Global Bond Yields Slide To Fresh Lows As Investors Scramble For Greater Returns (#GotBitcoin?)
Yields have slipped as central banks have signaled they are willing to hold rates low for significantly longer than expected. Global Bond Yields Slide To Fresh Lows As Investors Scramble For Greater Returns
Government bond yields from the U.S. to Germany slid Wednesday, falling further below recent lows, as signs that the European Central Bank could consider additional delays in interest-rate increases spurred a fresh round of bond buying.
The yield on the benchmark 10-year U.S. Treasury note, used as a reference for everything from mortgage rates to student debt, fell to 2.374% after settling at 2.418% Tuesday, its lowest level since 2017.
The yield on German 10-year government debt dropped to -0.066%, deepening a slide that recently took it into negative territory for the first time since 2016, while the yield on equivalent Japanese debt ended the day around its lowest level in more than two years.
Bond yields around the world have slipped this month as central banks have signaled they are willing to hold interest rates low for significantly longer than investors had expected just a year ago.
The moves have in large part been spurred by signs of slowing economic growth, particularly in the eurozone and China. But in the U.S., where growth remains relatively steady, the Federal Reserve’s argument for potentially delaying rate increases until next year has been strengthened by signs that inflationary pressures remain fairly muted.
The bond market’s rally Wednesday appeared to accelerate after ECB President Mario Draghi suggested he could consider further delaying plans to raise interest rates.
“Just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook,” Mr. Draghi said in remarks prepared for a conference in Frankfurt.
Mr. Draghi’s remarks came weeks after the ECB unveiled plans to deploy additional stimulus and said it would hold interest rates below zero at least through December—months longer than investors had previously expected.
“The prospect of central banks tightening has diminished to the point where markets aren’t expecting any further tightening [for the cycle],” said Tracie McMillion, head of global asset allocation strategy at the Wells Fargo Investment Institute. “Even if we see economic data turn, we’re still looking at very low inflation and very low yields.”
Inflation is considered a major threat to bonds, since it chips away at the value of their fixed payouts and can push central banks to step up efforts to raise borrowing costs. Signs that prices across the U.S. economy are picking up at a modest pace, even with a tight labor market and steady growth, have helped U.S. government bonds rally this year.
“In the absence of the threat of a Fed tightening or a surge of inflation, the 10-year is just a more attractive place to invest your money,” said Kevin Giddis, head of fixed income capital markets at Raymond James.
Confidence that the Fed will have to dial back its rate-increase plans for the foreseeable future has trickled into the futures market, where many traders have bet that the central bank may even have to lower rates by the end of the year.
Federal-funds futures showed Wednesday the market pricing in a 26% chance of the Fed holding interest rates steady this year, compared with a 40% chance of one rate cut and a 25% chance of two rate cuts, according to CME Group.
That was even as some Fed officials, including Dallas Fed President Robert Kaplan, said this week that it was too soon for the central bank to consider cutting rates.
Part of investors’ skepticism about the Fed’s rate path stems from growing doubts about the strength of the economy.
One widely watched indicator of growth expectations began flashing a cautionary signal last week for the first time in more than a decade. On Wednesday, the difference between yields on three-month and 10-year U.S. Treasurys fell even deeper into negative territory, trading at -0.085 percentage points—the lowest since August 2007. Investors watch the dispersion of bond yields, known as the yield curve, because shorter-term rates often exceed longer-term ones ahead of recessions.
What’s Behind Collapsing Bond Yields
Lower rate expectations from the Federal Reserve are playing a role, but so are investors’ fears of getting hit by the unexpected.
The Treasury market is in a different place than it was last fall.
Through much of November, the yield on the 10-year note was above 3%. Now, with the economy looking softer and the Federal Reserve making a dovish pivot, it is around 2.4%, below the three-month Treasury bill’s yield of 2.45%. This is a discomfiting development since such yield-curve inversions have preceded past recessions.
One reason for the drop in the 10-year yield is that the Fed now expects to stay on hold this year and raise its target range on rates just once next year. That compares with its expectation last fall that it would raise rates at least three times in 2019, with an additional increase in 2020. Since the 10-year Treasury yield is largely a reflection of what investors think overnight rates will average over the next decade, the expectation of a lower target rate over the next couple of years puts downward pressure on the 10-year yield.
But Fed rate expectations aren’t the only thing that go into long-term Treasury yields. The other is the “term premium,” or the additional yield investors demand for the risk of lending over a long period. Historically, term premiums have been positive since investors worried that unexpectedly high inflation might lead the Fed to maintain tighter policy than they forecast. In recent years, however, they have been negative—in reality a discount.
That appears due in part to the distortionary effects of central-bank bond-buying, or quantitative easing, pushing Treasury yields lower than they might otherwise have been. It also reflects a change in investors’ risk assessment, though. They aren’t as worried about getting caught off guard by a pickup in inflation but rather by unexpected weakness that leads the Fed to keep rates lower over the long haul.
According to a Federal Reserve Bank of New York model, the term premium on the 10-year Treasury slipped from negative-0.46 percentage point at the end of November to negative-0.78 percentage point as of Friday, accounting for more than half of the drop in the 10-year yield over that period. That doesn’t mean an economic downturn is the default expectation—just that it is seen as a less-remote possibility.
If those worries fade, then Treasury yields could rise in a hurry. But first they have to fade.
European Banks Face A Triple Whammy
Negative rates, a slowing economy and money laundering scandals are weighing on one of the world’s most unloved sectors for investors: European banks.
Plunging bond yields have made life difficult for bank investors everywhere. For Europe’s beleaguered lenders, it is heaping pain on an already tough situation.
A triple-whammy of factors has weighed on European lenders: negative rates, a slowing economy and money laundering scandals driving compliance costs higher.
The Euro Stoxx banks index has lagged behind the market, up less than 5% this year, compared with a nearly 11% rally for the broader Eurostoxx 600 benchmark index. And in a sign of investors’ dreary outlook, European banks on the index trade for 70% of their book value, down from above 100% in early 2018 and far below U.S. peers.
Some investors are wary of dipping in. “The sector is a value trap now,” said Fabio di Giansante, head of large-cap European equity at Amundi. Even though valuations are at “almost unprecedented levels” compared with other European stocks, he is betting economic troubles and low rates will send bank shares down even further.
The sector is being dragged down by individual names such as France’s Société Générale , which has dropped 8% in 2019 and Dutch bank ABN Amro , down 6% this year. Swiss UBS Group is down 3% this year after warning earlier this month about tough conditions in its investment bank.
“The stock market is pricing either a big recession coming up or the fact that maybe the marks on some of the assets in some of those European banks are incorrect,” said Filippo Alloatti, a senior credit analyst at Hermes Investment Management which has a long position on European lenders’ debt. He figures that while the banks will have trouble growing profits, which hurts their stock price, they are well capitalized.
Falling interest rates tend to help companies by lowering their interest costs and thus boosting profit margins, so long as the economy is growing. But for banks it’s a different story. Low and negative rates constrain banks’ profits by squeezing net interest margins, the difference between what banks pay for funding and make from loans.
Long-term bond yields have returned to ultralow or even negative levels, in the case of 10-year German government bonds.
“Equities are rising partly because the cost of credit is not going to increase as quickly as people expected and that’s good for everyone except for banks,” Jason Napier, head of European banks research at UBS, said.
Analysts at Moody’s paint a particularly gloomy situation for German banks, given net interest income makes up almost 70% of their revenues and most of their interest-earning assets are long-term, meaning the lenders would feel the benefits of any future rate rises with a lag.
The bleak outlook is partly the reason Deutsche Bank and Commerzbank , two leading German lenders, have entered into formal talks about a possible merger.
A series of money-laundering scandals is another factor driving up compliance costs and possible fines while driving stock prices lower. Scandinavia, whose lenders have generally been seen as lower risk bets, has been particularly hard hit.
“If you were hiding in some of these banks you think, “I’m in the high-quality end of the spectrum,” and you have a lower tolerance for risk than if you own some of the racier investment banks,” said Ronit Ghose, an analyst at Citi.
The latest high profile example is Sweden’s largest bank, Swedbank, whose shares have dropped 14% this year following reports of suspected money-laundering. That follows the scandal last year involving Denmark’s Danske Bank A/S after it was discovered that over $230 billion in Russia-linked transactions flowed through its business in Estonia. Danske Bank shares fell 47% last year and a further 6% this year.
One bright spot ironically has been Brexit. Domestically-focused British lenders Lloyds Banking Group and the Royal Bank of Scotland have gained 19% and 14% respectively this year as fears of a disruptive, no-deal Brexit ebbed. Though a no-deal Brexit is still possible, the U.K. and EU have pushed back Brexit several weeks in order to hash out a plan.
Europe’s lenders have also struggled as digital upstarts drive down margins in everything from business loans to foreign exchange transactions, says Chris Garsten, a European equities fund manager at Waverton Investment Management, a long-only investor which has restricted exposure to European banks to Sweden’s Handelsbanken.
“Whenever somebody wants a banking service they now do a Google search and by the time your product has come down to a Google search you have completely lost control of the pricing,” he added.
Fed Reserve Payments To U.S. Treasury Declined in 2018
Central bank sent $65.3 billion to the government in 2018, down from $80.6 billion in 2017.
Federal Reserve payments to the U.S. Treasury declined last year, the central bank said Friday in its updated annual financial statements.
The central bank sent $65.3 billion to the government in 2018, down from $80.6 billion in 2017. Last year’s payments included two lump-sum payments totaling about $3.2 billion from the Fed’s capital surplus account, which lawmakers tapped last year to offset federal spending.
The Fed is required to use its revenue to cover operating expenses and send much of the rest to the Treasury Department’s general fund.
Remittances to Treasury hit a record of $117 billion in 2015 because of high interest income from the Fed’s holdings of bonds purchased during and after the financial crisis.
The Fed is now in the process of unwinding those bonds from its portfolio. Interest income from its portfolio totaled $112.3 billion last year, down $1.3 billion from 2017, the Fed said.
Fed officials raised interest rates four times last year, which means it sent higher payments to financial institutions who keep reserves with the central bank. The Fed paid out $38.5 billion in interest on reserves last year, up $12.6 billion from 2017.
Those policy moves have reduced the Fed’s earnings and cut the amount it sends to Treasury. The Fed earned about $63.1 billion in 2018, down $17.6 billion from 2017.
The Fed spent about $7 billion on operating costs last year, including costs for running its 12 regional banks and the Consumer Financial Protection Bureau.
Bank CEO Warns of Tough First Quarter
CEO Sergio Ermotti says investment banking faces ‘one of the worst first quarter environments in recent history’.
UBS Group AG Chief Executive Sergio Ermotti on Wednesday warned of a weak start to the year for the bank’s investment-banking and wealth-management units, citing “one of the worst first quarter environments in recent history.”
The comments, prepared for a banking conference in London, sent UBS shares down, and underscored the challenges facing Switzerland’s biggest bank as it also confronts legal entanglements in France and the U.S.
In his speech, Mr. Ermotti also outlined an extra $300 million in cost savings.
UBS shares were down 2.5% in late afternoon trading in Europe.
Mr. Ermotti’s downbeat tone appeared to spread to other Swiss and European banks. UBS’s crosstown rival, Credit Suisse Group AG, saw its shares down 3.3%, while Swiss private bank Julius Baer Group ’s shares were 4.1% lower. The Stoxx Europe 600 Banks index fell 0.9%.
Investment-banking revenue is down by about a third compared with the “very strong” first quarter of 2018, Mr. Ermotti said.
“While clearly not in line with our long-term aspirations, I find it to be an acceptable outcome if it is a one-off in one of the worst first-quarter environments in recent history,” he said.
Revenue from its global wealth-management unit is down about 9% from a year earlier, though the decline narrowed as the first quarter went on, Mr. Ermotti said, while transaction-based income could be down about 25%.
“This is especially visible in Asia, where our most recent client survey shows a rather somber view on this year’s outlook amid political tensions, trade tariff disputes and concerns about slowing growth in the region,” he said. “Our U.S. clients remain on the sidelines as well, generally content with their planned asset allocations and financial plans.”
UBS and Credit Suisse have revamped their operations in recent years, gearing their businesses toward wealth management while streamlining their investment-banking units. But the banks have struggled to convince investors of their long-term growth prospects, with shares of both banks down over the past three years.
UBS, meanwhile, faces costly legal uncertainties. Last month, French judges ordered UBS to pay a record €3.7 billion ($4.2 billion) fine for helping wealthy clients in France evade taxes. UBS, which denied wrongdoing, is appealing the ruling, and the process could drag on for years.
In the U.S., UBS is contesting charges from the Justice Department that it misled investors about the quality of billions of dollars in subprime and other mortgage loans that were sold in the run-up to the financial crisis more than a decade ago.
Your Questions And Comments Are Greatly Appreciated.
Monty H. & Carolyn A.Go back