Look out for pointers from the Fed, more yields from a parallel universe, and suggestions of a count

ref :- "Germany to test investor interest with 30-year paper carrying zero coupon" , The Financial Times, Markets and Investing

Just time to alert you to two events today, one of which will probably have taken place by the time you read this (but no matter) .

This evening the minutes of the US Fed's July monetary policy meeting are released, and as ever the markets will be assessing them for a better insight into how members of the Open Market Committee really feel about the future course of policy. On this occasion however, the release will be followed on Friday by Fed Chair Jay Powell's speech at Jackson Hole, which should offer a more up-to-date reflection of the current thinking. Nevertheless, the minutes should be at least partially informative .... particularly because there are some vague murmurings doing the rounds that members of the Fed are still not as doveish as most of the market seems to be. Remember, some expect a cut of as much as 50 basis points next month, and 75bp by year-end. Scope for disappointment ? (See below).

Today Germany issues a new €2bn 30-year bond with a coupon (or annual interest payment) of ZERO. We know the world is looking to gobble up secure sovereign debt at almost any price, but there will be much interest to see how well the issue is received (or more to the point, by how much it is oversubscribed). Since the whole German yield curve (which only goes out to 30yrs) is trading in negative yield territory, it looks certain that the price of the bond will exceed the price of PAR at which it will be redeemed. The FT suggests that investors will be paying something like € 103 for every €100 they get back on maturity. Yes, investors are PAYING to lend their money for 30 years, assuming they hold the bond throughout its lifetime.

Yeah, yeah .... it seems like madness, but as we've discussed many times investors will be buying this instrument for a number of reasons but most often for one of two : 1.) Regulation requires future liabilities to be matched by such AAA-rated

holdings , or 2.) just because yields are low (or negative), it doesn't mean they can't go lower (or more negative) -- which is the same as saying that just because it's expensive, it doesn't mean that it can't get more expensive.

So far, so much the same .... but the FT suggests that some analysts are looking out for signs that demand for negative-yielding debt may be on the wane. Back in 2015 a poor reception for a new bond auction sparked a sharp sell-off in German bunds after the ECB's bond-buying programme had pushed yields down what seemed at the time bewilderingly low levels. The move was known as the "Bund tantrum", and the FT quotes Ralf Preusser of BofA Merrill Lynch as saying that "the risk is that at these incredibly low yield levels, the German Finance agency will eventually encounter a buyer's strike".

Now, to be clear .... that's NOT going to be today, when demand for the new bund is likely to be very high. But the fact that serious people are even thinking that way reminds us that if and when the momentum turns things could get very bloody. Scope for disappointment in the future ? (See above and below).

So, what's with all this "scope for disappointment" nonsense ? The FT is also carrying an article entitled "Shorting debt is back as some investors bet global growth gloom is overdone". Betting against bond markets, or if you prefer betting that yields will rise, has famously been a very painful position indeed. Shorting Japanese Government Bonds (JGBs) was the best example, and is a trade that became known as the "Widowmaker" . Yields kept falling, and prices rising, even though government debt has been soaring. Ouch ! Or rather ..... Aaaaaaaaagh !

But in spite those experiences, the FT tells us that some traders believe that the massive rally is overdone on the basis that the pessimism regarding economies, especially in the US, is also overdone. Grab a look at the article if you can, it's refreshing to hear a more upbeat and contrary view. Betting against the prevailing market momentum (and widely held wisdom) requires guts and very often deep pockets. Such a strategy is certainly brave, whether this one turns out to be wise or foolhardy only time will tell. Whatever the case, it's not something for the fainthearted and most would require a lot more confirmation (in fact, any confirmation) of a major reversal before considering jumping onto that particular bandwagon.

But still, if only from the point of view of a well-wisher for the global economy, it's good to hear that some people are thinking that way. Good luck to them .... they may well need it .

Featured Posts
Recent Posts