global fixed income CIO at Fidelity International.

“The only way to keep the plate spinning is keep refinancing costs low.”

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 10

Graphic: Debt levels on the rise since 2013 Taper Tantrumb – https://graphics.reuters.com/GLOBAL-BONDS/TANTRUM/bdwvknkrepm/chart.png

What bears watching is the “real” or inflation-adjusted bond yield that represents the true cost of capital. The 100 bps-plus spike in real U.S. yields of 2013 has not happened so far this time, sparing equities and emerging markets the fallout.

It also implies markets are not factoring a central bank response to higher inflation expectations.

That may be why, taper tantrum fears notwithstanding, BofA survey participants are holding equity and commodity allocations near decade-highs — with real yields near minus 1%, U.S. stocks still pay a 5% premium over bonds.

HIGHER, LONGER, WILDER

It’s not just the sheer weight of debt that makes markets more sensitive to interest rate moves.

After the interest rate collapse of recent years, just 7.8% of global government and corporate bonds on the Tradeweb platform yield 3% or more.

Global shares trade at 20 times forward earnings versus 12.5 times in May 2013.

Investors have fanned out into higher-yielding junk-rated debt and the BofA survey found a record proportion holding above-normal risk exposure.

Finally, investors are loaded up on longer-maturity debt.

Duration — how long it takes to recoup the original investment — is now 8.5 years on the ICE BofA World Sovereign Bond Index, two years more than in 2013.

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 11

Graphic: Investor exposure to duration rises – https://graphics.reuters.com/GLOBAL-BONDS/oakveradypr/chart.png

Longer-dated assets also expose investors to higher ‘convexity’ in the price-yield relationship, meaning a small rise in yields causes outsize losses.

That’s been highlighted this year to holders of Austria’s 100-year issue where a 35 bps yield rise has knocked prices 20% lower. Similarly, a 40 bps rise in 30-year U.S. yields has translated into a 4% price fall.

Ellis estimates holders of 10-year Treasuries would lose 4.62% over a month if yields rise 50 bps from current levels. A similar rise would have caused a 4.46% loss in 2013.

Similarly, JPMorgan Asset Management calculates a 1% rise across the U.S. curve would cause total annual price returns on a 30-year Treasury to fall 19%. Two-year notes would suffer a 2% price loss.

NOT ALL BAD

Some say delaying the tantrum might make matters worse.

“It’s better to put up with the tantrum when someone is two than when they are 14,” said David Kelly, chief global strategist at JPMorgan Asset Management.

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 12

Graphic: Are markets gearing up for another taper tantrum? – https://fingfx.thomsonreuters.com/gfx/mkt/yzdpxwndrvx/tapertantrum1502.png

But most policymakers have made clear they will not hurry. Cleveland Fed President Loretta Mester for instance said the Fed was keen to avoid taper tantrums and wouldn’t withdraw support until the economy was stronger.

Central banks also are less keen than previously to tighten policy in response to a price surge, having repeatedly pledged low rates even if inflation overshootsm.

Scars from 2013 and higher global indebtedness will force central banks to “lean against” market tantrums, asset manager BlackRock reckons.

Finally, emerging markets which bore the brunt of past tantrums, appear better placed this time. Many countries, including those reliant on foreign capital in 2013, now run balance of payments surpluses.

“Positioning in emerging market securities and currencies is far below previous cycle peaks, especially 2013,” said Bryan Carter, head of EM debt at HSBC Asset Management, pointing to higher bond risk premia and cheaper valuations.

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 13

Graphic: U.S. yields and EM capital flows – https://fingfx.thomsonreuters.com/gfx/mkt/oakvermzxpr/US%20yields%20and%20EM%20capital%20flows.PNG

(Reporting by Dhara Ranasinghe, Sujata Rao and Karin Strohecker; additional reporting by Saikat Chatterjee; editing by Sujata Rao and Toby Chopra)

 

Investing

Stocks edge down as investors hit pause, watch bond yields

Published

on

Stocks edge down as investors hit pause, watch bond yields 14

By Suzanne Barlyn

NEW YORK (Reuters) – Global equity markets were little changed on Tuesday as Wall Street retreated and investors paused to gauge whether a bond yield jump had run its course, taking stock of gains from Monday’s surge.

The subdued performance of the three major Wall Street indices followed a flat close in Europe and slipping shares in Asia.

“It was such a strong opening to the month yesterday that investors could be short-term focused and saying, ‘Let’s take some of the profits that we saw yesterday,'” said Sam Stovall, chief investment strategist at CFRA Research in New York.

March began with a bang on Monday as global equities markets rose, the S&P 500 had its best day since June 5 and bond markets calmed after a month-long selloff.

In Tuesday late-afternoon trading, the Dow Jones Industrial Average rose 45.37 points, or 0.14%, to 31,580.88, the S&P 500 lost 3.1 points, or 0.08%, to 3,898.72 and the Nasdaq Composite dropped 106.23 points, or 0.78%, to 13,482.60.

The pan-European STOXX 600 index rose 0.19% while MSCI’s gauge of stocks across the globe %.

Emerging market stocks rose 0.05%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.16% lower, while Japan’s Nikkei lost 0.86%.

The European Central Bank should expand bond purchases or even increase the quota earmarked for them if needed to keep yields down, ECB board member Fabio Panetta said on Tuesday, after weeks of steady increases in borrowing costs.

Australia’s central bank on Tuesday affirmed its pledge to keep interest rates at historic lows as policymakers battle to stop surging bond yields from disrupting the country’s surprisingly strong economic recovery.

After a sharp selloff last week, U.S. Treasuries have stabilized with bond market indicators and derivatives positioning pointing to near-term calm. But an improving economy could trigger another slide in their prices.

U.S. Federal Reserve Governor Lael Brainard said she was closely watching bond markets and would be concerned if a recent rise in yields continued and began to constrain economic activity.

“Some of those moves last week and the speed of the moves caught my eye,” Brainard said on Tuesday.

A Treasuries selloff last week pushed the 10-year yield to a one-year high of 1.614%. Benchmark 10-year notes last rose 11/32 in price to yield 1.4102%, from 1.446% late on Monday.

Gold prices rose, inching up from a more than eight-month low, as a retreat in the dollar and U.S. Treasury yields lifted demand for the safe-haven metal.

Spot gold added 0.8% to $1,736.02 an ounce. U.S. gold futures settled up 0.6% at $1,733.60.

The dollar index fell 0.318%, with the euro up 0.37% to $1.2092.

Earlier, the dollar was up for a fourth consecutive day after the spike in bond yields challenged the market consensus for dollar weakness in 2021. But riskier currencies rose as bond markets calmed and stocks recovered.

Bitcoin fell 2.19% to $47,808.00 after rising nearly 7% on Monday.

Shares in mainland China and Hong Kong fell overnight after a top regulatory official expressed concerns about the risk of bubbles bursting in foreign markets.

Oil prices largely shrugged off expectations that OPEC would agree to raise oil supplies at a meeting this week.

The global oil market is rebalancing after damage to demand wrought by the COVID-19 pandemic was met with curbs on output by OPEC producers, the group’s president said.

The industry is recovering from a collapse in demand triggered by the pandemic, but U.S. shale production will not recover to pre-pandemic levels, Occidental Petroleum Chief Executive Vicki Hollub said on Tuesday.

“The recovery is looking really good to us. If you look at what’s happening in India as well as the U.S., I think the oil industry is looking like things will be pretty good for us over next couple of years,” Hollub said.

U.S. crude futures settled down 89 cents at $59.75 a barrel, while Brent futures fell 99 cents to settle at $62.70 a barrel.

(Reporting by Suzanne Barlyn; Editing by Dan Grebler)

 

Continue Reading

Investing

Robinhood now a go-to for young investors and short sellers

Published

on

Robinhood now a go-to for young investors and short sellers 15

By John McCrank

NEW YORK (Reuters) – Robinhood, the online brokerage used by many retail traders to pile in to heavily shorted stocks like GameStop Corp, has made an ambitious push into loaning out its clients’ shares to short sellers as it expands its business.

The broker had $1.9 billion in shares loaned out as of Dec. 31, nearly three times the $674 million a year earlier, and it was permitted to lend out $4.6 billion worth of securities under margin agreements, around five times bigger than the prior year, according to an annual regulatory filing late on Monday.

The size of the jump highlights Robinhood’s rapid growth over the past year as the number of retail investors has soared in the work-from-home environment during the pandemic and as retail brokers have largely eliminated trading fees, a model Robinhood helped pioneer.

Menlo Park, California-based Robinhood is expected to go public this year with a valuation of more than $20 billion.

Securities lending is common among brokerages, which can earn income by lending shares to hedge funds and others, who then sell the shares back into the market, betting the share prices will drop so they can buy them back at a lower price when it is time to return them, pocketing the difference.

Shares that are in heavy demand from short sellers, like GameStop, which had 140% short interest in January https://www.reuters.com/article/us-retail-trading-shortselling-explainer/explainer-how-were-more-than-100-of-gamestops-shares-shorted-idUSKBN2AI2DD, command the biggest premium from the lender.

What makes Robinhood notable is that many of the stocks its users invest in are among the most sought-after by people who want to bet against them, said one senior financial executive involved with hedge funds.

It was unclear how great a benefit the securities lending was to Robinhood’s revenue and income, which it does not disclose.

Robinhood declined comment on the filing and did not immediately respond to a request for comment on the details of which stocks it loans out.

In January, retail investors coordinated through trading forums on social media in an attempt to punish hedge funds by buying up shares of GameStop and other heavily shorted names, like AMC Entertainment, driving up their prices and forcing short sellers to close out positions at big losses.

On Jan. 28, at the height of the retail trading mania, Robinhood, along with several other brokers, restricted the buying of GameStop and other so-called meme stocks due to a massive spike in collateral requirements needed to clear the trades, angering many of its customers.

The trading restrictions sparked congressional hearings, regulatory probes and have placed greater scrutiny on short selling.

In response, Vlad Tenev, Robinhood’s chief executive officer, called for shorter stock settlement times, which would reduce clearing collateral requirements.

He also said the idea that more shares of a stock can be shorted than there are available to trade, as was the case with GameStop, is a “pathology” that could destabilize the financial markets.

Robinhood positioned itself for growth in securities lending in October 2018 by launching its own clearing broker, which acts as a go-between with the clearinghouse that settles its trades, and allows it to hold its customers’ assets. The broker can then lend out securities its customers buy on margin.

At present, less than 3% of Robinhood’s funded accounts are margin-enabled, Tenev recently told Congress.

(Reporting by John McCrank in New York; Editing by Megan Davies and Matthew Lewis)

 

Continue Reading

Investing

Resurgent stock market evokes memories of long-gone bubble on Tokyo’s ‘Wall Street’

Published

on

Resurgent stock market evokes memories of long-gone bubble on Tokyo's 'Wall Street' 16

By Junko Fujita

TOKYO (Reuters) – At the almost empty “Wall Street” bar and restaurant in Tokyo’s Kayabacho financial district, three groups of patrons dine quietly at tables separated by partitions.

The sedate scene is a far cry from the area’s heyday 30 years ago when traders flush from big wins on the nearby Tokyo Stock Exchange routinely crowded the restaurant’s bar, downing glasses of premium whiskey.

Even though Japanese stocks are scaling giddy heights not seen since the asset inflation bubble of the late 1980s and early 1990s, bars and restaurants in the financial district aren’t along for the ride.

Kayabacho’s streets are instead eerily quiet.

“During the bubble era, people came here to drink a glass of Ballantine’s 30-year-old (whisky) for 5,500 yen ($52), even when there’s no seats available, just standing by the cash register,” “Wall Street” owner Kenichi Inoue, 62, told Reuters.

Inoue opened the European style bar and restaurant in 1989, the year the Nikkei index hit a record peak, aiming to serve drinks and food at the affordable price of around $30 per person.

Brokers and traders packed into the bar almost every evening, with tables at the back usually filled by workers from Yamaichi Securities, then the country’s fourth largest brokerage.

“It was easy to guess the size of the crowd for the evening,” said Inoue. “If the market was up, I knew it would be busy.”

Inoue’s restaurant wasn’t the only establishment to benefit during the boom. Coffee shops scattered throughout Kayabacho were filled with brokers exchanging information on the market.

The ‘Tatsumi’ restaurant was popular with superstitious traders because it served tempura, or deep fried vegetables and fish. The Japanese word for “deep-fry”, ageru, has the same sound as the word “boost”.

“Back then brokers used to come here in a group. They gave us 100,000 yen in cash in an advance,” said 62-year-old owner, Masahiko Tsuda, citing a figure equivalent to around $800 at the time. “If that was not enough, they paid the difference at the end of the week.”

The party came to an end when the stocks bubble burst in the early 1990s. Yamaichi was one of four major banks and brokerages that collapsed in 1997.

Compounding the market slide, the Tokyo Stock Exchange in 1999 completed a decade-long switch to electronic trading, closing the formerly bustling trading floor.

The number of brokerage employees almost halved from a peak of 170,000 nationwide in 1991 to 91,000 last year, according to the Japan Securities Dealers Association.

With them went much of the vibrancy of Kayabacho, a downturn that has been exacerbated by the coronavirus pandemic, which has led to trading restrictions on bars and restaurants across Tokyo.

REDEVELOPMENT PLANS

Redevelopment plans for Kayabacho, which houses many small and old buildings, have been in train for several years, with attempts to rebrand the area as a fintech hub. Heiwa Real Estate, the owner of the stock exchange building, plans to open a 15-storey office tower in the area later this year.

But the revamp lags the refurbishment of neighbouring districts like Marunouchi and Nihonbashi, where major property developers Mitsubishi Estate and Mitsui Fudosan have created hubs for global firms.

Adding to Kayabacho’s woes, the coronavirus pandemic has dealt a blow to the real estate market across Tokyo, as more people work from home and domestic economic growth slows.

“Kayabacho’s atmosphere is dark and gloomy,” said Yoko Hattori, 52, the owner of a standing bar, New Kayaba. “The economy is bad. Many buildings here are old but renovation is not easy because it costs money.”

Tsuda said he no longer sees people flashing lots of cash at his restaurant, while Inoue said “Wall Street” was facing the most critical time of its history.

Inoue has attempted to diversify his menu from the pasta, pizza and grilled meats that catered to mostly male stockbrokers, adding organic food and cold press juice for more health-conscious customers.

He is grateful that his own business never relied too heavily on the excesses of the bubble era: “If this had been an high-end restaurant, it would have been closed a long time ago.”

(Additional reporting by Mayu Sakoda and Hiroko Hamada; editing by Jane Wardell)

 

Continue Reading
Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

Call For Entries

Global Banking and Finance Review Awards Nominations 2021
2021 Awards now open. Click Here to Nominate

Latest Articles

Newsletters with Secrets & Analysis. Subscribe Now