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A Black Hole Is Swallowing Global Bond Yields

Robert Burgess
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A Black Hole Is Swallowing Global Bond Yields

(Bloomberg Opinion) -- An astrophysicist who worked on the Event Horizon Telescope project that released the first image of a super-massive black hole said “it feels like looking at the gates of Hell, at the end of space and time, the point of no return.” That also sounds like an apt description of the bond market these days. 

Yields on government bonds worldwide tumbled again on Wednesday as central bankers doubled down on their dire economic outlook. Yields on German bunds fell further below zero, adding to the $9.91 trillion global amount of debt with negative yields — a concept almost as incomprehensible as the inner workings of a black hole. Yields on bonds of the U.S., Canada, U.K., France, Italy and Spain also fell, along with many others. At a recent 1.82 percent, the yield on the Bloomberg Barclays Global Aggregate Bond Index has fallen from last year’s high of 2.27 percent in early November. The index has gained 4.31 percent since then, topping the 4 percent increase in the MSCI All-Country World Index of equities. Up first Wednesday was European Central Bank President Mario Draghi, who warned that the euro-area economy — which has basically stalled — faces accumulating risks. Gone was the optimistic Draghi of last year, who back then was talking about needing to withdraw from its extraordinary stimulus efforts by now. The Federal Reserve didn’t do anything to bolster confidence when the minutes of its last monetary policy were released Wednesday afternoon and showed that policy makers last month grappled with “significant uncertainties” and persistently low inflation as they scrapped forecasts for interest rate hikes in 2019.

The signals from the ECB and Fed reinforce the notion that the central bankers don’t have the answer to what has become a synchronized global economic slowdown. It’s not encouraging that the global economy is still struggling a decade after the worst financial crisis since the Great Depression. And that’s after central banks pumped trillions of dollars into the global financial system. 

GET READY FOR THE KITCHEN SINKIn that context, it’s not surprising that stocks moved very little on Wednesday, with the MSCI index rising just 0.27 percent. It wasn’t too long ago that stocks would soar by multiples of that amount on a dovish message by the ECB and Fed. But investors realize that central banks are powerless to stop the looming slowdown, which will limit earnings growth and stock values. In the U.S., for example, analysts have largely capitulated on first-half 2019 results. Estimates now call for a 1.9 percent decline in earnings compared with an earlier forecast of a 4.1 percent gain, according to Bloomberg Intelligence. But even a 1.9 percent decline may be too optimistic, the strategists at Bloomberg Intelligence fear. With expectations so low, they note that companies might have an incentive to “kitchen sink” their results. In other words, there’s a possibility that companies decide to include charges and other extraordinary items in their results that they might otherwise seek to delay when expectations are high. And although analysts forecast earnings to rise 5.5 percent in the second half, that’s down from a prior estimate of 8.3 percent. The BI strategists say those U.S. companies exposed to Europe face the greatest risk of posting disappointing earnings. “Multinational-earnings risk may be increasingly priced into stocks, but remains relatively high for those with the most European exposure,” they wrote in a research note Wednesday. Earnings “revisions for S&P 500 companies that generate the most sales in Europe have been suspiciously limited, considering the evident deterioration in regional growth, and their stocks are trading at a large premium (versus) other multinationals and the broader index.”

POUND TRADERS BECALMED Keeping up with the daily ins and outs of Brexit is an almost impossible task. All the permutations of what might happen and when and how is enough to give even the best political scientist a migraine. Nevertheless, the currency market is signaling that the situation is likely to work itself out in short order. The CBOE British Pound Volatility Index has tumbled over the past two weeks in its biggest slide since December 2016. Yes, the gauge had been at levels not seen since the U.K. voted to exit the EU, but the latest levels indicate volatility is returning to a more normal level. May was meeting with EU leaders on Wednesday in Brussels to hammer out the details on the length of the delay to a final Brexit that the EU is willing to grant. European Council President Donald Tusk wants them to offer an extension of up to a year, and some member states back December for the new departure date. “I’m very flexible because there’s not much sense to debate a concrete month,” Lithuanian President Dalia Grybauskaite told reporters. “What we’d like to see is to help and accommodate the U.K. to have any kind of decision finally.” If the EU doesn’t push back the departure date, volatility could quickly spike again.

IS TEXAS RUNNING OUT OF OIL?West Texas Intermediate crude oil prices rose again Wednesday, extending their gain from December’s low to 52 percent and pushing prices above $64 a barrel. Much of the gain can be tied to tighter global supplies. The output of oil by OPEC, the cartel that pumps 40 percent of the world’s supply, tumbled by 534,000 barrels a day last month to just above 30 million a day, according to Bloomberg News’s Grant Smith. If output remains at current levels, global inventories will decline sharply this quarter and next, OPEC indicated. While the U.S. is less dependent on OPEC, becoming a net exporter of crude oil and refined products, some disturbing news has arisen that may raise concerns about the sustainability of America’s supply. Oil wildcatters made zero new discoveries in Texas, the biggest U.S. crude-producing state last month, even as drillers amped up exploration efforts. The March bust followed two months of slim pickings for Texas explorers, who found just one new field per month in January and February, according to the Texas Railroad Commission, which oversees the state’s crude industry. For the first quarter, the pace of discovery was a fraction of the year-earlier period, when six new fields were detected, Bloomberg News reports.

DON’T BELIEVE BOND UNDERWRITERSOne of the biggest scams in financial markets is the concept of “order books.” When a company — or sometimes a government — is selling bonds, someone associated with the underwriters will anonymously leak to the media the amount of orders a deal has received. There’s no way of proving what the underwriters say is accurate, and it’s always in the best interest of the underwriters to say that a deal is “oversubscribed” to drum up interest. After all, no underwriter wants to say its deal is a dud. This practice was in the spotlight this week with reports — citing people who declined to be named — that Saudi Aramco received $100 billion of orders for $12 billion of bonds it was selling. There was certainly big demand for the deal, and the company was able to get lower yields on the bonds then originally proposed, but the order book suggested there would be a big scramble for the bonds once they started trading from those investors who were shut out, pushing yields even lower. Instead, risk premiums on the bonds rose in their first full day of trading. The extra yield investors demand to own the oil giant’s most actively traded debt, $3 billion of 3.5 percent bonds due in 2029, instead of Treasuries rose to 1.11 percentage points from as tight as 1.01 percentage point earlier, according to Bloomberg News’s Claire Boston.

TEA LEAVESInflation isn’t dead, at least not in China. The government is forecast to say that the consumer price index rose to 2.3 percent in March from a year earlier, rising from February’s 1.5 percent gain and reversing a deceleration that began in October. Much of the increase is tied to rising food prices. Pork prices have soared amid a proliferation of African swine fever on farms in East Asia. Bloomberg Economics forecasts that higher food prices likely contributed 1.18 percentage points to the rate of inflation in March. Nevertheless, evidence that the economy is rebounding, which could add to inflation, has led investors to push up bond yields in China, with those on the country’s five-year securities rising to 3.17 percent, a new high for 2019. That’s counter to what’s happening in the rest of the world.

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To contact the author of this story: Robert Burgess at bburgess@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.

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