Those three U.S. recession indicators – how near or far are those from being invoked?

We wrote recently about three slightly different U.S. recession indicators that have been predictive of the past few recessions. How near or far are those from being invoked?

30-year and 10-year Treasury yield

The 10-year Treasury yield has been greater than the 30-year Treasury yield three to six months before each of the past four. Currently the difference is just 19 bps.

And the 30-year, 20-year and 10-year Treasury yields have almost converged three to six months before each of the past five recessions as well. The 20-year yield already 3 bps higher than the 30-year yield, they have been converging for the past two weeks.

Continue reading “Those three U.S. recession indicators – how near or far are those from being invoked?”

This is what is likely to happen when the European Central Bank ends bond buying

The European Central Bank (ECB) announced on Wednesday that it will halve its bond buys to 15 billion Euros (from the current 30 billion Euros) a month from October then shut the programme at the end of the year.

Source: European Central Bank

ECB’s balance sheet has increased by 2 trillion Euros since 2015 when it announced its bond buying programme. 2-year yields for most of the Eurozone countries are currently negative and 10-year yields in most cases are lower than that of the United States. The European Central Bank (ECB) is by far the biggest holder of European bonds and the biggest (almost 90%) buyer of the weaker Eurozone (Italy, Spain, Portugal and Greece) countries debt since 2015. The ECB balance sheet is now over 4.5 trillion Euros, some 45% of Eurozone GDP.

Continue reading “This is what is likely to happen when the European Central Bank ends bond buying”

Three slightly different US recession indicators

Here are three slightly different US recession indicators that have been predictive of the past few recessions,

30-year and 10-year Treasury yield

The 10-year Treasury yield has been greater than the 30-year Treasury yield three to six months before each of the past four recessions. Graph below for the past decade, the shaded areas indicate recessions,

US 30 year and 10 year yield 2008 to 2018
Source: Board of Governors of the Federal Reserve System (US)

And the 30-year, 20-year and 10-year Treasury yields have almost converged three to six months before each of the past five recessions as well. Graph below, the shaded areas indicate recessions,

US 30 20 and 10 Treasury Yield
Source: Board of Governors of the Federal Reserve System (US)

Continue reading “Three slightly different US recession indicators”

Do economic fundamentals matter anymore? Part 3 of 3

Do economic fundamentals matter today? We look at the strange market conditions today. We are living in truly interesting times …

Read Part 1
Read Part 2

Super low Government bond yields

Government bond yields have never been lower with 2-year yields for most of Europe currently negative. The European Central Bank (ECB) is by far the biggest holder of European bonds and the biggest (almost 90%) buyer of the weaker Eurozone (Italy, Spain, Portugal and Greece) countries debt since 2015. The ECB balance sheet is now over 4.5 trillion Euros, some 45% of Eurozone GDP.

Even 10-year yields for Japan and Switzerland are barely positive.

Yields on government bonds for all maturities over 3 months have never been lower in the history of the world .

Some 80% of 10-year Japanese government bonds are held by the Bank of Japan. And apparently there are days when no one trades those 10-year bonds because there is no point of trading it. Why? Well, because the Bank of Japan has a policy to control yield curves and since they hold majority of it there are hardly any price movements.

Continue reading “Do economic fundamentals matter anymore? Part 3 of 3”

Weekly Overview: Investors seek safety as bond yields fall; Crude Oil down 5%; Baltic Dry Index down 15%; Bank of England Governor prepared to cut or freeze interest rates; US E-Commerce Retail sales soaring

Investors seek safety

What a difference a week makes, just last week everyone was talking about soaring bond yields. Investors are now seeking safety with developed economies bond yields falling significantly during the week.

Here are some 10-year bond yields, figures in brackets indicate change during the week.

US 2.93% (-15 bps)
UK 1.32% (-21 bps)
Germany 0.41% (-17 bps)
Canada 2.35% (-14 bps)
Switzerland 0.00% (-13 bps)
Netherlands 0.59%% (-15 bps)
Australia 2.79% (-13 bps) Continue reading “Weekly Overview: Investors seek safety as bond yields fall; Crude Oil down 5%; Baltic Dry Index down 15%; Bank of England Governor prepared to cut or freeze interest rates; US E-Commerce Retail sales soaring”

Weekly Overview: Emerging Market Rout; New Italian Government; Japan GDP; Oil surge continues

Emerging Markets are being routed with rising oil and a soaring US dollar

Here is the performance of the US dollar against emerging market currencies (figures in brackets are 1-month % change),

USD/MXN – Mexico 19.9450 (+8.17%)
USD/INR – India 67.9850 (+3.23%)
USD/TRY – Turkey 4.4894 (+10.07%)
USD/BRL – Brazil 3.7375 (+10.33%)
USD/ZAR – South Africa 12.7550 (+6.71%) Continue reading “Weekly Overview: Emerging Market Rout; New Italian Government; Japan GDP; Oil surge continues”

Can the UK Government afford higher interest rates or rising bond yields?

We recently wrote about the impact of rising interest rates for UK households, read more about it here. We also wrote about the impact of higher bond yields for the US government, read more about it here.

Impact of higher interest rates for the UK Government

The UK government has around £1.72 trillion in debt and pays around £36 billion in interest payments a year (an effective interest rate of 2%).

The UK tax revenues are around £800 billion a year, which would mean 4.5% of all tax revenues are paid as interest. The UK has paid £540 billion in interest since it last ran a surplus in 2001.

Continue reading “Can the UK Government afford higher interest rates or rising bond yields?”

US and emerging market bond yields soar; UK retail; US Student debt; German GDP

US and emerging market bond yields

The US 10-year bond yield soared to 3.09% today (up 75 bps over the past year and 25 bps over the past month), the highest since 2011. The 2-year yield hit 2.59%, the highest since August 2008 (read more here on the financial impact of rising yields for the US Government).

The bigger story is of emerging markets though. Brazilian and Indian 10-year yields have soared 33 bps in just a week. The Brazilian 10-year bond yield topped 10.12% while the Indian 10-year bond yield topped 7.91%. The US dollar has gained 7% against the Brazilian Real and 4% against the Indian Rupee over the past month.

Canadian bond yields are soaring the most amongst developed nations with the 10-year yield hitting 2.51%, up 94 bps over the past year and 24 bps over the past month. Continue reading “US and emerging market bond yields soar; UK retail; US Student debt; German GDP”

Iran trade with the US and Europe; Euro area consumer credit growth; Almost 3% coupon on 10-year Treasury bond; US yield curve inversion vs Euro area curve yield inversion

So, the US exits the Iran nuclear deal. The business impact of it?

Not much at all for the US. But a very major impact for Europe.

US exports to Iran
2015 exports were $282 million, 2016 were down to $172 million and 2017 were further down to $138 million

Iran exports to the US
Just $64 million in 2017

European exports to Iran
€10.8 billion ($12.80 billion) in 2017, has grown 10-fold since 2015

Iran exports to Europe
€10.14 billion ($12.02 billion) in 2017, has grown 10-fold since 2015 Continue reading “Iran trade with the US and Europe; Euro area consumer credit growth; Almost 3% coupon on 10-year Treasury bond; US yield curve inversion vs Euro area curve yield inversion”