Ah, there’s nothing like the smell of free money to get those bond market desperadoes, those vigilantes who have helped bring Greece, Spain, Portugal and Ireland to their knees, forget themselves and be willing to do and say anything for another hit of free central bank money.
Like problem gamblers looking to recoup their losses, banks, hedge funds and other investors have forgotten the fear and loathing of early July and been chasing shares and commodities higher in the past three weeks, quitting some of their safe-haven investments in government bonds in Germany, the US, Australia, the UK and even France. All this on the hope that suggestions last month from the US Fed and European Central Bank that they would be would be re-opening their wallets for another burst of quantitative easing next month.
As a result, many bond yields are on the rise around the world after the huge rally that took rates in “safe havens” such as Australia, the US, Germany, UK, Denmark and even France (yes, France) to record lows in the past 4-6 weeks. At the same time stockmarkets are up by 10%, as is oil, (but not so much gold). In fact the change in attitude in bond markets has been nothing short of a miracle. Basket case Greece has managed to sell billions of euros of short-term bonds (three and six months), and Italy got rid of €8 billion euros of paper this week. Yields for both were high, but not as high as they have been.
The bond sell-off has come as data releases have confirmed that the eurozone and much of the rest of Europe is struggling with recession. From the UK, to Greece, Spain and Portugal. But Sweden, Latvia and Germany were the outliers of growth, according to the latest figures, out overnight. France was flat. but the EU and the eurozone as a whole remain in recession.
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Despite that and weak growth in China, the US, Japan, Taiwan, Singapore and South Korea, we have seen bond yields rise, instead of falling as they would normally in a slowdown. For example, yields on Australian 10-year bonds are up more than half a per cent in less than three weeks. Bloomberg and Reserve Bank data shows that after dipping to an all-time low of 2.71% on July 27, Australian yields traded about 3.30% yesterday. In the US, it’s the same story, with yields rising from the all-time low of 1.38% in late July to a high late last week of 1.73% overnight. Yields on German 10-year bonds reached 1.47% overnight, up from the all-time low of 1.127% in late July.
Even though the market rally is starting to look tired, traders are hanging on in hope, lured by the hope of more funny money from central banks concerned that economic growth is flagging, not growing. So investors have gone all “risk on” and not “risk off” as they did for much of July. Investors can feel a pile of easy cash coming their way in the next month and they want to be at the front of the line when its doled out.
So when will that happen? Well, the dates are August 31 and September 1: that’s the annual two-day Jackson Hole conference of the US Federal Reserve, which attracts the great and good from central banks around the world. Starring this year is the double act of the two men who can save the world economy as we know it from ruin and perdition, according to those in the markets. They are “Helicopter” Ben Bernanke, the Fed chairman who speaks on August 31. The day after it’s the turn of “Super” Mario Draghi, head of the European Central Bank. Investors are looking for both to confirm that the two major central banks will release more money to boost flagging economies. That’s despite all the trillions of dollars so far of central bank spending having only produced weak growth (in the US), or recession, such as in much of the EU and UK.
Draghi speaks before the ECB’s September meeting the next week and at his next press conference on September 6. Bernanke speaks before the Fed’s next meeting on September 12 and 13 when new economic forecasts will be issued and he speaks at a post-meeting news conference that will be watched the world over. The expectation is that their Jackson Hole speeches will provide hints about the new moves and the following meetings will flesh out the detail, such as the amount.
So there is now an expectation of another round of easing from the Fed and ECB sufficient to help markets, but also rescue troubled Spain and Italy. No mention of Greece, which will again test this sunny disposition in September. The Bank of England has already boosted its spending by £50 billion, while after the sharp slide in second-quarter growth in Japan we will see the Bank of Japan under pressure to reopen its money printing machines, possibly next month.
For that reason, investors are selling bonds (where many have big gains), raising cash and punting in markets from shares to commodities, anything where leverage and loose money can generate a flood of profits, very quickly. That will in turn goose up third-quarter profits and revenues for the likes of Goldman Sachs, JPMorgan, Barclays, thereby boosting bonuses and remuneration. It’s a happy, “virtuous” circle in the minds of bankers and traders.
While yields about five to 10 years have risen, short-term rates remain low. Germany issued €3.77 billion of six-month notes on Monday and sold them for a negative yield of 0.055%. In other words investors paid Germany to buy the notes, so the fear hasn’t really gone away, just been suppressed for now by the smell of more free money. Italy raised €8 billion on Monday by the sale of 364-day bills at 2.767%, compared with 2.697%. That’s a bit more than in July, but they have paid about 4% earlier in the year. The improvement in sentiment has seen yields on 10-year bonds (the critical indicator) for Spain and Italy ease somewhat in the past week from the nasty to the spiteful.
Even France is in favour. Despite electing a Socialist President and government and losing its AAA credit rating (like the US), France has seen its bonds star so far this year. Since the start of 2012, France’s benchmark 10-year bond yield has dipped more than one percentage point to about 2.1%.
All this is more than slightly dysfunctional. And if “Helicopter Ben” and “Super Mario” don’t deliver or fluff their lines, then stand back and watch the markets head for the exits, again as fear returns. Let’s hope the lifts are working because getting out quickly could be bloody.