Morning Report: Negative yielding corporate debt

Vital Statistics:

 

Last Change
S&P futures 3020 5.35
Oil (WTI) 60.39 0.19
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.13%

 

Stocks are higher as we kick off earnings season. Bonds and MBS are up.

 

The upcoming week will be dominated by bank earnings. The economic data is unlikely to be market-moving, however we will get some real-estate related data with housing starts and homebuilder sentiment. We will also get retail sales, industrial production and capacity utilization.

 

Citigroup reported earnings this morning that beat Street estimates. Mortgage banking revenues were down 2% QOQ and down 9% YOY.

 

Manufacturing activity in New York State rebounded last month, climbing out of negative territory. New Orders were flat, shipments improved, while employment hit the lowest level in 3 years.

 

Europe is used to negative yields on sovereign debt, with the German Bund yielding -29 basis points. In other words, you are paying 105.25 to get back 100 in 10 years, along with some interest. That is strange enough, in of itself, but how about this? Corporate bonds trading with negative yields. Don’t believe it? US jar maker Ball Corp, maker of the mason jar, trades at a yield of -20 basis points and matures in 18 months. Why would any investor buy that? Because the principal hit will be less than deposit rates of -40 basis points or 18 month German paper yielding -70 basis points. It is a fascinating study of the law of unintended consequences. The whole point of negative interest rates is to push investors to get out of safe haven sovereign debt and take some risk – specifically lending money to businesses that need it. The whole point of this exercise is to increase the amount of credit in the system in order to fuel economic growth. However, instead of providing financing to nascent businesses who could be the growth drivers of tomorrow, they are lending money to a company that makes jars (hardly emerging technology) instead.

 

A portfolio manager at Janus Capital explained it as follows: “A bond like Ball Corp’s is “a safe place to hang out,” [Janus Capital Portfolio Manager Tim] Winstone said. “And just because something is negative yielding, that doesn’t mean it can’t get more negative yielding.” In other words, we are in greater fool territory. Fun fact: around 2% of the European junk bond market trades at negative yields. In fact, Winstone says that about 24% of the European investment grade market trades at negative yields. It isn’t entirely irrational – money managers are making a bet on further central bank stimulus and are positioning themselves to reap capital gains on negative yielding paper, which means they could end up making a positive return despite a negative yield headwind.

 

euro corporates

 

John Maynard Keynes once advocated inflation as the “euthanasia of the rentier class.” In reality it may turn out that negative interest rates will do the job. Fascinating times we live in.

20 Responses

  1. In case anyone was still wondering, they spell it out:

    “Chakrabarti had an unexpected disclosure. “The interesting thing about the Green New Deal,” he said, “is it wasn’t originally a climate thing at all.” Ricketts greeted this startling notion with an attentive poker face. “Do you guys think of it as a climate thing?” Chakrabarti continued. “Because we really think of it as a how-do-you-change-the-entire-economy thing.””

    https://www.washingtonpost.com/news/magazine/wp/2019/07/10/feature/how-saikat-chakrabarti-became-aocs-chief-of-change/

    Like

  2. Goddamn.

    Like

  3. Trump should include a vote on this as part of the budget and debt ceiling agreement.

    https://m.dailykos.com/stories/1871933

    This comment is outstanding!

    Goddamnit, he’s already killed CHILDREN on the border! He’s a serial murderer already!!! He condones journalist Kashoggis murder!
    What the hell more do they need!?!?

    Bunkerhobbit July 15

    Like

    • Another take, of the 3-d chess variety:

      https://spectator.org/trump-troll-level-grand-master/

      A top Democrat involved in the 2020 congressional races told Axios, “If all voters hear about is AOC, it could put the [House] majority at risk. [S]he’s getting all the news and defining everyone else’s races. Socialism is toxic to these voters.”

      So what do you do if you want to ensure Omar and AOC poison those so-called moderate Democrats who won those swing House districts last year?

      You force Pelosi into bed with them.

      Which is precisely what Trump has done.

      Liked by 1 person

    • But I think Frum should know better than this: Trump refuses to recognize the Americanness of nonwhite Americans.

      Trump refuses to recognize the Americanness of non-Trump supporters. And that could not be more obvious. A well-educated, well-read guy can’t be that confused.

      But then, he no doubt wants to keep writing for The Atlantic.

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      • KW:

        But I think Frum should know better than this: Trump refuses to recognize the Americanness of nonwhite Americans.

        NeverTrumpers are fully on board with the standard leftist talking points when it comes to Trump.

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        • Apparently. Which makes them useful idiots as opposed to principled critics. Trump has many flaws, and I don’t think I’d want to work for him in any capacity, but not everything the left says is reality. Of course, Frum is gentle and loving compared to Adam Serwer.

          https://www.theatlantic.com/ideas/archive/2019/07/trumps-white-nationalist-attack-four-congresswomen/594019/

          When Trump told these women to “go back,” he was not making a factual claim about where they were born. He was stating his ideological belief that American citizenship is fundamentally racial, that only white people can truly be citizens, and that people of color, immigrants in particular, are only conditionally American. This is a cornerstone of white nationalism, and one of the president’s few closely held ideological beliefs. It is a moral conviction, not a statement of fact. If these women could all trace their family line back to 1776, it would not make them more American than Trump, a descendant of German immigrants whose ancestors arrived relatively recently, because he is white and they are not.

          On the one hand, Trump gives the left plenty of red meat. Good for them. On the other hand, he’s doing it in a way that isn’t particularly alienating to anybody right-of-center–and the left’s response can be very alienating. Which is only important when it comes to voters paying attention, but still. Folks like Serwer think they can read minds and are essentially omniscient when it comes to Trump’s innermost thoughts and feelings. It’s bizarre.

          That none of them consider the idea that what Trump uses as a metric of Americanness is “how much they align to my beliefs ideologically” or “how useful or supportive they are to/of me” seems bizarre, as most human beings are focused on the utility of others to themselves, and how those others can benefit them. Not their racial heritage or complexion.

          Like

        • KW (from Serwer):

          He was stating his ideological belief that American citizenship is fundamentally racial….

          It’s just more evidence that “racism!” is just an unthinking, knee-jerk default attack for these people. He neither said nor alluded to anything at all to do with race. And he was clearly attacking them for their claims and ideas.

          BTW, on the whole “women of color” nonsense, two things. First, AOC is white, and therefore not a “woman of color” by definition. Which raises number two. What is the opposite of a “woman of color”? A “woman of no color”? A “woman of uncolor”? A “woman of noncolor”? Inquiring minds are really interested in the proper nomenclature here.

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        • BTW, now that I think about it, Rashida Tlaib is also white. So now apparently Trump is a “racist” for criticizing two white women. Hilarious.

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        • KW:

          BTW, apropos of nothing at all, you may recall that about 2 years ago you and I made an over/under bet on the Antifa movement “losing cohesion, sympathy, and dissolving”, with you giving it 4 years max and me saying it last way longer. I don’t think we ever agreed on a hard and fast metric to decide the bet, but I’ve been reminded of that bet in recent months, and I hope you’ll agree that after two years, it’s looking pretty good for me:

          https://www.thepostmillennial.com/i-am-antifa-far-left-extremist-writes-in-manifesto-before-bombing-washington-state-immigration-centre/

          https://www.theepochtimes.com/portland-police-admit-to-standing-by-as-antifa-blocked-traffic-assaulted-man_2688087.html

          Like

        • @scottc1: BTW, apropos of nothing at all, you may recall that about 2 years ago you and I made an over/under bet on the Antifa movement “losing cohesion, sympathy, and dissolving”, with you giving it 4 years max and me saying it last way longer.

          I had forgotten about that ill-considered bet, but I admit, I thought it was going to go the way of Occupy Wall Street. But apparently not.

          I’m guessing you’re likely to win. So–in 2 years, you’ll get your first $4 bucks, it looks like. I’m having a hard time seeing them “go away” at this point.

          I’m still thinking they might vanish next time a Democrat takes the Whitehouse, but I’m much less sure about that.

          Like

        • I thought her mother was Jewish, and while there are middle eastern and African Jews, it sticks in my mind that her mother was from New York and pretty, you know, white.

          Edit: guess I fucked this up.

          https://www.google.com/amp/s/beta.washingtonpost.com/nation/2018/12/10/alexandria-ocasio-cortez-reveals-jewish-ancestry-hanukkah-celebration/%3foutputType=amp

          I don’t even know what I don’t know!

          Liked by 1 person

        • BTW, on the whole “women of color” nonsense, two things. First, AOC is white, and therefore not a “woman of color” by definition.

          I’m pretty sure she’s Hispanic, at least by the one drop rule. Which, while technically white, the media and the left would never accept that parsing. And at one point in time Hispanic was just a race like black and caucasian.

          The antipathy once reserved for Jews or the Irish has now been transferred to the foul caste of caucasians, so those are the people of “no color”–and thus, lesser than. There’s always got to be a inferior race. Tribal humans.

          Like

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