Morning Report: Global Bond sell-off continues 9/12/16

Vital Statistics:

Last Change
S&P Futures 2111.5 -5.0
Eurostoxx Index 340.7 -5.0
Oil (WTI) 44.9 -1.0
US dollar index 86.5 0.3
10 Year Govt Bond Yield 1.68%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.48

Stocks are weaker this morning as global markets continue the sell-off that began on Friday. Bonds and MBS are lower.

Dennis Lockhart is speaking this morning, and said that it is time to have a serious discussion about raising rates. Neel Kashkari and Lael Brainard will be speaking later on today. That should be the end of Fed-speak until the FOMC meeting later this month. Fed Funds futures are now signalling a 60% chance of a rate hike by the end of the year.

So far it appears that mortgage rates are lagging the move up in sovereign yields. The same thing happened after the taper tantrum in 2013. The 10 year bottomed in spring, while mortgage rates kept falling and didn’t start rising until fall.

Donald Trump went after Janet Yellen and monetary policy, accusing the Fed of being political to protect Obama’s legacy. FWIW, it seems like there is a change in the consensus over ZIRP and whether it is causing more problems than it is solving. Not too long ago, such comments would have been treated with “How dare you!” kvetching by the press.

Certainly you are seeing the change in consensus overseas, as foreign bond markets have been selling off over the past week, with the German Bund now trading with a positive yield. Even the Japanese bond market is heading lower. Deutsche Bank lays out the scenarios going forward.

The chart below (courtesy of Deutsche Bank) looks at overvaluation / undervaluation of various asset classes over a two centuries. Bonds are extremely overvalued (we know that already), but ZIRP has also caused overvaluation in stocks and real estate, which should unwind as rates start going up. Best case scenario: a situation like the post WWII era where rates gradually crept up over the course of a few decades. Of course currencies were linked to gold back then.. Today, we are on the PhD standard where the value of paper is based on the relative value of other paper.


It is almost as if global bond markets jumped the shark last week when Sanofi and Henkel were able to issue corporate debt at negative yields.

10 Responses

  1. I don’t think there was precious metal linkage by 1946, Brent.

    I see the only stable way forward as slow incremental rate increases.

    And if the Federal Gummint is ever gonna fix the national highways, bridges, and tunnels, it better start soon.



    • we went from the gold standard to the gold exchange standard, which ended in the early 70s when Nixon closed the gold window


      • I thought “gold exchange” was honored in the breach – that is, with so many nations broken by WW2, everyone was trading in dollars, and while others COULD demand gold, as a matter of convenience they traded in various negotiable instruments.

        I though Nixon just wanted to protect American gold reserves from a hostile run.

        How wrong am I?


        • I think the US stood by ready to exchange an ounce of gold for $35 until the window closed… Once he closed the window, gold went to a market-driven value (a lot higher).


        • I believe you have the horse following the cart there, Brent. The US, as I recall, raised the price of gold at least twice to try to mirror the market. Then we properly gave up on it as a losing proposition, because gold prices were no longer stable.

          The idea of fixing the value of currency to the floating market value of a commodity is stupid on the one hand, and on the other hand, fixing the “value” of a marketed commodity is a socialist fantasy, in which value is not determined by supply and demand but by whatever some blowhard thinks its worth. That only works if the blowhard owns all of the commodity and is either a monopolist or a single government or a combination in restraint of trade, which is the essence of feudal/fascist economics.


  2. “FWIW, it seems like there is a change in the consensus over ZIRP and whether it is causing more problems than it is solving.”

    Dr. Cowbell will never go for that.


  3. Because the current War on Drugs is going so well it needs to be expanded:

    “The case for treating sugar like a dangerous drug
    Updated by German Lopez”


    • ” Well, my employer has to pay $2,750 per employee for obesity management and medicine, whether I’m obese or not.”

      And yet, the obvious solution will escape him


  4. hilarious. why are we talking about Clinton’s health. must be sexism!


    • I’ll happily concede that there’s bias in the press that frames the coverage based on her gender, especially vis-a-vis things like clothes & tone.

      But that’s not why this is news.

      And given that the general coverage of Trump is pretty much about how he’s completely ignorant and will destroy the world with nuclear bombs, and no one in the chain of command would stop him, it’s hard to argue with a straight face that the press are in the tank for him.

      What it really boils down to is HRC partisans view any negative coverage of her as out of bounds, unless it’s about how her policies don’t go far enough left.


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