As investors chase yields, junk bonds are still pulling the land-the risk is too high.
Wolf Richter (Wolf Richter) “WOLF STREET”.
The bond market fell on Friday. This is a good thing for the crying babies on Wall Street. They began to breathe excessively on Thursday, when the 10-year U.S. Treasury bond’s 10-year yield rose and accelerated for two consecutive months, soaring to 1.52%, which has tripled since then. August.
By Thursday, various complex leveraged transactions had broken down, and forced selling had begun. By historical standards, and given the current inflationary pressures, even on Thursday, these yields are still surprisingly low. But there must be a cow on Wall Street.
On Friday, the U.S. 1
The increase in yields is due to the fall in bond prices, which has dealt a big blow to the world-this is reflected in bond funds that focus on long-term Treasury bonds, such as the iShares 20 Plus Treasury Bond ETF [TLT]; After a 3.3% rebound on Friday, its price dropped by about 16% from the beginning of August.
Approved by the Federal Reserve.
Officials at the Federal Reserve have been talking about rising Treasury yields: this is a good sign, a sign of rising inflation expectations, and a sign of economic growth. That’s the mantra they keep repeating.
Federal Reserve Chairman Jerome Powell called the rise in U.S. Treasury yields “a statement of confidence.”
Kansas City Fed Chairman Esther George said on Thursday: “Much of this growth may reflect increased optimism about the momentum of the recovery and can be seen as an encouraging sign of growth expectations.”
St. Louis Fed President James Bullard is one of the most enthusiastic pigeons, saying on Thursday: “With the improvement in growth prospects and rising inflation expectations, a consistent increase in the 10-year Treasury yield is appropriate. “Investors who demand higher yields to offset higher inflation expectations “will be a welcome development.”
They are all singing on the same page: they are dovish about quantitative easing and low interest rates. But they will allow long-term interest rates to rise, which begins to suppress some absurd bubbles in the financial and real estate markets.
The Fed’s statement on Thursday morning in support of rising long-term yields (when the market screamed for the opposite quantitative easing policy, but focused on long-term maturity to reduce long-term yields) may also help Wall Street feel uneasy.
But on Friday, small panics eased, which is good, because real panics may change the Fed’s attitude.
The yield on Friday’s 30-year Treasury note fell 16 basis points to 2.17%, erasing the gains of the previous three days. It’s the position on January 23 last year:
The yield curve measured by the difference between the 2-year yield and the 10-year yield is sharp and steep, sticking to the 2-year yield, and the 10-year yield begins to rise. Last Friday, the spread between the two narrowed from 1.35 percentage points on Thursday to 1.30 percentage points, still the steepest yield curve for this indicator since December 2016.
In August 2019, when the 10-year Treasury bond yield fell below the 2-year Treasury bond yield difference, the yield curve measured by this method briefly “reversed”. Since then, the yield curve has steepened in a very crude way:
Mortgage rates are finally starting to follow.
According to a report by Freddie Mac on Thursday, in the week ending Wednesday, the average 30-year fixed mortgage interest rate rose to 2.97%. This does not include the actions on Thursday and Friday.
The 30-year mortgage interest rate is usually quite close to the 10-year yield. But in 2020, they were disconnected. When the 10-year yield began to rise in August, the mortgage market simply ignored this. Mortgage interest rates continued to fall from record lows to record lows until the beginning of January, which plunged the real estate market into a bubble.
But then at the beginning of January, mortgage interest rates began to climb and rose by 32 basis points in less than two months-although they were still at historical lows.
Note the disconnect between the weekly 10-year U.S. Treasury bond yield in 2020 (red) and Freddy Mac’s weekly average 30-year fixed mortgage interest rate (blue):
In this incredible bubble and overvalued bubble housing market, higher mortgage interest rates will eventually cause some new thinking.
The Fed also seems to welcome this. They are not blind. They have seen what is happening in the real estate market-what are the risks that this kind of price rise brings. They just can’t say it out loud. But they can increase long-term yields.
Mortgage loan interest rates have a certain degree of catch-up. Since the madness in March, the spread between the average 30-year fixed mortgage rate and the 10-year yield has been gradually narrowing, and is currently 1.37 percentage points, the narrowest level since April 2011.
Spreads always recover from such extreme lows to their mean value. It can do this in two ways, that is, mortgage interest rates are growing faster than treasury bond yields, or mortgage interest rates are falling faster than treasury bond yields.
High-end corporate bonds are beginning to feel painful.
Within the investment grade range of corporate bonds, yields have risen and prices have fallen, although the yields obtained through historical measures are still very low:
According to the ICE BofA AA American Company Index, the average yield of AA-rated bonds is 1.81%, which is higher than the record low point of 1.33% at the beginning of August (my corporate bond rating cheat sheet).
The ICE BofA BBB US Corporate Index shows that in the past two months, BBB-grade bonds (slightly higher than junk-grade bonds) have come out of the predicament, and the average yield climbed to 2.39%, higher than the historical high of 2.06%. At the end of December. Although U.S. Treasury yields have risen, mortgage interest rates will continue to fall through 2020.
Junk bonds are still pulling the land, with yields close to historical lows.
According to data from the ICE BofA AA US Corporate Index, BB-rated bonds (the highest-rated junk bonds) have been hit hard in the past two weeks, with the average yield rising to 3.45%, higher than the mid-term record low. 3.20% in February.
The average yield of CCC bonds is at the riskiest end of the junk spectrum, and there is a considerable chance of default. It has hardly risen from the historical low (7.17%) in mid-February, and is now hovering at 7.27%. In March, the yield soared to 20%. During the financial crisis, it soared by more than 40%.
The Federal Reserve smiled at its creation.
The fact that high-risk bonds still have yields close to record lows is a comforting sign for the Fed. This means that the financial situation is still very easy. Various high-risk companies with sharply reduced revenues and huge losses-cruise companies that believe that revenues are close to zero and loss-making can fund cash burns by issuing a large number of new bonds to investors eager to chase yields. There is no problem.
According to Bloomberg News, so far this year, the company has issued $84 billion in junk bonds. At this rate, the first quarter will be the largest junk bond issuance ever. Because of their higher yields, there is a huge demand for junk bonds-the risk is too high. The chase for revenue is in full swing. The size of the entire junk bond market has surged to more than $1.6 trillion.
For the Fed, this is one of many signs that even though Treasury bond yields have risen from record lows to record lows, the credit market is still in a bubble. Although it has vowed to continue its quantitative easing policy and will not raise interest rates for a period of time, it also told the market in a unified voice that the rise in long-term U.S. Treasury yields indicates that the Fed’s monetary policy is operating as expected. Those higher long-term yields are eliminating bubbles in the market, including the real estate market. I think this is not an unintentional side effect.
From crisis to crisis, even when there is no crisis. read… The Fed’s quantitative easing policy: assets reached 7.6 trillion US dollars.Despite this, long-term Treasury yields have soared, and Wall Street’s crying babies demand more quantitative easing
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