Displaying items by tag: bonds

(New York)

Some of the best forward looking recession indicators are in the commodities markets. Because they are generally a gauge for demand in the economy, they indicate where things are headed. Well, one of the best—copper—which is utterly ubiquitous across the global economy, is flashing some very worrying signs. Copper has had a very rough summer, but it has been worsening lately despite better share prices. The commodity just hit its lowest price in over a year. China accounts for around 40% of global copper demand. One analyst summarized the situation, saying “Copper is widely considered to be a bellwether for the global economy and so a weak price is cause for concern”.

FINSUM: Copper is partly at the mercy of the big fears in emerging markets, but that does not seem to account for the extremity of the selloff. This does worry us.

(New York)

There are a lot of bear market and recession indicators to make an investor nervous right now. There are also a wealth pf positive points. However, one area that really caught our eye was an industrial commodity that says a lot about the direction of the economy. Copper is in the middle of a big fall, and according to the Financial Times, the metal “is telling us not to worry a bit: the metal is telling us to panic”. Copper is down about 18% this year, and most of that fall is since May. Copper is used in a wide range of industrial applications across all regions in the world, it is utterly ubiquitous, so demand for it is a good leading indicator of economic performance.

FINSUM: This seems like a worrying sign, but we must say that some of the loss could be because of the trade war with China. That said, the sharp drop in prices is a very worrying sign.

(New York)

It is no secret that credit has expanded mightily in the last several years. The investment grade corporate bond market has completely ballooned, but leveraged loans have been another important area of growth. And while the risk of IG corporate bonds is well understood, the risks of the latter are less apparent. Leveraged loans are popular right now because they have floating rates, but those rates are a big risk. The reason why is not in the extra payments themselves, but because most leveraged loans are issued to refinance existing debt. The issue is that when corporate borrowers come back to the market to refinance, they might find many less lenders and much higher rates. The is so because as rates rise, other safer asset classes become more attractive.

FINSUM: The whole corporate sector has been binging on low rates for years, and there is bound to be a reckoning. The scale of that reckoning is the big question.

(Washington)

This has been a week of divergent views on bonds. Earlier this week we ran a story arguing that there would be no bear market in Treasuries. It was a solid argument. However, now there is a contention out there that ten-years, specifically, might struggle. The reason why is that demand at auction has been falling for the bonds just at a time when the US needs to issue more and more to cover its deficit. In addition to excess supply, the other big issue seems to be that short-term Treasuries are yielding so much relative to ten-years, that there is little incentive to buy them.

FINSUM: In one sense this is bad, but in another good. The downside is that holders of ten-years (which are a huge component of fixed income indexes) will be hurt as yields rise. But on the positive side, this is exactly the kind of force that keeps the yield curve from inverting as longer-term yields rise alongside shorter-term ones.

(New York)

With all of the bearish stories swirling around lately (us included), it was refreshing to find an alternative view today. Bloomberg has put out an argument that there will be no bear market in store for Treasuries. The story is from the top ranked bond strategist in the world, who points out that a decline in structured credit and related products means that Treasuries are a much higher component of overall fixed income indexes these days. This concentration is likely to keep rising over the next decade, which means indexes and benchmarks will need to buy Treasuries, a critical factor which will keep demand high. Another important point is that the stock market is losing its appeal compared to short-term Treasuries, as the yield of the latter is way ahead of the former and likely to stay that way.

FINSUM: This is excellent analysis from a highly reputably source. Our only addition would be to point out that US and global demography also reinforces the key points, as the aging of the world means there will be a higher demand for income investments over the next decade.