When you're a whore (Australia) and are damaged goods (all resource, no manufacturing) and no punter (foreign bond buyers) wants to pay for your expensive (high AUD) ass (Aus government debt), just bring down your price (devalue) or move to a cheaper brothel (G20) where other whores (ECB, BOJ, Fed) have a steady clientele of drug addicted (QE) poor ass punters (pension funds, banks, hedge funds).
The proportion of federal securities held by non-resident investors in the second quarter fell to just 59 per cent, the least since 2009, according to official data. The face value of the government debt pile at the end of last week was $433 billion and budget estimates have it climbing to around $500 billion by the end of June 2017.
While the Aussie dollar has climbed 5.3 per cent this year to 76.71 US cents as of 5pm on Wednesday in Sydney, it will slide to 72 cents by mid-2017, according to analyst forecasts compiled by Bloomberg. Sovereign bond prices are also predicted to fall, with the benchmark 10-year yield projected to rise to 2.04 per cent from 1.83 per cent over the same period, a separate poll shows. Such moves could help lure back buyers to a market that's this year attracted the weakest average auction bidding since 2002.
"Aussie government bonds need to cheapen up or the currency needs to weaken in order to juice up overseas demand," said Sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. She said the Aussie is "far too high" based on the differential between local and overseas interest rates and that a possible drop in iron ore prices could also provide a "headwind" to the currency.
The Australian dollar is on course to notch its first annual gain since 2012, having started the year at 72.86 cents. The yield on the 10-year federal note last month touched a record low 1.81 per cent, while the premium it offers over equivalent-tenor US securities shrank to as little as 22 basis points, the smallest gap since 2001.
The Aussie-US spread was more than 2 percentage points in 2012 when the proportion of foreign ownership peaked at 76 per cent amid a hunt for yield and diversification by reserve managers. Since then, repeated blowouts in the budget deficit have led to a near doubling of the amount of sovereign securities outstanding as revenue has slipped and successive governments have struggled to rein in spending. The uptick in bond supply has seen the ratio of foreign ownership ebb for eight consecutive quarters.
The softening of demand is evident at the regular bond tenders held by the Australian Office of Financial Management. Buyers at non-inflation linked bond auctions in 2016 have submitted bids to buy an average 2.8 times the amount of debt on offer at each sale, the lowest mean ratio since 2002, AOFM data show. Wednesday's $US1 billion sale of 2027 bonds was covered just 1.59 times, the slackest demand in three years.
Aussie-US yields seen narrowing
While data from the funding arm shows the total value of securities held by offshore buyers nudged up 0.3 per cent to $285.1 billion in the second quarter of 2016, that's less than the 2.4 per cent capital gain delivered by the rallying market over the same period, according to the Bloomberg AusBond Treasury Index. Last quarter was the first time foreigners were net sellers of the securities since 2012, National Australia Bank's Alex Stanley said.
"With ongoing bond supply, the Australian dollar nearer to the top of its range and the Aussie-US 10-year spread historically tight, foreign demand could remain subdued in the near term," the Sydney-based interest rate strategist said. "The Australian dollar has scope to fall. That view partly depends on the US Fed raising rates in December. A far enough fall in the currency from current levels could ultimately support foreign demand for Australian government securities."
Futures are pricing in about a one-in-two probability of an increase in US borrowing costs by the end of the year, while the swaps market shows there's is a better than even chance of rate reduction by the Reserve Bank of Australia by the end of March. That policy divergence is expected to further compress the yield spread between the Australian benchmark bonds and the US 10-year paper. The premium is predicted to slide to 14 basis points by mid-2017, based on Bloomberg surveys.
"Australian government bonds will need to cheapen in order to attract increased demand," David Plank, a macro strategist at Deutsche Bank in Sydney wrote in a research note on Tuesday. "We don't think this cheapening will be via higher rate spreads to other markets, however. Indeed, we still see downward pressure on rate spreads over time. We think the needed price adjustment will occur via a weaker Australian dollar."
When you're a whore (Australia) and are damaged goods (all resource, no manufacturing) and no punter (foreign bond buyers) wants to pay for your expensive (high AUD) ass (Aus government debt), just bring down your price (devalue) or move to a cheaper brothel (G20) where other whores (ECB, BOJ, Fed) have a steady clientele of drug addicted (QE) poor ass punters (pension funds, banks, hedge funds).
Australia's government could do with a weaker currency to help lure back foreign bond buyers and provide a boost to demand as it ramps up sales.
The proportion of federal securities held by non-resident investors in the second quarter fell to just 59 per cent, the least since 2009, according to official data. The face value of the government debt pile at the end of last week was $433 billion and budget estimates have it climbing to around $500 billion by the end of June 2017.
While the Aussie dollar has climbed 5.3 per cent this year to 76.71 US cents as of 5pm on Wednesday in Sydney, it will slide to 72 cents by mid-2017, according to analyst forecasts compiled by Bloomberg. Sovereign bond prices are also predicted to fall, with the benchmark 10-year yield projected to rise to 2.04 per cent from 1.83 per cent over the same period, a separate poll shows. Such moves could help lure back buyers to a market that's this year attracted the weakest average auction bidding since 2002.
"Aussie government bonds need to cheapen up or the currency needs to weaken in order to juice up overseas demand," said Sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. She said the Aussie is "far too high" based on the differential between local and overseas interest rates and that a possible drop in iron ore prices could also provide a "headwind" to the currency.
The Australian dollar is on course to notch its first annual gain since 2012, having started the year at 72.86 cents. The yield on the 10-year federal note last month touched a record low 1.81 per cent, while the premium it offers over equivalent-tenor US securities shrank to as little as 22 basis points, the smallest gap since 2001.
The Aussie-US spread was more than 2 percentage points in 2012 when the proportion of foreign ownership peaked at 76 per cent amid a hunt for yield and diversification by reserve managers. Since then, repeated blowouts in the budget deficit have led to a near doubling of the amount of sovereign securities outstanding as revenue has slipped and successive governments have struggled to rein in spending. The uptick in bond supply has seen the ratio of foreign ownership ebb for eight consecutive quarters.
The softening of demand is evident at the regular bond tenders held by the Australian Office of Financial Management. Buyers at non-inflation linked bond auctions in 2016 have submitted bids to buy an average 2.8 times the amount of debt on offer at each sale, the lowest mean ratio since 2002, AOFM data show. Wednesday's $US1 billion sale of 2027 bonds was covered just 1.59 times, the slackest demand in three years.
Aussie-US yields seen narrowing
While data from the funding arm shows the total value of securities held by offshore buyers nudged up 0.3 per cent to $285.1 billion in the second quarter of 2016, that's less than the 2.4 per cent capital gain delivered by the rallying market over the same period, according to the Bloomberg AusBond Treasury Index. Last quarter was the first time foreigners were net sellers of the securities since 2012, National Australia Bank's Alex Stanley said.
"With ongoing bond supply, the Australian dollar nearer to the top of its range and the Aussie-US 10-year spread historically tight, foreign demand could remain subdued in the near term," the Sydney-based interest rate strategist said. "The Australian dollar has scope to fall. That view partly depends on the US Fed raising rates in December. A far enough fall in the currency from current levels could ultimately support foreign demand for Australian government securities."
Futures are pricing in about a one-in-two probability of an increase in US borrowing costs by the end of the year, while the swaps market shows there's is a better than even chance of rate reduction by the Reserve Bank of Australia by the end of March. That policy divergence is expected to further compress the yield spread between the Australian benchmark bonds and the US 10-year paper. The premium is predicted to slide to 14 basis points by mid-2017, based on Bloomberg surveys.
"Australian government bonds will need to cheapen in order to attract increased demand," David Plank, a macro strategist at Deutsche Bank in Sydney wrote in a research note on Tuesday. "We don't think this cheapening will be via higher rate spreads to other markets, however. Indeed, we still see downward pressure on rate spreads over time. We think the needed price adjustment will occur via a weaker Australian dollar."
Bloomberg
Story hasn't changed. Similarly, the more you have to hedge against your carry trade, the greater the impact to profit from the easy money. Even worse for the Japanese mom and pop retail investors who lack resources and know how to protect themselves when they invest in AUD-denominated term investments through their friendly neighborhood retail banks. It's pretty much known how the AUD reacts when SHTF. Just a matter of time.
The mood has shifted suddenly. Investors are losing faith in the efficacy of monetary stimulus, and it appears that perhaps central bankers may be, too. The Bank of Japan and European Central Bank have refrained from committing to additional rounds of stimulus and are quickly running out of bonds to buy under their existing programs. The BOJ may run out of bonds within the next 18 months, while the ECB may run into a wall sooner than that, according to analysts cited by the Wall Street Journal and the Financial Times.
The Federal Reserve, meanwhile, is still planning to raise benchmark interest rates despite underwhelming economic data. This is in large part because policy makers are increasingly concerned about the threats to longer-term financial stability by keeping rates so low. Meanwhile, inflation expectations are rising on bets that government officials will embark on spending plans to stimulate growth.
This multifaceted dynamic is a game changer, and markets have taken note. Traders have started dumping government bonds, leading to the biggest rout in Japanese debt in 13 years.
On the Rise Japanese bond yields have risen in the past few months as the BOJ studied its stimulus effort Yields on 10-year German bonds just turned positive for the first time since July. Breakthrough German 10-year bond yields turned positive for the first time since July U.S. government bonds are poised for a second consecutive month of losses for the first time this year. Going Down U.S. government bonds are set for their second consecutive month of losses for the first time this year
Futures traders are predicting a greater chance of the Fed raising rates this month than they were just a day ago, with every new speech or piece of data moving the needle. It's clear that many are struggling to understand what the Fed members' main considerations will be when deciding whether to take action.
“Interest rates have bottomed," Gundlach said in the webcast. "They may not rise in the near term as I’ve talked about for years. But I think it’s the beginning of something, and you’re supposed to be defensive.”
The big question now is, how far will this selloff go? If it stops here, it will be another blip soon forgotten. So far, the moves have not been drastic. Japanese government debt, for example, has been losing value steadily, but the losses since June amount to 2.3 percent, which isn't the end of the world.
But this does feel like part of a bigger trend. Jitters are spreading.
If European and Japanese central bankers are approaching the end of their bond-buying programs, then investors will have little reason to buy debt at a premium that pays no interest. Developed-market sovereign bonds would certainly suffer some significant losses, sending ripple effects through stocks, currencies and riskier bonds.
No one really knows how damaging a bond-market tantrum would be for the worldwide economy. Indeed, it seems as though it would be healthy for bond yields to rise and some equity valuations to fall a bit. But it's worrisome that global markets are moving together as much as they have been, leaving investors with few hiding spots.
The next few months will most likely be more turbulent than what traders have become accustomed to. And it probably won't be much fun for many bond investors. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
In doing so those banks, like the BoJ, the ECB, the Swiss National Bank, and the BoE are taking bonds out of the market, driving yields down and prices up.
So knowing the central bank demand is continuing means some fixed income investors are buying bonds not to protect capital, or preserve wealth, but as pure trades for capital gains.
In my almost 30 years in markets, whenever this happens and fixed income investors start focusing on the return on their investments – capital gains – and not the return of their investments, capital preservation and diversification, the alarm bells start ringing.
I immediately think of Drexel Burnham Lambert, of Long Term Capital Management, and of the sub-prime crisis.
All periods when the chase for return overtook the chase for preservation and all periods which ended badly. In the latter two, cases for not just the investors but the entire global market.
Back in July, in the immediate aftermath of Brexit, when everyone was quoting the $10 trillion, no $11 trillion, no it’s $12 trillion in sovereign debt with paying a negative interest rate, I saw a story which crystalised my latent, monkey brain fears that interest rates were getting to a destabilising and distorting level for markets across the globe.
Susan Buckley, QIC’s managing director of global liquid strategies, told the AFR her fund had “bought a negative yielding bond in expectation of greater capital gain”.
That comment and the reality neither Buckley or QIC were on their own in this approach set the claxons sounding.
The fact QIC was happy to acknowledge this approach gave me pause and I wondered if the bond market rally could be approaching a structural, perhaps long term, low. One that would see the end to the secular bull market in bonds which has dominated my career above all else.
Coming in late July, the AFR story hit just a couple of days before the 10-year Japanese government bond (JGB) rate bottomed at -0.292% and started its lift back toward zero. It was also just a week or two after the bottom in German Bund, US Treasury, and other market lows for interest rates in many jurisdictions.
In the past 6 weeks, watching what seemed like the relentless selling in JGBs, even as many other markets were more stable – if at higher rates than their July lows – was a curious thing given the Japanese economy remains mired in the low growth, low inflation paradigm it has been trapped in for two decades.
As US investment bank Jeffries Japanese equity strategy team put it over the weekend, “without the rest of the world necessarily watching”, JGBs had broken higher suggesting “that the bond markets are beginning to discount no further deposit rate cuts”.
A “more sinister view” Jeffries says, could be that “markets have begun to realize that the ‘frontier’ in QE policies is drawing to a close”. They say that “if the accepted wisdom and ideology of ‘more QE’ is starting to be discounted to one of ‘less QE'” it could change investment dynamics in Japan, and likely the globe should such a thought take hold. That means “even a small change in the yield curve ought to bring about massive rotation within the stock market”.
Likewise, the broader question of whether we are at, or near the end of the 35-year rally in bonds across the globe is probably the single most important question in markets right now.
It’s a question Roger Bridges, Nikko Asset Management’s Sydney based global rates and currency strategist is pondering in a new post on the firm’s blog.
Bridges says (our emphasis):
Many market commentators have been speculating that we are finally coming to the end of the bond rally that has endured for the past 35 years. It’s worth noting that this is nothing new — we have heard similar suggestions many times before over recent years.
Is it different this time? In my view, the answer is: possibly.
Bridges says that Japanese and German bonds have been the main drivers of lower bond rates in recent years and “given that the yields on these securities are now negative, it is hard to believe that they can continue to drive global bond yields much lower”.
That said, he’s not a bond bear.
“Even if the great bond rally is drawing to a close, that doesn’t mean that it is now going to reverse violently. It is more likely that we will see a period where bonds trade within a range, with any rally reversing fairly quickly and any sell-off likely to meet the same fate,” Bridges says.
But Bridges does believe that it is in the German and Japanese markets where the eventual selling will come from. Just like 2003, when JGB’s pushed yields higher, and 2014 when German Bunds were the driver.
That’s interesting given the Fed is warning about further rate hikes in the US this year.
But Bridges says that because the spread to US Treasuries has widened, as JGBs and Bunds have rallied, since the “Taper Tantrum” in 2013.
Bridges says any Fed tightening, when it comes, will have a “limited long-term impacts on the long end of the Treasury curve”. So the impetus to the end to the global bond rally will come from those markets which have outperformed in recent years. That means the strong rallies in JGBs and Bunds are likely to be unwound.
Whether such a move will cause a rush for the exits as fixed income managers again find the preservation of capital their foremost objective over a thirst for capital gains, only time will tell.
http://www.afr.com/business/banking-and-finance/aofm-to-issue-first-30year-bond-defies-rating-threat-20160913-grf8hz AOFM to issue first 30-year bond, defies rating threat Sep 13 2016 at 2:56 PM by Jonathan Shapiro The Australian government has unveiled plans to issue its first ever 30-year bond as it seeks to take advantage of strong investor demand for high yielding assets even as foreign investors scale back purchases and credit rating agencies threaten downgrades.
Rob Nicholl, the chief executive of the Australian Office of Financial Management told an audience of economists in Sydney that the unit responsible for debt issuance was planning a benchmark sized 30-year bond issue in October.
The 30-year bond is part of the AOFM's long-term strategy to issue longer-term debt to reduce the refinancing risk of the government debt by pushing debt maturities into the future while reducing the impact of changing interest rates on the federal government's funding cost.
The strategy has so far been successful as the government has managed to lengthen the average maturity of its debt book from five years to seven years.
This has reduced funding risks over the next five years by $12 billion a year, he said.
At the same time average funding costs have fallen by 1.60 percentage points as global interest rates around the world have fallen.
"That the government can now borrow at lower cost than it could seven years ago is a consequence of global economic and financial market influences and does not in itself reflect an AOFM objective," said Mr Nichol.
Lower rates, longer maturities
But, he said the falls in global rates had allowed the government to extend its debt maturities at lower than historic cost.
"It comes down to the fact that rates are low globally because of the extraordinary attempts by central monetary authorities to stimulate the economic growth through various channels."
While long-term debt constitutes more secure funding, it is more costly and Mr Nicholl said it was "debatable" how hard the unit should push to achieve this objective.
In his annual update to the market, Mr Nicholl said its annual funding task had been set at around $93 billion achieved by several large "syndicated" bond placements and regular auctions held throughout the year.
To hit its funding target – which is set by the government – the AOFM monitors market conditions, currency derivative levels which influenced offshore demand and the ability of dealers to support new and existing issues.
In the last five years international investors, such as central banks and sovereign wealth funds, emerged as major buyers of Australian government bonds, owning up to 80 per cent of all government debt at one stage.
Offshore buyers back off
But recent data has shown that ownership has fallen to below 60 per cent. So why are foreigners buying less of our bonds?
"It's difficult to determine in detail what lies behind this trend but we do know that reserve manager accumulation of government bonds is a mature rather than maturing story," said Mr Nicholl.
He added that while foreigners have bought more Australian government bonds, it has not kept pace with the rate of issuance of government debt while longer-term debt issuance has attracted more domestic investors.
"The declining significance of offshore investors is not in itself a concern as we look at our current and forecast issuance tasks but it does remind us there are likely to [be] limits to offshore demand for our bonds in Australian dollars and at current yields relative to alternative assets."
Mr Nicholl said the potential impact of a loss of Australia's coveted AAA credit rating was "very little to nothing".
He said when Standard & Poor's revealed in July that it had placed the rating on negative outlook "there was no perceptible price move".
"That's a clear signal. Since that announcement I have been overseas talking to investors and the feedback I have had is consistent with our expectation that most offshore buyers invest for yield and liquidity, not credit rating. So the prosect of the credit rating move is not something that is attracting much attention from investors."
Australia's 30-Year Bonds Are a Treat for Yield-Hungry Debt Investors
Yield-hungry debt investors are in for a treat. Australia’s decision to extend its bond curve out to 30 years for the first time means the highest interest-rate available from a major developed sovereign market is about to get even more appealing.
It’s one of the few such countries that doesn’t already issue debt of that tenor and the Australian Office of Financial Management is betting the global hunt for yield will ensure investors are keen to snap up the new security it plans to sell next month. The longest bond currently on issue from the South Pacific nation -- due in 23 years -- yielded 2.91 percent as of 8:40 a.m. on Wednesday in Sydney, and the new longer one announced by the government funding arm is likely to have a higher yield than that.
Mr Nicholl said the potential impact of a loss of Australia's coveted AAA credit rating was "very little to nothing".
He said when Standard & Poor's revealed in July that it had placed the rating on negative outlook "there was no perceptible price move".
"That's a clear signal. Since that announcement I have been overseas talking to investors and the feedback I have had is consistent with our expectation that most offshore buyers invest for yield and liquidity, not credit rating. So the prosect of the credit rating move is not something that is attracting much attention from investors."
Yes - because (good) bond investors know Australia is a sovereign country that issues its own currency. Therefore any rating change for bonds issued in Aussie tokens is meaningless. Who coulda known?
One of Britain’s largest bond funds has suggested that people would be better off keeping their money in cash, rather than investing in debt, as it warned of the extraordinary impact that central bank policies are having on fixed-income returns.
M & G Investments, which manages more than £260 billion ($A460bn) for its customers, of which nearly £160 billion is in fixed-income assets, said the “traditional approach” to investing should be reappraised in the light of negative interest rates, where depositors pay to save their money.
The dramatic shift away from shares and bonds is underlined in the latest Bank of America Merrill Lynch global survey of the industry, which found that 54 per cent of fund managers believe that equities and bonds are overvalued. The perceived overvaluation of stocks alone was at its highest level since May 2000.
The Merrill Lynch survey also found that the proportion of investors’ assets held in cash had risen to 5.5 per cent this month, with a fifth of respondents citing low yields as the reason.
In a blog post on the M & G website, Richard Woolnough, a 30-year veteran of the bond markets, said that negative rates meant the old advantages of putting money into bonds over holding cash had vanished. Highlighting the strange impact that bank policies were having on financial markets, Mr Woolnough said that even though physical cash did not pay income and was costly to store, it represented a rival to bonds that carried negative interest rates.
“Developed bond markets are now at the point where the income on a ten-year bund and a 100-euro note is exactly the same (zero) and the yield advantage of owning a ten-year bund is gone,” said Mr Woolnough, who is among a handful of senior portfolio managers at M & G who write for the company’s closely followed Bond Vigilantes blog.
German and Japanese sales of safes have risen in the past year as central banks imposed negative rates, prompting savers to withdraw money from banks and hoard cash at home.
Jim Leaviss, head of retail fixed interest at M & G, said that while wholesale withdrawals from the mainstream financial system remained largely a “philosophical talking point”, the pressure on investors to find unconventional solutions to the problems presented by low and negative rates were growing.
“As rates go negative, the danger is people will find ways of getting around the banking sector,” Mr Leaviss said.
Last month, a Swiss pension fund tried to withdraw a large amount of its cash from the bank in order to store the money itself, but had been rejected, local media reported. Munich Re, the Bavaria-based reinsurer, has withdrawn millions of euros and moved the cash to its secure storage facilities.
M & G warned that the logical next step could be that a bank or money manager offers cash exchange traded funds for investors with large holdings of negative yielding assets that would enable them to switch into physical holdings of cash. “Such an ETF would allow both small and large transactions and allow customers from individuals to institutions to store their money efficiently at a zero rate before fees,” Mr Woolnough said.
Helvetia Holding AG said it charges about 1,000 francs ($1,020) a year to insure 1 million francs, a fraction of the 7,500 francs a company would pay to park the same amount in a bank for a year
What an amazing statement from Britain’s largest bond fund, I can hardly believe my eyes. Finally some truth about the situation....
“As rates go negative, the danger is people will find ways of getting around (i.e. getting their cash out of) the banking sector,” Mr Leaviss said.
This highlights perfectly the black hole of negative rates because, for example, there is far more digital money than physical cash to match it. And as cash goes into hiding, the banks will not be able to square their books.
Yes - because (good) bond investors know Australia is a sovereign country that issues its own currency. Therefore any rating change for bonds issued in Aussie tokens is meaningless. Who coulda known?
Ratings matter for assessing exchange rates.
It doesn't matter if Aus bonds pay more yield than the ECB and Jap bonds and that the Australian government can always print more to pay coupons and principal.
If the the Aus dollar tanks, bond investors will be wiped and no amount of currency hedging can make up for the losses.
Jerry
15 Sep 2016, 12:15 AM
What an amazing statement from Britain’s largest bond fund, I can hardly believe my eyes. Finally some truth about the situation....
“As rates go negative, the danger is people will find ways of getting around (i.e. getting their cash out of) the banking sector,” Mr Leaviss said.
This highlights perfectly the black hole of negative rates because, for example, there is far more digital money than physical cash to match it. And as cash goes into hiding, the banks will not be able to square their books.
Correction, there is far more digital money debt than physical cash debt to match it. This is why we'll never get out from this depression. Because there is one BIG fundamental flaw with the QE model.
QE at it's root was founded off the writings of Keynes who suggested notes be buried on the ground for people to dig up and spent to get out of a depression.
Keyne's theory was based on the depressions of the 1800's where economic crashes were quickly recovered from with the gold rushes.
Depressions then were shorter, a year or two max, and immediately followed by economic booms. It's because of all the new gold dug up from the ground and this new supply of gold quickly expanded the money supply. And it is from this historical experience that Keynes suggested "notes" be buried on the ground for people to dig up and get out of a depression.
The fundamental difference is "notes" in Keynes time were convertible to gold.
This is why depressions were shorter then. Digging enterprise is not costly, just needs sweat equity and a few tools, and the gold nuggets dug can be spent immediately or saved for future consumption or investment, with little to no debt for the diggers.
Today, central banks are not printing money. They are printing debt.
It's already owed even before it's spent or even before it's disbursed. It's debt in the central banks' books and even the cash is debt in the commercial banks' ledger.
They are not printing money. QE is not money printing. QE is debt printing.
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