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The Bond Bubble Collapse Thread; Reset Time. This is the End of the Line for All the Rolling Bubbles Propped Up in the last 30 Years
Topic Started: 21 Aug 2016, 04:02 PM (11,441 Views)
createdby
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b_b
22 Aug 2016, 09:24 AM
Hence why Banks are buying bonds with a negative yield - the alternative is to hold cash with a larger negative yield. And that is setting the price.
This doesn't make sense. You're telling me a bond with a face value of 1,000,000, which someone had to buy for 1,005,0000 at 50 basis point negative yield, so they can get back 1,000,000 at maturity, is more valuable than holding 1,000,000 in electronic or paper cash?

Truth is, they're just buying the negative yielding bond in the hopes of selling it to another sucker when the negative IR goes from 50 basis to 100 basis. The very definition of a speculative bubble.
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Foxy
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Zero is coming...

createdby
22 Aug 2016, 11:25 AM
This doesn't make sense. You're telling me a bond with a face value of 1,000,000, which someone had to buy for 1,005,0000 at 50 basis point negative yield, so they can get back 1,000,000 at maturity, is more valuable than holding 1,000,000 in electronic or paper cash?

Truth is, they're just buying the negative yielding bond in the hopes of selling it to another sucker when the negative IR goes from 50 basis to 100 basis. The very definition of a speculative bubble.
or Gold,
http://www.afr.com/content/dam/images/g/n/2/1/u/8/image.imgtype.afrArticleInline.620x0.png/1456285515560.png
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Loonie.

http://www.wsj.com/articles/sellers-paradise-companies-build-bonds-for-central-bank-to-buy-1471815100

Seller’s Paradise: Companies Build Bonds for Central Bank to Buy
Two European firms have sold debt directly to the ECB through private placements, a startling example of how the market is adapting to extremes of monetary policy
By Christopher Whittall
Aug. 21, 2016 5:31 p.m. ET


The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy.

In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.

It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age. In the past decade, wide-scale purchases of government bonds—a bid to lower the cost of borrowing in the economy and persuade investors to take more risk—have become commonplace. Central banks more recently have moved to negative interest rates, flipping on their head the ancient customs of money lending. Now, they are all but inviting private actors to concoct specific things for them to buy so they can continue pumping money into the financial system.

The ECB doesn’t directly instruct companies to create specific bonds. But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list. And the ECB isn’t alone: The Bank of Japan said late last year it would buy exchange-traded funds comprising shares of companies that spend a growing amount on “physical and human capital,” essentially steering fund managers to make such ETFs available to buy.

The furious central-bank buying has been a relief to companies and governments that can now borrow at rock-bottom interest rates. But it has also spurred criticism that the extreme policies are killing the returns available to other investors, such as pension funds, and loading up the economy and financial system with potentially overpriced debt.

The ECB was late to the central-bank party—it began quantitative easing only in 2015, years after the U.S., the U.K. and Japan—but it has embraced bond-buying with fervor. In March, it boosted its purchases to €80 billion ($90.6 billion) a month from €60 billion and surprised investors by saying it would soon add corporate bonds to its shopping list.

It had already bought so many government bonds that it was running out of things to purchase.

The ECB had bought more than €16 billion of corporate bonds as of Aug. 12, according to the latest available data from the central bank, after starting purchases in early June. The lion’s share has been already-issued bonds trading in secondary markets, but some has come in new debt sales, according to the ECB.

And Morgan Stanley has arranged two private placements that have been bought by the ECB, according to a Wall Street Journal analysis of data from Dealogic and national central banks.

The ECB cited its website when asked to comment on the corporate-bond-buying program. On Thursday, it updated information on the site to clarify that the bank can participate in private placements. The ECB isn’t involved in defining the characteristics of the bonds in these sales, a spokeswoman for the central bank said.

Private placements are private debt sales not open to the broader market, typically relying on a handful of investors that want to buy a company’s bonds.

For the company, such a sale allows it to raise cash quickly without having to draft a bond prospectus. Investors, for their part, are guaranteed to get a sizable chunk of the bonds they want to buy without having to compete with the wider investment community.

"Typically there won’t be a prospectus, there won’t be any transparency, there won’t be a press release. It’s all done discreetly,” said Apostolos Gkoutzinis, head of European capital markets at law firm Shearman & Sterling LLP.

The ECB executes bond purchases through the eurozone’s national central banks, which function like branches.

The Bank of Spain holds some of a €500 million private placement issued by Spanish oil company Repsol SA on July 1, and some of a €200 million deal from Spanish power utility Iberdrola SA sold on June 10, two days after the ECB program got under way.

Both deals were solely arranged by Morgan Stanley and are the only private placements issued since the start of the ECB’s corporate buying program to have been bought by national central banks, according to the Journal analysis. Morgan Stanley declined to comment.

Iberdrola didn’t respond to requests for comment. A spokesman for Repsol said it makes sense for the company to lock in low borrowing costs in bond markets. “It’s all about bringing your global interest payments as low as possible,” the spokesman said.

It is impossible to say exactly how much the ECB holds, because the national central banks that make the purchases disclose only which bonds they have bought, not the amounts. For almost the first six weeks of the program they didn’t give any details about which bonds they had bought.

Still, the scant data are enough to make traders and strategists scramble to divine what the big fish is buying. Guessing right can pay off. Yields on corporate bonds have plunged in Europe. (Yields fall when prices rise.) The average yield on euro investment-grade corporate bonds is 0.65%, according to Barclays , compared with 0.99% before the program started and 1.28% before the bank said in March that it would buy corporate bonds.

“We’re all looking at the data,” said the head of credit trading at a major European bank. “They’re only one new customer—but it’s a big one.”

And banks are rushing to serve it. Credit Suisse Group AG reshuffled its sales coverage of national central banks in recent weeks when the trading desk realized it wasn’t doing enough business with the new largest buyer in town, according to a person familiar with the matter.

The ECB’s corporate-bond program may well grow further. The bank is widely expected to extend quantitative easing beyond March, when it is planned to end. Government bonds are growing increasingly scarce. The ECB can buy only bonds that yield more than its deposit rate, currently minus-0.4%. That rules out vast amounts of German government debt, and much else too.

More corporate bonds are one option, and the central bank could buy a greater proportion directly from companies. The program has only been operating in the summer, typically a slow season for bond sales.

That means more opportunities for investors.

Credit strategists at Citigroup Inc. calculate that bonds eligible for ECB purchases have outperformed ineligible bonds by roughly 30% since the program was announced in March.

Tom Ross, a portfolio manager at Henderson Global Investors, said he spends a good deal of time perusing a spreadsheet created by his team to track and analyze ECB purchases.

“It has a number of implications,” he said. The ECB owning a bond “is almost like a backstop bid. It provides liquidity in a time of stress.”

—Tom Fairless contributed to this article.

Write to Christopher Whittall at christopher.whittall@wsj.com






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Rastus2
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b_b
22 Aug 2016, 09:24 AM
Banks can not “stash cash” in size.

Bank reserves are fixed (outside of CB operations). They are used to settle transactions on behalf of customers. So they are stuck with them. And the problem with QE it is gives the banks even more cash!

Hence why Banks are buying bonds with a negative yield - the alternative is to hold cash with a larger negative yield. And that is setting the price.

Apart from that, I’m not sure what part of my first post you actually disagreed with?
Quote:
 

Banks can not “stash cash” in size.


I was under the impression that the bank reserves are fixed to a minimum level, not a maximum.

Thus, banks can stash cash in size, if they wish... can't they ?
Shadow - Defrauded his Bank ? 2015 I have 9 different loans and my bank had no idea which ones were personal and which were investment. They had half of them classed incorrectly. When this change came in they asked me to tell them if any personal loans were incorrectly classed as investment, which I did, and they switched them to personal for the lower rate. They also had a couple of investment loans incorrectly classed as personal. They didn't ask me about those. So they stay on the lower rate too. Worked out pretty well. :)
Shadow - 2008 Sydney Median House Price 1.25M by 2014-2015

Shadow : I think this boom has already begun in several cities. My prediction :
Peak of boom: 2014-2015. Sydney Median Price: $1,250,000 Bottom of bust: 2017-2018. Sydney Median Price: $1,100,000

Shadow's Original 2010 House Boom and Crash prediction http://s836.photobucket.com/user/rastus22/media/shady-orig-2010-chart.png.html?sort=3&o=0

Shadow's attempt to edit his 2010 chart in 2015 and replace it with one that does not show a crash in 2013 http://s836.photobucket.com/user/rastus22/media/Screen%20Shot%202015-06-06%20at%207.12.52%20pm_1.png.html
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Jon Snow
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Rastus2
22 Aug 2016, 02:15 PM
I was under the impression that the bank reserves are fixed to a minimum level, not a maximum.

Thus, banks can stash cash in size, if they wish... can't they ?
Yes, but there is a (small) carry cost.

Lets say you wanted to store $100 billion in cash. $100B takes up a volume of roughly 1034 cubic metres. For that you would need a vault 25m wide, 25 metres long and 2 metres high (for pallets and other sundries). A vault that size would cost more than $100M to construct. Then you need to add site security, 24.7 monitoring, armed guards, etc etc.

However, a kilo of gold is (at today's spot) USD42847.3. $100B in gold would be roughly 2334 metric tonnes of gold. But gold is heavy and so that only works out to be 121 cubic metres which only needs a vault 2 X 6 X 10 metres.

$100B in bearer bonds (if they were still issued) however could be stored in a small cupboard.
Speak when you are angry and you will make the best speech you will ever regret.
Ambrose Bierce
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createdby
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http://www.fuw.ch/article/the-fed-is-now-hostage-to-wall-street/


James Grant: «The Fed is now hostage to Wall Street»
CHRISTOPH GISIGER, NEW YORK

Posted Image
James Grant, Wall Street expert and editor of the investment newsletter «Grant’s Interest Rate Observer», warns of a crash in sovereign debt, is puzzled over the actions of the Swiss National Bank and bets on gold.

From multi-billion bond buying programs to negative interest rates and probably soon helicopter money: Around the globe, central bankers are experimenting with ever more extreme measures to stimulate the sluggish economy. This will end in tears, believes James Grant. The sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer» is one of the most ardent critics when it comes to super easy monetary policy. Highly proficient in financial history, Mr. Grant warns of today’s reckless hunt for yield and spots one of the biggest risks in government debt. He’s also scratching his head over the massive investments which the Swiss National Bank undertakes in the US stock market.

Jim, for more than three decades Grant’s has been observing interest rates. Is there anything left to be observed with rates this low?
Interest rates may be almost invisible but there is still plenty to observe. I observe that they are shrinking and that the shrinkage is causing a lot of turmoil because people in need of income are in full hot pursuit of what little of yields remains.

What are the consequences of that?
It reminds me of the great Victorian English journalist Walter Bagehot. He once said that John Law can stand anything but he can’t stand 2%, meaning that very low interest rates induced speculation and reckless investing and misallocation of capital. So I think Bagehot’s epigraph is very timely today.

John Law was mainly responsible for the great Mississippi bubble which caused a chaotic economic collapse in France in the early 18th century. How is the story going to end this time?
It will turn out to be very bad for many people. If Swiss insurance and reinsurance executives are reading this right now they might be rolling their eyes and they might be frustrated to hear an American scolding from a distance of 3000 miles about the risk of chasing yield. After all, if you’re in the business of matching long term liabilities with long term assets you have little choice but to wish for a better, more sensible world. But you have to take the world as it is and today’s world is barren of interest income. The fact is, that these are very risk fraught times.

Where do you see the biggest risks?
Sovereign debt is my nomination for the number one overvalued market around the world. You are earning nothing or less than nothing for the privilege of lending your money to a government that has pledged to depreciate the currency that you’re investing in. The central banks of the world are striving to achieve a rate of inflation of 2% or more and you are lending certainly at much less than 2% and in many cases at less than nominal 0%. The experience of losing money is common in investing. But where is the certitude of loss even before your check clears? That’s the situation with sovereign debt right now.

On a worldwide basis, more than a third of sovereign debt is already yielding less than zero percent.
There is not quite a bestseller, but a very substantial book called «The History of Interest Rates». It was written by Sidney Homer and Richard Sylla. Sidney Homer is no longer with us, but Richard Sylla is alive and well at New York University. So I called him and said: « Richard, I’ve read many pages but not every single page in your book which traces the history of interest rates from 3000 BC to the present. Have you ever come across negative bond yields?» He said no and I thought that would be kind of a major news scoop: For the first time in at least 5000 years we have driven interest rates below the zero marker. I thought that was an exceptional piece of intelligence. But I notice however that nobody seems to have picked up on it.

It’s now already two years ago since the ECB was the first major central bank to introduce negative rates.
There are some other historical settings: In Europe, ​​Monte dei Paschi di Siena, this 500 and plus year old bank in Italy, is struggling and as broke as you can be without being legally broke. Monte dei Paschi has survived for half a millennium and now it is on the ropes. Meanwhile, the Bank of England is doing things today that it has never done in its history which is 300 plus years. So I suggest that these are at least interesting times and in many respects unprecedented ones.

So what’s the true meaning of all this?
In finance, mostly nothing is ever new. Human behavior doesn’t change and money is a very old institution and so are our markets. Of course, techniques evolve, but mostly nothing is really new. However, with respect to interest rates and monetary policy we are truly breaking new ground.

Now central bankers are even talking openly about helicopter money. Will they really go for it?
I already hear the telltale of beating rotor blades in the sky. I also hear the tom-toms of fiscal policy being pounded. There seems to be some kind of a growing consensus that monetary policy has done what it can do and that what me must do now – so say the «wise ones» – is to tax and spend and spend and spend. That seems to be the new big idea in policy. In any case, it is not good for bondholders.

Interestingly, nobody seems to be talking about the growing government debt anymore. Also, budget politics are just a side note in the ongoing presidential elections.
The trouble with this election is that somebody has to win it. I have no use for Donald Trump but I have equally no use for Hillary Clinton. The point is that one of those two is going to win. That is the tragedy! So we at Grant’s regret that one of them is going to win.

The financial crisis and the weak economic recovery likely have spurred the rise of Donald Trump. Why isn’t the US economy in better shape after all those monetary programs?
I wonder how it would have been if markets had been allowed to clear and if prices had been allowed to find their own level in real estate in 2008. Central banks have intervened to quell financial panics for at least 200 years. For instance, in 1825 the bank of England lent without stint and was not – as they said – overnice about the kind of collateral. That was a very dramatic intervention. So it’s not as if we have never before seen the lender of last resort at work. But what is new is the medication of markets through this opiate of quantitative easing year after year after year following the financial crisis. I think that this kind of intervention has not only not worked but it has been very harmful. Around the world, the economies are not responding despite radical monetary measures. To some degree, I believe, they are not recovering because of radical monetary measures.

What’s exactly the problem with the US economy?
There is another side of what we are seeing now: In America certainly the Federal Reserve and bank regulators generally are very heavy handed in their interventions. I’m sure they have every good intention. But with their regulatory charges they are suppressing the recovery in credit that takes place in a normal economic recovery and in this particular case after a depression or after a liquidation.

Then again, a revisit of the financial crisis would be catastrophic.
The new rules with respect to financial reform have absorbed not only forests worth of paper but also the time and attention of legions of lawyers. If you talk to a banking executive what you hear is that the banks have been overwhelmed by the need to hire compliance and regulatory people. This is especially bearing on the smaller banks. I think that’s part of the story of the lackluster recovery: Monetary policy has been radically open in the creation of new credit. But it has been radically restrictive with regard to risk taking in the private world.

So what should be done to get the economy back on track?
There are guides in history on how to do this. For more than a hundred years in Britain, in the United States and probably as well in Switzerland, the owners of the equity of a bank themselves were responsible for the solvency of the bank. If the bank became impaired or insolvent they had to stump up more capital to pay off the liability holders, including the depositors. But over the past hundred years collective responsibility in banking has gradually replaced individual responsibility. The government, with the introduction of deposit insurance, new regulations and interventions has superseded the old doctrine of the responsibility of the owners of a property. That’s why I think we need to go away from government intervention and go more towards market oriented solutions such as the old doctrine of responsibility of the bank owners.

At least in the US, the Fed is trying to go back to a more normal monetary policy. Do you think Fed chief Janet Yellen will make the case for another rate hike at the Jackson Hole meeting next week?
Janet Yellen is by no means an impulsive person. According to the « Wall Street Journal», she arrives for a flight at the airport hours early – and that’s plural! So this is a most deliberative and risk averse person. Also, as a labor economist, she’s a most empathetic person. She believes what most interventionist minded economists believe: They have very little faith in the institution of markets and they don’t believe that the price mechanism is anything special. They want to normalize rates and yet they can always find an excuse for not doing so. We have been hearing for years now that the next time, the next quarter, the next fiscal year they will act. So I believe what I’m seeing: None of these days the Federal Funds Rate will go higher than 0.5%. I can’t see that happening.

Wall Street seems to think along the same lines. So far, many investors don’t take the renewed chatter of a rate hike too seriously.
The Fed is now hostage to Wall Street. If the stock market pulls back a few percent the Fed becomes frightened. In a way I suppose, the Fed is justified in that belief because it is responsible to a great degree for the elevation of financial asset values. Real estate cap rates are very low, price-earnings-ratios of stocks are very high and interest rates are extremely low. One can’t be certain about cause and effect. But it seems to me that the central banks of the world are responsible for a great deal of this levitation in values. So perhaps they feel some responsibility for letting the world down easy in a bear market. It has come to a point where the Fed is virtually a hostage of the financial markets. When they sputter, let alone fall, the Fed frets and steps in.

Obviously, the financial markets like this cautious mindset of the Fed. Earlier this week, US stocks climbed to another record high.
Isn’t that a funny thing? The stock market is at record highs and the bond market is acting as if this were the Great Depression. Meanwhile, the Swiss National Bank is buying a great deal of American equity.

Indeed, according to the latest SEC filings the SNB’s portfolio of US stocks has grown to more than $60 billion.
Yes, they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new.

Other central banks, too, have become big buyers in the global securities markets. Basically, it all started with the QE-programs of the Federal Reserve.
It is a truism that central banks do this. They’ve done this of course for generations. But there is something especially vivid about the Swiss National Bank’s purchases of billions of Dollars of American equity. These are actual profit making, substantial corporations in the S&P 500. So the SNB is piling up big positions in them with money that really comes from nothing. That’s a little bit of an existential head scratcher, isn’t?

So what are investors supposed to do in these bizarre financial markets?
I’m very bullish on gold and I’m very bullish on gold mining shares. That’s because I think that the world will lose faith in the PhD standard in monetary management. Gold is by no means the best investment. Gold is money and money is sterile, as Aristotle would remind us. It does not pay dividends or earn income. So keep in mind that gold is not a conventional investment. That’s why I don’t want to suggest that it is the one and only thing that people should have their money in. But to me, gold is a very timely way to invest in monetary disorder.

Edited by createdby, 23 Aug 2016, 09:16 AM.
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Rastus2
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< deleted >

Edited by Rastus2, 23 Aug 2016, 09:18 PM.
Shadow - Defrauded his Bank ? 2015 I have 9 different loans and my bank had no idea which ones were personal and which were investment. They had half of them classed incorrectly. When this change came in they asked me to tell them if any personal loans were incorrectly classed as investment, which I did, and they switched them to personal for the lower rate. They also had a couple of investment loans incorrectly classed as personal. They didn't ask me about those. So they stay on the lower rate too. Worked out pretty well. :)
Shadow - 2008 Sydney Median House Price 1.25M by 2014-2015

Shadow : I think this boom has already begun in several cities. My prediction :
Peak of boom: 2014-2015. Sydney Median Price: $1,250,000 Bottom of bust: 2017-2018. Sydney Median Price: $1,100,000

Shadow's Original 2010 House Boom and Crash prediction http://s836.photobucket.com/user/rastus22/media/shady-orig-2010-chart.png.html?sort=3&o=0

Shadow's attempt to edit his 2010 chart in 2015 and replace it with one that does not show a crash in 2013 http://s836.photobucket.com/user/rastus22/media/Screen%20Shot%202015-06-06%20at%207.12.52%20pm_1.png.html
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Terry
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Yeah, it's a real pearl of an interview. I take umbrage at the following:

There are guides in history on how to do this. For more than a hundred years in Britain, in the United States and probably as well in Switzerland, the owners of the equity of a bank themselves were responsible for the solvency of the bank. If the bank became impaired or insolvent they had to stump up more capital to pay off the liability holders, including the depositors. But over the past hundred years collective responsibility in banking has gradually replaced individual responsibility. The government, with the introduction of deposit insurance, new regulations and interventions has superseded the old doctrine of the responsibility of the owners of a property. That’s why I think we need to go away from government intervention and go more towards market oriented solutions such as the old doctrine of responsibility of the bank owners.

I disagree with how this plays out (if it does at all). The suburbanites pick up the tab either directly or indirectly.
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createdby
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The US dollar bubble. Peter Schiff's biggest short call after his 2008 meltdown prediction and the world's last hope. The rush for the exists would be amazing to watch.



http://www.bloomberg.com/news/articles/2016-08-25/there-s-basically-no-alternative-to-u-s-corporate-bonds-right-now
There's Basically No Alternative to U.S. Corporate Bonds Right Now
U.S. corporate credit is on the global map.
Sid Verma
@_sidverma
August 26, 2016 — 4:47 AM AEST


The foreign hunt for yield in U.S. markets is stepping up as central banks in Europe increasingly crowd out investors from their domestic credit markets.
Higher policy rates in the U.S. have reeled in heavy private-sector foreign flows into U.S. corporate bonds this year. And this trend is poised to intensify as valuations in European credit markets become more stretched, while declining returns from currency-hedged investments in Treasuries push portfolio managers into the higher-yielding U.S. corporate credit market, say analysts.

Take the case of the U.K.

In the wake of the Bank of England's decision to follow the European Central Bank's decision to buy corporate bonds in a bid to keep the U.K. economy afloat, returns in the sterling investment-grade corporate bond market have never been this meager.

After hitting an all-time low of 2.120 percent on 10 August, the yield on the Bank of America Merrill Lynch Sterling Corporate Index is trading at 2.190 percent compared with 3.70 percent in mid-February.

Posted Image

Meanwhile, the 10-year gilt is yielding a paltry 0.566 percent after hitting as low as 0.518 percent earlier in the month. As a result, the investment case for both U.K. government and high-grade corporate bonds has reached the breaking point.
Ben Lord, portfolio manager at M&G Limited, explained the math in a blog post — entitled 'The BoE and ECB render the US bond market the only game in town' — on Tuesday.

In short, the relative appeal of buying either U.K. government or corporate bonds compared with simply putting money in cash — known as the breakeven-yield number — is at an all-time low, he says, which boosts the allure of U.S. corporate bonds for yield.

To get this breakeven number, one divides the U.K. government yield, or in the case of corporate bonds, the credit spread, by the duration. After applying an average credit spread for sterling investment-grade credit at 200 basis point, and an average duration of 10 years for the asset class, an investor can tolerate spread widening of just 20 basis points before they will conclude that they would have been better off in cash, he calculates.

In yield terms, there's also little room for comfort. If one combines breakeven figures for government and corporate bonds, yields would need to rise by just 26 basis points before an investor in an average investment-grade U.K. corporate bond concludes that "they should have been in cash", he says.

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While there are still rational reasons for some investors to grab government bonds even if returns are negative, historically-low corporate bond yield breakevens in the U.K. will redouble domestic investor efforts to increase their U.S. corporate exposure, he says.

With the Bank of England buying gilts and soon to start buying corporate bonds, with the aim of loosening financial conditions and providing a stimulus to the economy as we work through the uncertain Brexit process and outcome, low corporate bond breakevens are to be expected. But with Treasury yields at extreme high levels out of gilts, and with the Fed not buying government bonds or corporate bonds at the moment, my focus is firmly on the attractive relative valuation of the US corporate bond market.

Suki Mann, a former head of credit strategy at UBS AG, and now independent strategist at Credit Market Daily, agrees: "With U.K. spreads at or around record tight levels, breakevens have crunched lower. That's a major concern if corporate spreads wobble given that we won't need to see much widening to sit on any losses from a break-even perspective."

Low corporate breakeven yields are also bedeviling euro investors.

The average-weighted yield of the U.S. investment grade market is 2.76 percent, according to Bank of America Corp indexes, with a duration of seven years. That compares with just 0.62 percent in the euro market, albeit with a lower duration of five years. Mann adds: "There is a clear crowding impact from the ECB involvement in the corporate bond market too. As yields crunch lower, investors move down the credit curve in their search for higher returns. Alternatively, there is the US market and those who can buy dollar denominated corporate debt will be looking at it. "

But, here's the kicker: there are now fewer places in the U.S to dodge the low-carry bullet — meaning that, from the perspective of foreigners, U.S. corporate credit is the highest-yielding, most liquid market in the developed world. In short, foreign investors are now less inclined to grab U.S. Treasuries as the currency-adjusted returns have effectively vanished.

While the rate differential between the U.S. and major advanced economies has stayed broadly stable in recent months, the cost of using short-dated forwards to eliminate the FX risk associated with buying long-dated Treasuries for foreign investors has risen. These charts from George Saravelos, strategist at Deutsche Bank AG., in a research report this week tell the story.

Posted Image

The rising cost of hedging dollar exposures mean that for some investors, especially Japanese, the euro market has become more attractive to grab yield for those who chose to invest fully hedge their exposures for the life-cycle of a bond.
But since most investors only partially hedge their portfolios, the dollar market remains attractive. More generally, the increasing dollar-hedging costs actually reinforce the allure of higher-yielding U.S. corporate bonds since returns from the latter offset any partial FX-hedging premia, reckons Well Fargo LLC.

Nathaniel Rosenbaum, credit strategist at the bank, notes foreign investors have increased their ownership of the U.S. corporate debt stock by around 5 percentage points over the past year to 40 percent, with Europe representing 80 percent of the foreign investor base. U.S. corporate bonds offer significant yield-pick in a return-starved Europe, and, as such, foreign flows into the U.S. will continue their frenzied pace, he says:

While dollar corporate yields are not far from all-time lows and spreads are relatively tight from a U.S. domestic investor’s perspective, the exact opposite is true from the perspective of most foreign investors: Dollar yields are cheap to most major alternatives such as yen and euro credit. Sterling credit is now well on its way to joining that list as well with the BoE set to start buying corporate bonds in September. This increasingly leaves dollar credit as the only viable and liquid alternative for incremental yield pickup, and that notion remains valid despite the increasing costs to hedge FX risk.

At this rate, given the yield differentials, foreigners could even own half of the U.S. corporate bond market in the coming years, Wells Fargo predicts. While Asian central banks and sovereign wealth funds have sold off their U.S. Treasury holdings, including corporate bonds, over the past year to shore up their finances, the next wave of foreign demand could come from emerging markets' re-allocating some of their U.S. Treasury holdings to U.S. corporates, the bank suggests.

U.S. policy makers, investors and market structure will need to adapt to a new world where foreign investors exert a powerful influence in the world's largest credit market, the strategist concludes.

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Edited by createdby, 26 Aug 2016, 10:14 AM.
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Heres the problem we face now. We saw in a thread the other day how $13,000 billion in bonds were now getting a negative return. While this might be exceptable to some , or seems many, its not for others. We now have less economic sectors making profit as commodity prices have been tanking over recent years. As a result, there are now less sectors from which to make a profit from. What this does is then force more and more money into these only sectors making a profit. The result is that these sectors soon become oversupplied, and then the profits on those start dropping as well. As time goes by, what was still profitable, soons becomes less profitable as too much money flows into that sector.

Basically, the profits are slowly but surely dissappearing.
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