Buttonwood
Investors call the end of the government-bond bull market (again)
It is the corporate-bond market they should worry about
FOR the umpteenth time in the past decade, a great turning-point has been declared in the government-bond market. Bond yields have risen across the world, including in China, where the yield on the ten-year bond has come close to 4% for the first time since 2014. The ten-year Treasury-bond yield, the most important benchmark, has risen from 2.05% in early September to 2.37%, though that is still below its level of early March (see chart).
Investors have been expecting bond yields to rise for a while. A survey by JPMorgan Chase found that a record 70% of its clients with speculative accounts had “short” positions in Treasury bonds—ie, betting that prices would fall and that yields would rise. Meanwhile a poll of global fund managers by Bank of America Merrill Lynch (BAML) in October found that a net 85% thought bonds overvalued. In addition, 82% of the managers expected short-term interest rates to rise over the next 12 months—something that tends to push bond yields higher.
In part, this reflects greater optimism about the global economy. For the first time since 2014, America has managed two consecutive quarters of annualised growth of 3% or more. Forecasts for European growth have also been revised higher. Commodity prices, including oil, have been rising since June, which may be a sign of improving demand.
The BAML survey found that, for the first time in six years, more managers believe in a “Goldilocks” economy (in which growth is strong and inflation is low) than in a “secular stagnation” outlook (in which both growth and inflation are below trend). If those views turn out to be correct, then it might be expected that bond yields would move a bit closer to more “normal” levels. Until the crisis of 2008, the ten-year Treasury-bond yield had been above 5% for most of the previous four decades.
Investors also expect that, eventually, some kind of fiscal stimulus will be passed in Washington, DC. Of the fund managers polled by BAML, 61% expect tax cuts in the first quarter of next year. Such a package may increase the deficit and induce more economic growth; both factors would push bond yields higher.
Another factor behind the upturn in yields is a shift in central-bank policy. The Federal Reserve has started to wind down its balance-sheet, by not reinvesting the proceeds when bonds mature. The European Central Bank will soon cut the amount of bonds it buys every month by half, to €30bn ($35bn). The private sector will have to absorb the bonds that central banks are no longer purchasing.
Whether this will trigger the long-prophesied collapse of the bull market in bonds is another matter. Globally, there are no signs of a sustained surge in inflation (see previous article).
PIMCO, a fund-management group, thinks that global economic conditions may now be “as good as it gets”. The momentum of growth may already have reached its peak.
Central banks also know that higher bond yields can act as a brake on economic growth. In G20 advanced economies, the combined debt of households, governments and the non-financial corporate sector has been rising steadily and stands at 260% of GDP. Every debt is also a creditor’s asset, but higher borrowing costs can create awkward adjustments; in America, for example, 30-year mortgage rates are around half a percentage point higher than they were a year ago. So the pace of tightening will be very slow. And if the economy shows any sign of wobbling, central banks will probably relent.
Perhaps the real area of worry should be the corporate-bond market. Low government-bond yields have pushed investors in search of a higher income into taking more risk. American mutual funds now own 30% of the high-yield bond market, up from less than 20% in 2008. The spread (extra interest rate over government bonds) on these riskier securities is close to its lowest level since before the financial crisis. BlackRock, another fund-management group, says there is “a more favourable environment for issuers at the expense of lenders”, especially as the quality of the covenants protecting lenders has been deteriorating.
With the rate of bond defaults falling, and the global economy doing well, investors probably feel there is little to worry about. But there is a problem: the corporate-bond market is less liquid than it was before 2007, as banks have pulled back from their market-making roles.
Investors have found it easy to get into the market in search of higher yields. When the time comes, they will find it much more difficult to get out.
INVESTORS CALL THE END OF THE GOVERNMENT-BOND BULL MARKET (AGAIN) / THE ECONOMIST BUTTONWOOD COLUMN
CHINA´S CENTRAL BANK INJECTS $47 BN INTO FINANCIAL SYSTEM / THE FINANCIAL TIMES
China’s central bank injects $47bn into financial system
Largest intervention in almost a year sends bond yields down from 3-year high
Don Weinland in Hong Kong and Yuan Yang in Beijing
China’s central bank injected $47bn into its financial system, its largest intervention in nearly a year, in an effort to calm investor fears that Beijing’s crackdown on debt-fuelled growth would put a brake on the country’s rapid expansion.
Yields on China’s benchmark 10-year sovereign bond had risen above 4 per cent this week, a level not seen since 2014, following a sell-off that began following last month’s Communist party Congress, where the outgoing People’s Bank of China chief warned of the risks from excessive debt and speculative investment.
Although Thursday’s Rmb310bn injection saw the yield eased to 3.98 per cent from an intraday day peak of 4.015 per cent, analysts warned the PBoC had no clear target and that yields could rise beyond 4 per cent again without further easing.
“They don’t want the market to panic but I don’t think they have a set target,” said Zhou Hao, senior emerging markets economist at Commerzbank in Singapore.
Emerging markets have been suffering a rough patch as investors have retrenched following Venezuela’s recent bond default, Saudi Arabia’s threatening war against Iran and continued political turbulence in Turkey. The jitters have also resulted in price swings for commodities such as metals and oil.
But China has come under particular scrutiny after recent remarks by policymakers that they are determined to crack down on easy credit, which many analysts believe has created bubbles and oversupply throughout the economy.
Loose monetary policy in China has helped keep bond yields artificially low as central bank liquidity — often in the form of stimulus intended to support the economy — has flowed into financial markets.
But policymakers are concerned the easy credit has masked concerns over the build-up of bad debt and a slowdown in China’s economy. The PBoC’s recent decision to hold off on adding liquidity to the system has led to a correction in Chinese markets as those fears are priced in.
“There should be a credit-risk premium but yields have been distorted by all the liquidity,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets in Hong Kong. “This year they have stopped the liquidity and the bond market is only now catching up with reality.”
Yields remained steady during the party congress in October as banks, mutual funds and other state-backed institutions — often referred to as the “national team” for their role in stabilising the market — continued to buy sovereign debt.
But the buying has recently slowed amid signs the government planned to rein in credit growth.
“Investors, in particular mutual funds which have become the second-largest buyer of China’s government bonds, had previously bought sovereign debt because they had assumed the government would loosen [credit] in the fourth quarter in order to achieve the GDP growth target,” said Jonas Short, Beijing head of Sun Kai Hung Financial, an investment bank. “But the realisation that in fact there will be no loosening whatsoever has triggered the sell-off.”
INDUSTRIAL COMMODITIES HITCH A RIDE ON GLOBAL GROWTH HOPES / THE FINANCIAL TIMES
Industrial commodities hitch a ride on global growth hopes
Metals are rising sharply, but this is not a repeat of the commodity ‘supercycle’
by David Sheppard and Neil Hume in London
.
© Bloomberg
Industrial commodities are on a tear. Oil, copper and niche metals such as cobalt all shot to multiyear highs in recent weeks, buoyed partly by the strongest and most widespread global growth since the financial crisis.
The move, which has seen Brent crude top $60 for the first time in two years and copper pass $7,000 last month, has been accompanied by renewed interest from investors and hedge funds who had largely abandoned the sector during a brutal slump over the past three years.
Now, with growth picking up and commodity markets tightening due to under-investment and producers’ attempts to rein in output, some industry executives and analysts say funds are again treating commodities as the go-to assets to profit from global growth.
They caution, however, that while the commodity cycle appears to be turning, this is not a repeat of the so-called “supercycles” that propelled oil and metals to record highs last decade, as China’s rapid industrialisation caught the industry napping.
“We are in the upswing of a classic commodity cycle but this time — while demand is strong — it is being driven by supply constraints rather than a sudden surge in consumption that the industry just wasn’t ready for,” said Julian Kettle, vice-chairman of metals and mining at Wood Mackenzie.
“The last five years there has been under-investment in metals and to a certain degree energy and, while supplies are relatively comfortable, investors are starting to see that producers are risking storing up problems for the future.”
The issue, analysts say, is that miners and oil producers were so badly burnt by the commodity crash that they have pulled investment from new projects during the downturn.
While demand is not soaring at the rate it was last decade, it is now expanding quickly enough to provoke concerns about future supplies, drawing in investors who want to tap into global growth and to have a possible hedge against rising inflation.
“The herd-like behaviour from investors is certainly reminiscent of what we saw a decade ago,” said Caroline Bain, chief commodities economist at Capital Economics in London.
“But a lot of this optimism we’re seeing is about future demand. The crash in prices has caused much lower investment.”
Take oil, for example. Swiss commodity house Trafigura was one of the first to sound the alarm in September when it warned demand could exceed supply by as much as 4m barrels a day by the end of this decade, after energy companies halted $1tn of spending on new production during the oil crash.
While the market is currently being propped up by Opec supply cuts, doubts are growing that the US shale industry will be able to meet future demand growth wholly on its own, which is forecast to keep expanding even as electric cars become a bigger part of the market.
Hedge funds have amassed a near-record bet on higher Brent crude oil prices in recent weeks.
In metals, the industry has been awash with projections that the same growth in electric cars will transform corners of the market, with nickel — long a laggard on the base metals complex — set to see demand soar as battery use grows, while copper is also seen benefiting due to its use in charging points.
Cobalt, essential to modern battery technology, has also become the industry’s new darling, with supply dominated by challenging jurisdictions such as the Democratic Republic of Congo, where 50 per cent of the metal is mined. The price has soared by 200 per cent over the past 18 months.
Ivan Arriagada, chief executive of Chile-focused copper producer Antofagasta, said this week that the talk around electric vehicles meant that investors were looking at metals and mining with different eyes.
“We have generally been seen as an industry at the periphery of the modern economy and all this [the electric vehicle narrative] is showing that metals are very important,” Mr Arriagada said.
Ian Roper, general manager of Chinese metals data company SMM, highlighted, however, that it is still supply issues rather than demand that has provided the main impetus for the recovery in industrial metals. China has prioritised cutting pollution, leading it to place restrictions on mines and smelters for many key metals and minerals, including steel and coal.
“Given we’ve seen all the clampdowns from the supply side and the lack of investment in new mines globally that could put commodities on a very firm footing on the next three to five year cycle,” Mr Roper said.
Not all commodities are benefiting, however. Agricultural commodities, from grains to pulses, remain weighed down by bumper crops. Gold, which tends to act as a hedge against weak economic growth, is likely to face headwinds.
Paul Horsnell, head of commodities research at Standard Chartered, said the key message was investors still need to pick and choose commodities and the companies that produce them carefully.
“This probably isn’t a rising tide that is going to raise all ships,” Mr Horsnell said.
“Each of the commodities that has rallied has its own unique story and fundamentals, so investors need to be cautious. In a lot of them we’re going up simply because prices have been too low.”
Additional reporting by Henry Sanderson
THE TROUBLE WITH SPANISH NATIONALISM / GEOPOLITICAL FUTURES
The Trouble With Spanish Nationalism
THE U.S. PLUTOCRACY´S WAR ON SUSTAINABLE DEVELOPMENT / PROJECT SYNDICATE
The US Plutocracy’s War on Sustainable Development
JEFFREY D. SACHS
NEW YORK – The US plutocracy has declared war on sustainable development. Billionaires such as Charles and David Koch (oil and gas), Robert Mercer (finance), and Sheldon Adelson (casinos) play their politics for personal financial gain. They fund Republican politicians who promise to cut their taxes, deregulate their industries, and ignore the warnings of environmental science, especially climate science.
When it comes to progress toward achieving the United Nations Sustainable Development Goals, the US placed 42nd out of 157 countries in a recent ranking of the SDG Index that I help to lead, far below almost all other high-income countries. Danish author Bjørn Lomborg was puzzled. How could such a rich country score so low? “America-bashing is popular and easy,” he surmised.
Yet this is not about America-bashing. The SDG Index is built on internationally comparable data relevant to the 17 Sustainable Development Goals for 157 countries. The real point is this: sustainable development is about social inclusion and environmental sustainability, not just wealth.
The US ranks far behind other high-income countries because America's plutocracy has for many years turned its back on social justice and environmental sustainability.
The US is indeed a rich country, but Lord Acton’s famous aphorism applies to nations as well as to individuals: power corrupts, and absolute power corrupts absolutely. The US plutocracy has wielded so much power for so long that it acts with impunity vis-à-vis the weak and the natural environment.
Four powerful lobbies have long held sway: Big Oil, private health care, the military-industrial complex, and Wall Street. These special interests feel especially empowered now by Donald Trump’s administration, which is filled with corporate lobbyists, not to mention several right-wing billionaires in the cabinet.
While the Sustainable Development Goals call for mitigating climate change through decarbonization (SDG 7, SDG 13), US fossil-fuel companies are strenuously resisting. Under the sway of Big Oil and Big Coal, Trump announced his intention to withdraw the US from the Paris climate agreement.
America’s annual energy-related per capita CO2 emissions, at 16.4 tons, are the highest in the world for a large economy. The comparable figure for Germany, for example, is 9.2 tons. The US Environmental Protection Agency, now in the hands of lobbyists from the fossil-fuel sector, dismantles environmental regulations every week (though many of these actions are being challenged in court).
The SDGs also call for reduced income inequality (SDG 10). America’s income inequality has soared in the past 30 years, with the Gini coefficient at 41.1, the second highest among high-income economies, just behind Israel (at 42.8). Republican proposals for tax cuts would increase inequality further. The US rate of relative poverty (households at less than half of median income), at 17.5%, is also the second highest in the OECD (again just behind Israel).
Likewise, while the SDGs target decent jobs for all (SDG 8), American workers are nearly the only ones in the OECD that lack guaranteed paid sick leave, family leave, and vacation days. The result is that more and more Americans work in miserable conditions without job protections. Around nine million American workers are stuck below the poverty line.
The US also suffers from an epidemic of malnutrition at the hands of the powerful US fast-food industry, which has essentially poisoned the public with diets loaded with saturated fats, sugar, and unhealthy processing and chemical additives. The result is an obesity rate of 33.7%, the highest by far in the OECD, with enormous adverse consequences for non-communicable diseases. America’s “healthy life expectancy” (morbidity-free years) is only 69.1 years, compared to 74.9 years in Japan and 73.1 years in Switzerland.
While the Sustainable Development Goals emphasize peace (SDG 16), America’s military-industrial complex pursues open-ended wars (Afghanistan, Iraq, Syria, Yemen, Libya, to name some of America’s current engagements) and large-scale arms sales. On his recent visit to Saudi Arabia, Trump signed a deal to sell over $100 billion in weapons to the country, boasting that it would mean “jobs, jobs, jobs” in America’s defense sector.
America’s plutocracy contributes to homegrown violence as well. The US homicide rate, 3.9 per 100,000, is the highest of any OECD country, and several times higher than in Europe (Germany’s rate is 0.9 per 100,000). Month after month, there are mass shootings in the US, such as the massacre in Las Vegas. Yet the political power of the gun lobby, which opposes limits even on assault weapons, has blocked the adoption of measures that would boost public safety.
Another kind of violence is mass incarceration. With 716 inmates per 100,000 people, America has the world’s highest incarceration rate, roughly ten times that of Norway (71 per 100,000).
Remarkably, America has partly privatized its prisons, creating an industry with an overriding interest in maximizing the number of prisoners. Former President Barack Obama issued a directive to phase out private federal prisons, but the Trump administration reversed it.
Lomborg also wonders why the US gets a low score on global “Partnership for the Goals,” even though the US gave around $33.6 billion in official development assistance (ODA) in 2016. The answer is easy: relative to gross national income of almost $19 trillion, ODA spending by the US amounted to just 0.18% of GNI – roughly a quarter of the global target of 0.7% of GDP.
America’s low ranking in the SDG Index is not America-bashing. Rather, it is a sad and troubling reflection of the wealth and power of lobbies relative to ordinary citizens in US politics. I recently helped to launch an effort to refocus state-level US politics around sustainable development, through a set of America’s Goals that candidates for state legislatures are beginning to adopt. I am confident that a post-Trump America will recommit itself to the values of the common good, both within America and as a global partner for sustainable development.
Jeffrey D. Sachs, Professor of Sustainable Development and Professor of Health Policy and Management at Columbia University, is Director of Columbia’s Center for Sustainable Development and of the UN Sustainable Development Solutions Network. His books include The End of Poverty, Common Wealth, The Age of Sustainable Development, and, most recently, Building the New American Economy.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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