Monday, 29 April 2013

Market’s $20 Trillion Yielding 1% Shows Austerity Mistaken

By Anchalee Worrachate - Apr 29, 2013 2:50 PM GMT+0400

At a time when politicians are squeezing budgets to cut borrowing, the bond market is clamoring for more debt, pushing yields on almost $20 trillion of government securities to less than 1 percent.
The average yield to maturity for the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index fell to a record-low 1.34 percent last week from 3.28 percent five years ago. Even though the amount of bonds in the index has more than doubled to $23 trillion -- bigger than the gross domestic product of the U.S. and China combined -- countries from Germany to Rwanda sold debt in the past month at their lowest yields.
Market’s $20 Trillion Yielding 1% Shows Austerity Mistaken
For all the concern that governments are taking on too much debt, there may be a shortage of bonds. Barclays Plc estimates that central banks will buy $2.5 trillion of assets considered to be safe this year as they inject cash into the global economy in an effort to stimulate growth. Photographer: Jin Lee/Bloomberg
April 18 (Bloomberg) -- International Monetary Fund Managing Director Christine Lagarde speaks about the outlook for the global economy and Europe's debt crisis. Lagarde, speaking with Sara Eisen on the sidelines of the IMF and World Bank meetings in Washington on Bloomberg Television's "Market Makers," also discusses U.S. fiscal policy. (Source: Bloomberg)
April 29 (Bloomberg) -- Richard McGuire, senior fixed-income strategist at Rabobank International, talks about European bonds, European Central Bank policy and the new Italian government. He speaks from London with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)
Market’s $20 Trillion Yielding Below 1% Says Austerity Mistaken
Yields on 10-year Treasuries, the benchmark for everything from corporate bonds to mortgages, fell four basis points, or 0.04 percentage point, last week to 1.67 percent, the lowest closing rate this year. Photographer: Daniel Acker/Bloomberg
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While Harvard University economists Carmen Reinhart and Kenneth Rogoff say high debt levels slow economies, a warning political leaders from Washington to London have used to justify austerity measures, yields imply investors are giving a green light to boost borrowing. The three-decade rally in bonds shows no sign of abating as gold, the world’s traditional store of value, sinks into a bear market and inflation slows.
“Just like the beginning of last year, 2011, 2010, and 2009, people were convinced government bonds yields are going to head higher, but that hasn’t happened,” Jamie Stuttard, head of international bond management for Boston-based Fidelity Investments, which oversees $1.7 trillion, said in a telephone interview April 23. “Bond yields may stay low, as global growth rates are simply low and central banks’ policy remains accommodative.”

Bond Shortage

For all the concern that governments are taking on too much debt, there may be a shortage of bonds. Barclays Plc estimates that central banks will buy $2.5 trillion of assets considered to be safe this year as they inject cash into the global economy in an effort to stimulate growth. That’s up from $1.15 trillion of purchases in 2012 and outstrips net supply of $2 trillion, according to the London-based bank.
The global amount of the safest bonds, as measured by ratings companies, will fall to $6 trillion from $10 trillion before the financial crisis, according to an International Monetary Fund report in January. At the same time, the Dodd- Frank financial-overhaul law in the U.S. and regulations set by the Bank for International Settlements in Basel, Switzerland, require banks to hold more top-graded debt as loss reserves.

Unprecedented Stimulus

Bank of America said in a report to clients on April 11 that yields on $20 trillion of global securities were below 1 percent, and that unprecedented stimulus from central banks including interest-rate cuts and asset-purchases was boosting both equities and bonds.
Yields on 10-year Treasuries, the benchmark for everything from corporate bonds to mortgages, were little changed at 1.67 percent at 6:37 a.m. in New York after falling to 1.64 percent on April 23, the lowest this year. The price of the 2 percent note due in February 2023 was at 102 30/32.
Low government financing costs are extending to companies and consumers.
Yields on corporate bonds tumbled to 3.15 percent on average on April 25 from almost 5 percent at the start of 2012, the Bank of America Merrill Lynch Global Corporate & High Yield Index shows. That saves about $18.5 million a year on every $1 billion borrowed.
A homeowner in the U.S. taking out a $300,000 mortgage for 30 years would pay a rate of 3.4 percent, down from about 4 percent a year ago, according to Freddie Mac. The interest payment would drop by about $1,222 a year.

‘Liquidity Rush’

“The strong demand for bonds across markets is being driven by a combination of a huge liquidity rush from central banks and slowdown in growth,” Salman Ahmed, a London-based global strategist at Lombard Odier Investment Managers, which oversees $46 billion, said by telephone on April 24.
While the MSCI All-Country World Index (MXWD) of stocks has risen 7.5 percent this year, investors are buying government bonds that the Bank of America index shows returned about 1.7 percent.
The IMF cut its 2013 global growth forecast for a fourth time on April 16, to 3.3 percent from 3.5 percent. A Commerce Department report April 26 showed U.S. GDP grew at a 2.5 percent annual rate in the first quarter, below the 3 percent median estimate in a survey of almost 90 economists by Bloomberg.
Led by the Federal Reserve’s monthly bond purchases of $85 billion, central banks are flooding the world with cash. The Bank of Japan is also printing money to buy debt and the European Central Bank will probably cut its target interest rate this week to 0.5 percent from 0.75 percent, a separate Bloomberg survey shows.

Mongolia, Rwanda

Even the riskiest nations, from Mongolia to Rwanda to the Dominican Republic have found easy money in the bond market.
“Market conditions are very favorable for any credit, let alone frontier places that would be generally perceived as higher risk,” Giulia Pellegrini, a sub-Saharan Africa economist at JPMorgan Chase & Co. in London, said in a telephone interview on April 22.
Mongolia, which raised $1.5 billion in November including 10-year bonds that yielded 5.125 percent, may issue more foreign-currency bonds, central bank Governor Naidansuren Zoljargal said April 18.
Rwanda raised $400 million last week from its debut dollar bond, paying a yield of 6.875 percent on the 10-year securities. Zambia raised $750 million in its first sale of Eurobonds in September, issuing 10-year debt at 5.625 percent. It’s planning an offering of as much as $1 billion this year, Deputy Finance Minister Miles Sampa said April 16.

Dominican Sale

The Dominican Republic sold $1 billion of 5.875 percent dollar bonds this month that are due in 2024. The nation is rated B+ by Standard & Poor’s and the equivalent B1 by Moody’s Investors Service, both four levels below investment grade.
The Czech Republic, Hungary, Poland and Romania are also paying record-low rates to borrow, as are Mexico and Paraguay.
The flood of sales from lower-rated borrowers may be a signal the bond market has become too frothy.
In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own equities or plan to buy them as falling yields diminish the appeal of fixed-income investments.
Goldman Sachs Group Inc. says investors should own a smaller percentage of government bonds than contained in benchmark indexes. Securities in developed markets are expensive as catalysts for lower rates, such as slower growth in the U.S. and China and the boost provided by the BOJ’s stimulus, may prove temporary, according to the New York-based company.

‘Perfect Storm’

“The perfect storm that has pushed yields lower is not here to stay,” Goldman Sachs analysts including Francesco Garzarelli, co-head of the firm’s global macro and markets research team, and Silvia Ardagna wrote in a report on April 23. “We therefore continue to recommend being underweight government bonds on both a 3-month and a 12-month horizon.”
Governments may be going too far in their cost-cutting efforts, dragging down growth, particularly in the euro region. Some nations can afford to slow the pace of deficit reduction, IMF Managing Director Christine Lagarde told Sara Eisen in a Bloomberg Television interview on April 18.
“It’s a question of how much and how quickly, and for some of them there’s no reason to rush into up-front, heavily loaded fiscal consolidation,” Lagarde said.
Spain’s 10-year yields dropped six basis points to 4.22 percent today even after the nation said last week it would seek two more years to tackle Europe’s widest budget deficit. That’s down from a euro-era record of 7.75 percent on July 25.

Belgian Sale

Belgium sold 10-year bonds today at a record low yield of 1.97 percent. France paid 1.94 percent, the least ever, to auction 10-year bonds on April 4. Germany sold 30-year securities at an all-time low yield of 2.16 percent on April 24. Italy’s two-year yields dropped to a record low last week even as the nation struggled to form a new government. Enrico Letta was sworn in as Italy’s prime minister yesterday, ending a two- month political stalemate.
Even with yields so low, lawmakers continue to seek ways to reduce debt levels instead of borrowing to spur growth.
German Chancellor Angela Merkel last week defended her push for spending cuts as an unavoidable measure to overcome Europe’s sovereign debt crisis. In the U.S., as much as $85 billion of spending cuts this year started on March 1 after Congress and President Barack Obama failed to agree on a deal to postpone the automatic reductions.

Harvard Professors

Harvard professors Rogoff and Reinhart, who argued in a 2010 paper that debt above 90 percent of GDP slowed growth, acknowledged this month they had inadvertently left some data out of their calculations. In response to a paper by three researchers from the University of Massachusetts at Amherst, they said the error didn’t change the basic findings.
The research has been cited by U.S. House Budget Committee Chairman Paul Ryan and European Union Economic and Monetary Affairs Commissioner Olli Rehn in defense of deficit cuts.
Austerity is a “monstrous exercise in unethical human experimentation” Nobel economics laureate Paul Krugman of Princeton University said in an interview with Bloomberg Businessweek on April 11. He favors governments borrowing at record-low interest rates to fund spending programs.
A March 2012 study by University of California at Berkeley economist Bradford DeLong and Lawrence Summers, who was Treasury Secretary under President Bill Clinton, concluded that stimulus may generate so much growth that it would pay for itself.

Fiscal Multiplier

Key to the debate is a number called the fiscal multiplier, a gauge of how much growth can be generated for each dollar spent by the U.S. government. With short-term rates near zero, DeLong and Summers say the multiplier is at its most powerful.
The U.S. debt-to-GDP ratio will rise to 108.1 percent this year from 98.2 percent in 2010, according to the IMF’s forecast this month. Growth will increase to 2.7 percent next year from 2 percent in 2013, according to more than 75 economist estimates compiled by Bloomberg.
Advocates of stimulus say now is the time to spend because inflation is slowing.
The U.S. core consumer price index, which strips out food and energy prices, rose at a 1.9 percent annual rate in March, the smallest increase since July 2011. A report in Japan last week showed consumer prices, excluding the impact of a sales-tax increase and fresh food costs, tumbled by 0.5 percent in March, the most in two years.
Falling commodity prices are helping to curb inflation. The Standard & Poor’s GSCI Total ReturnIndex (SPGSCI) of 24 raw materials has declined 8.6 percent from this year’s peak in February. Gold futures dropped by the most in 33 years on April 15 amid concern slowing economic growth in China will damp demand for the metal.
“There seems to be no sign of a let-up in bond demand around the world,” Frances Hudson, a strategist at Standard Life Investments in London, which manages $248 billion, said in an interview on April 23. “I see no prospect of central banks withdrawing their bond-buying programs any time soon. The global recovery is going through a soft patch and inflation is not a concern. This suits the bond market.”
To contact the reporter on this story: Anchalee Worrachate in London at
To contact the editor responsible for this story: Paul Dobson at

Friday, 26 April 2013

ECB Data to Show Extent of Capital Flight in Cyprus

By Stefan Riecher - Apr 26, 2013 3:00 AM GMT+0400

The European Central Bank will publish data today showing how much money savers withdrew from the euro region’s banks after a botched attempt to tax Cypriot savers as part of a European Union-led bailout.
The ECB will publish data for euro-area bank deposits including Cyprus after 10 a.m. in Frankfurt. In February, the month before the rescue, Cypriot deposits decreased 2.2 percent to 46.4 billion euros, down from 47.4 billion the previous month. It was the ninth straight decline.
ECB Data to Show Extent of Capital Flight After Cyprus Rescue
Pedestrians pass a euro sign sculpture outside the European Central Bank (ECB) headquarters in Frankfurt. Photographer: Ralph Orlowski/Bloomberg
ECB Data to Show Extent of Capital Flight After Cyprus Rescue
A customer holds her head in her hands outside an automated teller machine (ATM) operated by Cyprus Popular Bank Pcl, also known as Laiki Bank, in Nicosia on March 28, 2013. Photographer: Simon Dawson/Bloomberg
Cypriot officials, euro-area finance ministers and the ECB agreed mid-March on an unprecedented measure to impose a levy on deposits of less than 100,000 euros ($130,000) under a 10 billion-euro bailout. The plan was ditched after the country’s parliament rejected it, and a new accord was reached where only savings above the insured level of 100,000 euros will be taxed.
“I’m sure Cypriot banks have seen a deposit flight last month and it would be even more interesting to see how much money left the country in the second half of the month,” said Christian Schulz, an economist at Berenberg Bank in London. “The deposit data for other countries will tell us a lot about how much damage the incident in Cyprus has done.”
The episode damaged investor confidence across the currency bloc. The Stoxx Europe 600 Banks Index (SX7P) dropped 6.8 percent between March 15 and March 27, the day before banks reopened in Cyprus with limits on withdrawals.
To impose a levy on insured depositors “was not smart, to say the least,” ECB President Mario Draghi said on April 4. “It was quickly corrected.”

’Limited Contagion’

The rescue attempt came at a time when doubts about a recovery of the euro-area economy later this year were growing, and Draghi said on April 19 that he hasn’t “seen any improvement in the situation” since the beginning of April.
Banks including Nomura International Plc, UBS AG (UBSN) and Royal Bank of Scotland Group Plc forecast the ECB will cut its benchmark interest rate to a record low of 0.5 percent when policy makers convene for their monthly meeting on May 2.
The ECB today will also publish data on bank deposits for the other euro-area countries. Last month in Greece, deposits rose, while they were little changed in Spain, Portugal and Ireland.
“I expect non-existent, or just limited contagion,” said Berenberg’s Schulz.
To contact the reporter on this story: Stefan Riecher in Frankfurt at
To contact the editor responsible for this story: Craig Stirling at

Yen Advances With Gold as European Stock Futures Decline

By Pratish Narayanan & Yoshiaki Nohara - Apr 26, 2013 10:28 AM GMT+0400

The yen rose as the Bank of Japan maintained a pledge to double the nation’s monetary base in two years. Gold headed for its biggest weekly increase since October 2011 and European stock futures dropped.
The yen strengthened 0.5 percent to 98.73 per dollar as of 7:27 a.m. in London. Euro Stoxx 50 futures slid 0.3 percent, indicating the region’s shares may fall for the first time in six days, while contracts on the Standard & Poor’s 500 Index lost 0.1 percent. The MSCI Asia Pacific Index added 0.1 percent, paring a 0.4 percent advance. Spot gold increased 0.4 percent, while copper in London sank 0.7 percent.
Most Asian Stocks Fall as BOJ Meets; Gold Rises as Won Advances
A pedestrian walks past an electronic stock board in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg
April 26 (Bloomberg) -- Herald Van Der Linde, head of equity strategy for Asia Pacific at HSBC Holding Plc in Hong Kong, talks about the outlook for the region's stocks and his investment strategy. He speaks with Rishaad Salamat on Bloomberg Television's "Asia Edge." (Source: Bloomberg)
April 26 (Bloomberg) -- Mikio Kumada, a Hong Kong-based global strategist for LGT Capital Partners, talks about Bank of Japan monetary policy, the yen, and his investment strategy. Japan’s consumer prices fell at a faster pace in March, underscoring the challenge facing BOJ Governor Haruhiko Kuroda as he works to meet a 2 percent inflation target within two years. Kumada speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
April 26 (Bloomberg) -- May Yan, a Hong Kong-based analyst at Barclays Plc, talks about the outlook for the China's banking industry. She speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
April 26 (Bloomberg) -- Yujiro Goto, a foreign-exchange strategist in New York at Nomura Holdings Inc., talks about Bank of Japan monetary policy and the outlook for the yen. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
April 26 (Bloomberg) -- Jacob Frenkel, chairman of JPMorgan Chase International, talks about Japan's economy and central bank monetary policy, shadow banking in China and the outlook for Europe. He spoke with Bloomberg Television's Stephen Engle in Beijing yesterday. (Source: Bloomberg)
The BOJ did not outline any additional measures to meet inflation targets following the central bank’s first meeting since announcing unprecedented monetary easing this month. Data today may show the U.S. economy grew 3 percent in the first quarter amid speculation the European Central Bank will cutinterest rates next month. Some 54 percent of Stoxx Europe 600 Index companies reported quarterly profit that missed analyst estimates, data compiled by Bloomberg show.
“Equities can go higher, but it’s not without risk because earnings aren’t really justifying prices moving higher,” said Tim Schroeders, a portfolio manager who helps manage $1 billion in equities at Pengana Capital Ltd. in Melbourne. “Policy settings are very accommodative. The question remains globally in terms of how effective that policy is.”

European Stocks

The Stoxx Europe 600 Index advanced 0.8 percent yesterday, rising a fifth day in their longest rally this year. Spain’s government will present budget plans today, while the ECB will publish data showing how much money savers withdrew from the euro region’s banks after a botched attempt to tax Cypriot savers as part of a European Union-led bailout.
About three stocks declined for every two that rose in the MSCI Asia Pacific Index. Bank of China, which reported record quarterly profit, gained 1.4 percent in Hong Kong, where theHang Seng Index (HSI) climbed 0.9 percent. Japan Tobacco, the world’s best-performing cigarette maker this year, surged 2.7 percent after it forecast profit that beat analysts’ estimates.
Samsung Electronics Co. lost 0.5 percent, trimming its gain in the past year to 11 percent, even as it posted a record quarterly profit that topped analyst estimates on surging sales of Galaxy handsets. Investors may not buy on today’s news as the company already reported preliminary operating profit on April 5, said Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd.

Yen, Won

The yen rose against all 16 of its major counterparts as Bank of Japan Governor Haruhiko Kuroda and his fellow board members concluded their second policy meeting this month. The Japanese currency has strengthened 0.7 percent this week against the dollar.
New Zealand’s currency advanced 0.4 percent to 85.31 U.S. cents after the country’s trade surplus widened more than forecast.
China’s yuan was poised for its biggest weekly gain in six months after the central bank set a record reference rate for the currency amid signs capital inflows are gathering pace.
The yuan rose 0.25 percent this week to 6.1620 per dollar, according to the China Foreign Exchange Trade System. It gained 0.15 percent today and touched 6.1616, the strongest level since the government unified the official and market exchange rates at the end of 1993.

Gold Rebound

Gold for immediate delivery climbed 0.4 percent to $1,474.01 an ounce, taking its gain this week to 5 percent. The metal, rebounding after the worst slump in three decades, has surged 12 percent from a two-year low on April 16 as coin and jewelry demand expanded from the U.S. to China and India. Bullion is 5.6 percent below the close on April 11, the day before the rout began.
“Emerging-markets central banks’ growing appetite for gold is likely to help support prices,”James Steel, an analyst at HSBC Securities (USA) Inc., wrote in a note.
Copper futures in London dropped 0.7 percent to $7,127.25 a metric ton, reversing an earlier gain of as much as 1.1 percent.
To contact the reporters on this story: Pratish Narayanan in Mumbai at; Yoshiaki Nohara in Tokyo at
To contact the editor responsible for this story: Darren Boey at

Thursday, 25 April 2013

U.S. Stock Futures Rise; S&P 500 May Extend Two-Week High

By Sarah Jones - Apr 25, 2013 4:38 PM GMT+0400

U.S. stock futures rose, signaling the Standard & Poor’s 500 Index will extend a near two-week high, as companies from Cliffs Natural Resources Inc. to 3M Co. reported earnings that topped estimates and jobless claims fell.
Cliffs Natural soared 8.3 percent and Akamai (AKAM) Technologies Inc. rose 18 percent. 3M slid 3.8 percent as profit trailed estimates and the company cut its full-year forecast amid a slowing global economy. Qualcomm Inc. lost 4.8 percent after the biggest seller of semiconductors for mobile phones forecast profit that may miss some analysts’ projections.
April 25 (Bloomberg) -- Fewer Americans than forecast filed first-time claims for unemployment insurance payments last week, pointing to an improving labor market. Applications for jobless benefits decreased by 16,000 to 339,000 in the week ended April 20, the lowest since March 9, according to Labor Department data released today in Washington. Betty Liu and Michael McKee report on Bloomberg Television's "In the Loop." (Source: Bloomberg)
April 25 (Bloomberg) -- John Woods, a Hong Kong-based investment strategist for Asia Pacific at Citigroup Inc.’s private bank, talks about the U.S. economy and stock market. He also discusses the outlook for South Korea, Japan and China's economies and financial markets. He speaks with Susan Li and Rishaad Salamat on Bloomberg Television's "Asia Edge." (Source: Bloomberg)
Futures on the S&P 500 expiring in June advanced 0.5 percent to 1,581.7 at 8:37 a.m. in New York after the gauge closed at the highest level since April 12 yesterday. Contracts on the Dow Jones Industrial Average added 54 points, or 0.4 percent, to 14,669 today.
“The earnings season so far has been plagued by slow growth and a weak economy, but hopes of a second-half rebound continue to buoy the market,” said Nick Xanders, an equity strategist at BTIG Ltd. in London. “Everyone believes in the second half, plus you can’t get in the way of the central banks.”
Some 59 S&P 500 companies post earnings today. Of the those that have published results so far in this reporting season, 74 percent have exceeded analysts’ earnings estimates while 55 percent missed revenue projections, data compiled by Bloomberg show.

Earnings Season

Profit at S&P 500 companies dropped 1.1 percent in the first three months of the year, according to forecasts compiled by Bloomberg. That would mark the first year-over-year decrease since 2009.
Fewer Americans than forecast filed first-time claims for unemployment insurance payments last week, pointing to an improving labor market. Applications for jobless benefits decreased by 16,000 to 339,000 in the week ended April 20, the lowest since March 9, according to Labor Department data released today in Washington. Economists projected 350,000 claims, according to the median estimate in a Bloomberg survey.
In the U.K., the economy grew more than forecast in the first quarter, avoiding a triple-dip recession. Gross domestic product rose 0.3 percent in the period, the Office for National Statistics said , topping the average estimate of 37 economists in a Bloomberg survey for 0.1 percent growth.
Twenty-four of 40 economists surveyed by Bloomberg expect the European Central Bank to cut its benchmark interest rate by a quarter point to 0.5 percent next week.

Cliffs Natural

Cliffs Natural gained 8.3 percent to $19.73 after the company reported first-quarter net income of 66 cents a share, down from $2.63 a year earlier. Excluding a 6-cent tax benefit, per-share profit exceeded the 33-cent average of 18 estimates compiled by Bloomberg.
Akamai surged 18 percent to $42.65 after reporting first- quarter revenue and profit that topped estimates as Internet traffic accelerated faster than expected.
Biogen Idec Inc. added 3.7 percent to $213.80 after the fourth-largest U.S. biotechnology company by market value raised its full-year forecast as first-quarter net income increased on a tax benefit.
3M fell 3.8 percent to $103.80. The maker of products ranging from Scotch tape to dental braces said net income in the quarter was little changed at $1.13 billion, or $1.61 a share. The average of 15 estimates compiled by Bloomberg was $1.65 a share.
Qualcomm lost 4.8 percent to $62.80 after the company forecast fiscal third-quarter net income of 80 cents to 88 cents a share. Analysts on average had projected earnings of 87 cents, according to data compiled by Bloomberg.
Zynga Inc. sank 8.9 percent to $3.05 after the maker of online games also forecast sales that fell short of some projections.
Intuit Inc. slid 12 percent to $56.70 as the maker of tax and financial-planning software cut its earnings forecast. JPMorgan Chase & Co. downgraded the shares to neutral from overweight, the equivalent of a buy rating.
Boston Scientific Corp. fell 1.9 percent to $7.22. The maker of heart devices forecast second-quarter revenue of $1.80 billion at most, below the $1.81 billion estimated by analysts.
To contact the reporter on this story: Sarah Jones in London at
To contact the editors responsible for this story: Andrew Rummer at; Lynn Thomasson at