Friday, February 26, 2021

Weekly Commentary: Regime Change

Ten-year Treasury yields closed out a tumultuous week at 1.41% bps, pulling back after Thursday’s spike to a one-year high 1.61%. Ten-year Treasury yields are now up 49 bps from the start of the year and almost 100 bps (1 percentage point) off August 2020 lows. More dramatic, five-year yields jumped 16 bps this week to 0.73%.

Surging yields are a global phenomenon. Ten-year yields were up 12 bps in Canada (to 1.35%), 30 bps in Australia (1.90%), 28 bps in New Zealand (1.89%), five bps in Germany (-0.26%), and five bps in Japan (0.16%) - with Japanese JGB yields hitting a five-year-high.

“Periphery” bond markets were under intense pressure, Europe's and EM. Greek yields surged 22 bps to 1.11%, while Italian yields rose 14 bps to 0.76%. EM dollar bonds were bloodied. Yields were up 31 bps in Turkey (5.90%), 28 bps in the Philippines (5.90%), 25 bps in Peru (2.39%), 23 bps in Indonesia (2.57%), 16 bps in Qatar (2.14), 16 bps in Ukraine (6.95%), and 16 bps in Mexico (2.92%). Local currency bonds were walloped. Yields were up 125 bps in Lebanon, 31 bps in Brazil, 29 bps in Colombia, 27 bps in Romania, 19 bps in Poland, and 17 bps in Hungary.

Global bond markets have an inflation problem. The international central bank community has an inflation problem. Perhaps Treasuries and the Fed face the biggest challenge in managing around mounting inflationary risks.

The U.S., after all, is running unprecedented peacetime deficits, with a new $1.9 TN stimulus package scooting through Congress. This legislation will be followed by what is sure to be a major infrastructure program. There is literally colossal deficits and Treasury issuance as far as the eye can see.

February 23 – Bloomberg (Gerson Freitas Jr.): “Commodities rose to their highest in almost eight years amid booming investor appetite for everything from oil to corn. Hedge funds have piled into what’s become the biggest bullish wager on the asset class in at least a decade, a collective bet that government stimulus plus near-zero interest rates will fuel demand, generate inflation and further weaken the U.S. dollar as the economy rebounds from the pandemic. The Bloomberg Commodity Spot Index, which tracks price movements for 23 raw materials, rose 1.6% on Monday to its highest since March 2013. The gauge has already gained more than 60% since reaching a four-year low in March 2020.”

February 25 – Bloomberg (Vince Golle and Olivia Rockeman): “U.S. consumer prices are headed higher -– at least according to the people who set them. Corporate leaders are increasingly confident that they can charge more for their products without losing business. On recent earnings calls, plenty of executives said they boosted prices in response to the higher costs they’re having to pay. And many expect further increases, with economic growth speeding up and commodity prices showing no sign of coming off the boil. ‘There is a cost headwind and we continue thus far to be able to experience pretty positive ability to price,’ said Melinda Whittington, chief financial officer of La-Z-Boy…”

Inflationary pressures are mounting and broadening – food, energy, housing and beyond. There are worsening inflationary bottlenecks (i.e. semiconductors, global shipping, trucking, steel, myriad supply chains, and so on). And we’re in uncharted territory with respect to massive fiscal deficits, with another year of a $3.0 TN plus shortfall in the offing. Meanwhile, the Fed is trapped with rates at zero along with a $120 billion monthly QE operation.

I appreciated the Bloomberg headline (Mike Dolan): “Tantrum Without the Taper.” It’s a bond rout lacking even a hint of future QE tapering. Rather than sooth, the old dovish salve is starting to burn.

Senator Pat Toomey (Senate Banking Committee hearing: 2/23/21): “As you know, the TIPS 10-year Breakeven on inflation is now over 2%, up from six-tenths of 1%. My point is that, at some point, we’ve got too much liquidity going into the system. The economy is recovering very, very well. Problems are isolated and should be addressed narrowly. And I hope that $120 billion a month of bond buying doesn’t become a permanent situation. One of the things that I’m concerned about - I wonder if you could comment on: the risk that we would have an increase in inflation, an increase in bond yields that would correspond to that, but without being back at full employment. What would that imply -- which I think is a very plausible scenario for later this year. What does that imply for the bond-buying program?”

Fed Chairman Powell: “Well, so what we said about the bond-buying program is that it will continue at least at the current pace until we make substantial further progress toward our goals. And we’ve also said that as we monitor that progress, we’ll communicate well in advance of any actual purchases. And so, that’s what it will take for us to begin to moderate the level of purchases. It's substantial further progress toward our goals, which we haven’t really been making for the last three months. But expectations are that that will pick up as the pandemic subsides.”

Powell and fellow Fed officials have gone out of their way to offer markets strong assurances they will stick with ultra-loose policies - economic recovery or mounting inflation risk notwithstanding. A few notable headlines: “Powell Says Inflation Goal is Still Years Away;” “Fed Officials Shrug Off Rise in Longer-Term Yields;” “Bostic Says Economy Can Run ‘Pretty Hot’ Without Inflation Spike;” “Fed’s Williams Says He Expects Inflation to Remain Subdued…;” “Fed’s Bullard Says Rise in Yields ‘Probably a Good Sign;’” ”Fed’s George Says It’s Too Soon to Pull Back on Monetary Support for Economy;” “Clarida: Robust Demand Won’t Generate Sustained Price Pressures;’ and “Brainard Says Fed Won’t React to Transitory Inflation Pressures.”

Traditionally, such cavalier attitudes toward inflation risks would provoke a stern bond market rebuke. But since QE’s introduction, bond market fixation shifted to prospects for additional QE. And with consumer price inflation essentially a non-issue, market yields responded positively to any development that could possibly usher in additional central bank bond purchases (i.e. market Bubble Dynamics, heightened money market liquidity risk, economic vulnerability, global instability, pandemic risks, etc.). The Fed well-recognized the risk of rising market yields and an associated tightening of financial conditions ahead of waning QE support (“taper tantrums”).

Powell and Fed officials this week adhered closely to their seasoned playbook. Major development of the week: Treasuries and global bond markets puked on the same old dovish gruel. Perhaps it’s a little premature to declare the long-awaited Reincarnation of the Bond Market Vigilantes. Yet I would caution against dismissing this week’s upheaval in the face of commentary that would have previously stoked market exuberance. The times, they are a changin. Regime Change.

Not many weeks ago markets relished in ultra-loose monetary policies forever. Not only would the Fed be sticking with zero rates and QE for years to come, our central bank would clearly resort to yield curve control in the unlikely event of rising Treasury yields. The Reserve Bank of Australia Friday moved to “control” their yield spike with a $2.4 billion purchase program – with notably little effect.

How enormous would Fed Treasury purchases need to be at this point to place a ceiling on yields – especially with additional Trillions of supply in the pipeline? Furthermore, would such huge additional liquidity injections prove counter-productive in a backdrop of heightened inflation concerns?

Powell: “Inflation dynamics do change over time, but they don’t change on a dime. And so, we don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics.

Hope is not a strategy. We’re in a period of unmatched synchronized global monetary inflation. Short-term rates are near – or even below – zero internationally. Global “money” and Credit growth is unprecedented. Governments around the globe are locked in massive deficit spending. It is difficult to imagine global financial conditions being any looser.

In an environment of such extremes, it is imperative that central banks remain especially vigilant. But they aren’t because they can’t. Global central bankers are beholden to precarious market Bubbles. Policy tightening measures would incite a de-risking/deleveraging episode that would surely be quite challenging to control. After expanding its balance sheet by $3.4 TN over the past year – and stoking an epic mania and other Bubble excess in the process – how much additional QE would now be required to counter another major deleveraging episode?

Markets have just begun the process of coming to grips with a harsh reality: There are myriad historic speculative and Credit Bubbles, and central bankers are definitely not in control of the process. They have retained a semblance of control only through monstrous monetary inflation. And yet this week demonstrated it’s no longer so easy to manipulate market behavior with the usual pedestrian dovish comments. Markets now scoff at the notion of the Fed anchoring inflation expectations at a particular level. Moreover, even after Trillions of liquidity injections, central bankers are clearly not in command of marketplace liquidity. It is as if Fed credibility is evaporating right along with bond prices.

After beginning Thursday trading at 1.37%, 10-year Treasury yields were up to 1.45% in early afternoon trading. Then the results of a particularly poor (“disaster”) seven-year auction hit.

February 25 – Bloomberg (Elizabeth Stanton and Edward Bolingbroke): “Treasury’s $62b 7-year auction was awarded at 1.195% vs 1.151% when-issued yield…, the highest auction stop for the tenor since February… 39.8% primary dealer award was highest since September 2014 as indirect award slumped to 38.1%... Record low 2.04 bid-to-cover compares with 2.35 average for previous six auctions.”

In what must have sent chills from Wall Street to Washington – while swiftly radiating to London, Tokyo, Beijing and EM financial hubs around the world – the Treasury market briefly dislocated as yields spiked to 1.61%. Less than a month after a spectacular “meme stock” equity dislocation and near market accident, the behemoth Treasury market was revealed as anything but immune to “flash crash” dynamics and financial accident risk.

January’s equities upheaval left scars throughout the leveraged speculating community. In particular, losses were suffered in long/short and various “quant” strategies. This left many funds impaired by drawdowns (and prospective outflows) and the overall hedge fund industry with scaled down pain/risk tolerance. And while this doesn’t ensure a market drop, it does create vulnerability to commonplace market pullbacks escalating into a downside momentum dynamic. This week’s Treasury rout was a significant blow to many levered strategies, creating acute vulnerability to self-reinforcing “risk off” de-risking/deleveraging dynamics.

February 26 – Bloomberg (Justina Lee): “One of the ugliest things about this week’s selloff is that there are so few places to hide, and that’s bad news for a breed of quant which seeks to spread out risk across assets. So-called risk-parity strategies posted their worst day in four months on Thursday…, while the $1.2 billion RPAR Risk Parity ETF plunged the most since the depths of the Covid rout in March. The investing style made famous by Ray Dalio allocates money across assets based on their volatility, so can struggle when things go haywire together. Thursday saw the S&P 500 slump 2.5% as benchmark U.S. Treasuries tumbled, the latest in a series of co-movements that have taken the 60-day correlation between their futures to the highest since 2016.”

The leveraged “risk parity” strategies this week were an obvious area under pressure to de-lever with stocks, Treasuries, corporate Credit and the precious metals suffering simultaneous price declines. Yet there are scores of strategies and products that have for years benefited from the reliability of Treasuries as a hedge against weakness in the risk markets. Why de-risk or purchase derivative “insurance” when one can simply use levered Treasuries holdings to hedge market risks?

But with inflation risk an issue and Federal Reserve yield control impractical, the game has changed. With Treasuries no longer a reliable hedge, a key source of Treasury demand has waned – which was especially notable during this week’s bout of market instability. Indeed, the week likely saw significant de-risking/deleveraging in the Treasury market – helping explain poor demand for the seven-year auction, market liquidity challenges along with Thursday’s flash of “flash crash” vulnerability.

Asset Bubbles create their own liquidity abundance. Rising prices foster leveraged speculation, leveraging that bolsters marketplace liquidity while begetting self-reinforcing asset inflation, speculative leveraging and liquidity abundance. And when the Fed’s balance sheet expands $3.4 TN in a year and M2 inflates $4.0 TN (institutional money funds an additional $570bn!), markets will understandably envisage liquidity abundance as a virtually permanent condition.

This week provided a major wakeup call: despite the Trillions upon Trillions of “cash” on the sidelines – and the Fed’s $120 billion monthly “money” injections – markets are at heightened risk for a liquidity accident. The world is plagued by highly levered market Bubbles. Fueled by zero rates and the global QE bonanza, global bond prices became divorced from reality. Now bond prices are sinking, an innately problematic development for levered markets. It would appear a period of major de-risking/deleveraging has commenced, implying challenging market liquidity issues ahead.

I’ll add that it is in no way obvious how interest-rate hedging can be expected to function effectively in the current environment. Globally, tens of Trillions of bonds have been issued at artificially high prices (low yields). If a meaningful segment of the marketplace now moves to hedge interest-rate risk, who has the wherewithal to take the other side of the trade?

It will be necessary for those selling rate protection to short Treasuries or other debt securities to hedge their exposures. This would seem to ensure market liquidity issues and could portend more serious market dislocations than Thursday’s fleeting yield spike. It was a notably rough week for mortgage-backed securities, Eurodollars and other instruments in the belly of the interest-rate hedging beast. I do not envy those responsible for managing portfolios of interest-rate derivatives.

Representative Warren Davidson (House Financial Services Committee hearing: 2/24/21): “Chairman Powell, thank you for your time, and I want to commend the Federal Reserve for the work that was done at the end of March to provide the liquidity and stability to our economy, to deal with the massive surge in demand for U.S. dollars, and we’re just so grateful that the U.S. dollar has become the world’s reserve currency and in time of crisis not just Americans, but people all around the world, want our dollar. It is indeed a source of our strength as a country to have a strong dollar that has become the world’s reserve currency. It does great things for our capital markets and frankly helps enable the deficit spending that we continue to do, because we certainly haven’t saved for bad times. We’re able to navigate them because we still can borrow. I wonder, sir, do you have a definition of sound money?”

Fed Chairman Powell: “We target inflation that averages two percent over time. That is what we consider to be…”

Davidson: “Well, that's the policy, but I mean, when you think of sound money, what would you say constitutes sound money?”

Powell: “Where the public has confidence in the currency, which they do, which the world does. That’s really what it comes down to - that people believe that the United States currency is perfectly reliable and stable in value.”

Davidson: “Okay, so as a store of value. It clearly isn’t stable in value. It is not. What is a store value? The U.S. dollar really, is it diluted as a store value when M2 goes up by more than 25% in one year? Does the printing of more U.S. dollars somehow diminish the value of the dollars that others hold?”

Powell: “You know there was a time when monetary aggregates were important determinants of inflation and that has not been the case for a long time. So you’ll see if you look back, the correlation between movements in different aggregates - you mentioned M2 - and inflation is just very, very low, and you see that now where inflation is at 1.4% for this year…”

Davidson: “Yeah, you keep using that, you keep using it to talk about inflation. And I don’t think that’s the only proxy for whether the dollar is a store value and an efficient means of exchange. It is clearly still the world’s reserve currency, but we’re putting it under a pretty big stress test by diluting the value of the dollar. And I think one of the indicators of that is when the U.S. government issues debt for all this spending that we’ve done as a country, it isn’t really funded, is it? There’s not a true market demand for this much debt. It’s not being lent. When there’s borrowing there’s actually a lender. How much has the Federal Reserve had to purchase to bridge the gap between market demand for Treasuries and the actual need to finance the spending?”

Powell: “That’s not at all what’s happening. We don’t have to purchase any of this. We purchased it because it is providing accommodative financial conditions and supporting the economy in keeping with our mandate. There’s plenty of demand for U.S. Treasury paper around the world.”

Davidson: “So, all of it would sell – you’re competing, so are you bidding up the price then? Is it your contention that you’re inflating asset prices by increasing this purchase?”

Powell: “No. I think that we could sell all of our debt. The reason we do it - by the way, we issue debt - we issue United States obligations in the form of reserves when we buy Treasuries, so we’re not actually changing the amount of obligations outstanding on the part of the Treasury -- what we’re doing is we’re substituting an overnight reserve for a Treasury bill. It has no effect on the overall outstanding obligations to the United States when we do that.”

Davidson: “Right. So, the growth of the Federal Reserve’s balance sheet - you don’t think that has anything to do with the disconnect between Wall Street and Main Street? Let’s just take as an example the confidence people have expressed in bitcoin and other cryptocurrencies and you know well-respected proven investors like Ray Dalio - who said ‘cash is trash’ – isn’t it because the U.S. dollar is being destroyed by fiscal and monetary policy?”

Powell: “It's hard to say that it’s being destroyed. Another way to look at the dollar, you mentioned the dollar, you can ask domestically what can it purchase and that’s a question of inflation. You can also look at it in terms of a basket of other currencies and…”

Davidson: “I understand, but if you look at it, if you look at it, sir… the key to this is the Fed has done a horrible job at predicting asset Bubbles. They have. And if the pensions are going up because the market prices are going up, people with marketable securities have their basket of wealth going up and wages aren’t. Teachers, for example, they have a great pension but their current consumption isn’t going up. So, CPI lags what’s going on in the investment. I think it’s a big concern and I would just implore you and the other members of the Fed to pay attention to monetary inflation, not just price inflation.”

Noland comment: It is a disturbing flaw in Powell’s (and conventional) thinking to equate sound money to relatively contained consumer price inflation. After all, asset inflation and Bubbles are this era’s greatest threats to monetary stability and sound money more generally. Unfettered “money” and Credit is the root cause. Massive monetary inflation and fiscal deficits are categorically incompatible with sound money. And unsound money is incompatible with social and political stability.

Inequality, speculative Bubbles and manias, resource misallocation, wealth redistribution and destruction, and deep economic structural impairment are all consequences of years of unsound money. And it’s back to this fundamental flaw I’ve been railing against for too long: it is impossible to resolve Monetary Disorder and the fallout from unsound money through additional monetary inflation. It’s destined for catastrophic failure, and it was another week when inklings of a failing system were observable to those with discerning eyes.

It may be archaic and relegated to the dustbin of history. But one cannot overstate the peril associated with entrenched unsound money. An insidious corruption of price mechanisms over time jeopardizes the very foundation of Capitalism. And as Capitalism decays Democracy flounders. Society frays, while insecurity, animosity, anxiety, and the forces of distrust are left to fill the void. And as we continue to witness, the consequences of unsound money incite only more perilous inflationism.

For the Week:

The S&P500 dropped 2.4% (up 1.5% y-t-d), and the Dow fell 1.8% (up 1.1%). The Utilities sank 5.0% (down 7.3%). The Banks declined 0.5% (up 15.8%), and the Broker/Dealers fell 2.4% (up 13.8%). The Transports added 0.4% (up 6.6%). The S&P 400 Midcaps declined 1.5% (up 8.2%), and the small cap Russell 2000 dropped 2.9% (up 11.5%). The Nasdaq100 sank 4.9% (up 0.2%). The Semiconductors lost 4.8% (up 9.7%). The Biotechs dropped 4.9% (up 0.1%). With bullion falling $50, the HUI gold index sank 5.1% (down 16.5%).

Three-month Treasury bill rates ended the week at 0.0325%. Two-year government yields increased two bps to 0.13% (up 1bp y-t-d). Five-year T-note yields surged 16 bps to 0.73% (up 37bps). Ten-year Treasury yields gained seven bps to 1.41% (up 49bps). Long bond yields added two bps to 2.15% (up 51bps). Benchmark Fannie Mae MBS yields jumped 11 bps to 1.84% (up 50bps).

Greek 10-year yields surged 22 bps to 1.11% (up 49bps y-t-d). Ten-year Portuguese yields gained six bps to 0.32% (up 29bps). Italian 10-year yields jumped 14 bps to 0.76% (up 22bps). Spain's 10-year yields rose seven bps to 0.42% (up 38bps). German bund yields gained five bps to negative 0.26% (up 31bps). French yields increased five bps to negative 0.01% (up 22bps). The French to German 10-year bond spread was unchanged at 25 bps. U.K. 10-year gilt yields rose 12 bps to 0.82% (up 62bps). U.K.'s FTSE equities index fell 2.1% (up 0.4% y-t-d).

Japan's Nikkei Equities Index dropped 3.5% (up 5.5% y-t-d). Japanese 10-year "JGB" yields surged five bps to 0.16% (up 14bps y-t-d). France's CAC40 declined 1.2% (up 2.7%). The German DAX equities index fell 1.5% (up 0.5%). Spain's IBEX 35 equities index gained 0.9% (up 1.9%). Italy's FTSE MIB index fell 1.2% (up 2.8%). EM equities were under pressure. Brazil's Bovespa index sank 7.1% (down 7.5%), and Mexico's Bolsa declined 0.7% (up 1.2%). South Korea's Kospi index dropped 3.0% (up 4.9%). India's Sensex equities index fell 3.5% (up 2.8%). China's Shanghai Exchange sank 5.1% (up 1.0%). Turkey's Borsa Istanbul National 100 index was slammed 5.7% (down 0.4%). Russia's MICEX equities index dropped 3.2% (up 1.8%).

Investment-grade bond funds saw inflows of $4.218 billion, while junk bond funds posted outflows of $2.217 billion (from Lipper).

Federal Reserve Credit last week rose $39.0bn to a record $7.551 TN. Over the past year, Fed Credit expanded $3.432 TN, or 83.3%. Fed Credit inflated $4.740 Trillion, or 169%, over the past 433 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week fell $2.9bn to $3.547 TN. "Custody holdings" were up $86.5bn, or 2.5%, y-o-y.

Total money market fund assets gained $10.9bn to $4.344 TN. Total money funds surged $710bn y-o-y, or 19.5%.

Total Commercial Paper jumped $13.9bn to $1.089 TN. CP was down $39bn, or 3.5%, year-over-year.

Freddie Mac 30-year fixed mortgage rates surged 16 bps to a six-month high 2.97% (down 48bps y-o-y). Fifteen-year rates rose 13 bps to 2.34% (down 61bps). Five-year hybrid ARM rates spiked 22 bps higher to 2.99% (down 21bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 17 bps to 3.18% (down 52bps).

Currency Watch:

For the week, the U.S. dollar index increased 0.6% to 90.913 (up 1.1% y-t-d). For the week on the downside, the Brazilian real declined 3.9%, the South African rand 2.8%, the Norwegian krone 2.3%, the Australian dollar 2.1%, the Mexican peso 2.1%, the Swedish krona 1.9%, the South Korean won 1.6%, the Swiss franc 1.3%, the Japanese yen 1.1%, the Canadian dollar 1.0%, the New Zealand dollar 0.9%, the Singapore dollar 0.7%, the British pound 0.6%, and the euro 0.4%. The Chinese renminbi declined 0.33% versus the dollar this week (up 0.75% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index was little changed (up 9.3% y-t-d). Spot Gold dropped 2.8% to $1,735 (down 8.6%). Silver fell 2.4% to $26.637 (up 0.9%). WTI crude gained $2.32 to $61.56 (up 27%). Gasoline rose 3.9% (up 33%), while Natural Gas sank 9.8% (up 9%). Copper added 0.5% (up 16%). Wheat increased 0.7% (3%). Corn gained 1.3% (up 13%). Bitcoin sank $9,125, or 16.4%, this week to $46,504 (up 60%).

Coronavirus Watch:

February 22 – Associated Press (Adam Geller): “In recent weeks, virus deaths have fallen from more than 4,000 reported on some days in January to an average of fewer than 1,900 per day. Still, at half a million, the toll recorded by Johns Hopkins University is already greater than the population of Miami or Kansas City, Missouri. It is roughly equal to the number of Americans killed in World War II, the Korean War and the Vietnam War combined. It is akin to a 9/11 every day for nearly six months. ‘The people we lost were extraordinary’ President Joe Biden said Monday, urging Americans to remember the individual lives claimed by the virus, rather than be numbed by the enormity of the toll.”

February 24 – CNBC (Noah Higgins-Dunn): “New, highly transmissible Covid-19 variants ‘stand to reverse’ the nation’s control of the pandemic and could ‘undermine all of our efforts’ against the disease if the virus is left to proliferate in different parts of the globe, the head of the U.S. Centers for Disease Control and Prevention said…”

February 23 – Los Angeles Times (Melissa Healy): “A coronavirus variant that probably emerged in May and surged to become the dominant strain in California not only spreads more readily than its predecessors but also evades antibodies generated by COVID-19 vaccines or prior infection and is associated with severe illness and death, researchers said. In a study that helps explain the state’s dramatic holiday surge in COVID-19 cases and deaths — and portends further trouble ahead — scientists at UC San Francisco said the cluster of mutations that characterizes the homegrown strain should mark it as a ‘variant of concern’ on par with those from the United Kingdom, South Africa and Brazil… ‘The devil is already here,’ said Chiu, who led a team of geneticists, epidemiologists, statisticians and other scientists in a wide-ranging analysis of the new variant, which they call B.1.427/B.1.429. ‘I wish it were different. But the science is the science.’”

Market Mania Watch:

February 20 – Bloomberg (Lu Wang): “The American love affair with stocks is deepening as everyone from frenetic day-traders to staid institutions dive further into the market. Equity funds are drawing fresh money at an unprecedented pace and hedge funds are boosting their stock exposure to a record. Companies themselves are re-emerging as big buyers, with share repurchases doubling from a year ago… While aspects of the craze -- the growing obsession with penny stocks and options, primarily -- are the basis for daily warnings about a bubble, bulled-up positioning is proving a sturdy backbone for the rally. Up 75% from March, the S&P 500’s gain dwarfs all previous bull markets at this stage of the cycle since the 1930s.”

February 22 – Wall Street Journal (Marco Quiroz-Gutierrez): “Shares of small companies are outpacing their larger counterparts by the widest margin in more than two decades. Behind their rise: confidence among investors that heavy stimulus and coronavirus vaccine deployment will boost the economy. Through Friday, the Russell 2000 index of small companies had climbed 15% and set 10 closing records so far this year, well above the S&P 500’s 4% rise. That is the largest such gap between the two indexes through Feb. 19 since 2000… Over the past six months, they are beating the S&P 500 by about 30 percentage points…”

February 19 – Financial Times (Billy Nauman): “As the enthusiasm for climate-friendly investing hits fever pitch, analysts warn that investors are pumping cash into anything that looks ‘green’ — sending valuations of eco-friendly companies into the stratosphere and fanning fears of a bubble. Larry Fink, chief executive of the world’s biggest asset manager, BlackRock, said last month that the market is undergoing a ‘tectonic shift’ towards sustainable investments. Global funds linked to environmental, social and governance principles took in nearly $350bn last year, compared with $165bn in 2019… I think we’re 100% in a green bubble,’ said Gordon Johnson, chief executive of GLJ Research. ‘Pretty much every solar company I cover, their numbers got worse and the stock, like, tripled . . . This is not normal.’”

February 22 – Bloomberg (Drew Singer): “Special purpose acquisition companies are entering the most bullish stage of their lifecycle in record numbers this month. A surge of mergers by these firms is creating an unprecedented number of buying opportunities amid stagnation in the broader market. The number of acquisitions announced by SPACs has spiked to 48 so far in February, the most since at least 2008 and nearly doubling the prior high of 26 in October…”

February 24 – CNBC (Yun Li): “Charlie Munger… issued a dire warning on the manic momentum-driven trading activity by amateur investors and said commission-free trading apps like Robinhood were partly to blame for the bubble. ‘It’s most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robinhood and I think all of this activity is regrettable,’ Munger said…”

Market Instability Watch:

February 25 – Bloomberg (Christopher Maloney and Liz Capo McCormick): “There comes a point in any big selloff in Treasury bonds when the move becomes so pronounced that it starts to feed on itself. Increases in yields force a crucial group of investors to sell Treasuries, which in turn leads to further increases in yields. Two months into this rout, that moment appears to have arrived, and it’s beginning to send shudders throughout all corners of U.S. financial markets. The forced sellers are investors in the $7 trillion mortgage-backed bond market. Their problem is that when Treasury yields… suddenly rise sharply, many Americans lose interest in refinancing their old mortgages. A reduced stream of refinancings means mortgage-bond investors are left waiting for longer to collect payments on their investments. The longer the wait, the more financial pain they feel as they watch market rates climb higher without being able to take advantage of them.”

February 24 – Financial Times (Robin Wigglesworth): “The global government bond sell-off deepened on Wednesday, with the 10-year US Treasury yield jumping above 1.4% for the first time since the start of the coronavirus crisis. European government bonds were also caught-up in Wednesday’s selling, sending yields on British, French, German and Italian bonds rising. The drop in prices is the latest leg of a broad shift away from government debt that has been driven by a more upbeat global economic outlook and rising concerns over inflation… The global bond market is suffering its worst start to a year since 2015…”

February 22 – Bloomberg (Katie Greifeld): “Exchange-traded funds across the bond spectrum are bleeding assets as investors brace for higher inflation. The $46 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) has lost $7.4 billion in six weeks -- its worst-ever stretch of outflows… Short interest as a percentage of shares outstanding on the $14 billion iShares 20+ Year Treasury Bond ETF (TLT) is at a three-year high… Over $1 billion was pulled from the $10 billion SPDR Bloomberg Barclays High Yield Bond ETF (JNK) in the biggest weekly exodus since last February.”

February 22 – Bloomberg (Vivien Lou Chen and William Shaw): “A wave of reflation bets sweeping across global markets is prompting traders to brace for an end to the low interest-rate regime earlier than expected. The ramp-up in inflation expectations intensified a selloff in Treasuries sending the gap between the 5- and 30-year yields to the widest since October 2014 and bringing forward expectations for U.S. rate hikes to as early as mid-2023.”

February 22 – Bloomberg (Lisa Lee and Paula Seligson): “From money managers at BlackRock and T. Rowe Price, to analysts at Goldman Sachs, to the credit shops run by Blackstone and KKR, a new economic reality is prompting Wall Street’s most powerful forces to adjust their investment strategies. The rise in inflation set to accompany the post-pandemic economic boom is threatening to reverse the four-decade decline in U.S. interest rates, sparking a rush to protect the value of trillions of dollars of debt-market investments.”

February 23 – Bloomberg (John Authers): “If capital markets can be likened to spoiled and obstreperous toddlers — and they can — then the job of the central banker is to be the harassed parent. As a parent, you have to inculcate sufficient discipline while also making sure that the youngsters can stand on their own two feet… The next episode of difficult parenting is upon us. Bond yields have shot up (from very low levels) across the world so far this year… Markets are looking for a parental response. Central banks have said they are going to leave rates lower for longer this time. Do they really mean it? If yields go up half a percentage point in short order (the monetary equivalent of threatening to scream until you’re sick), will central banks relent at the risk of an even bigger tantrum next time, or opt to draw the disciplinary line, and put up with the screaming?”

Inflation Watch:

February 22 – Wall Street Journal (Bob Tita and Austen Hufford): “U.S. manufacturers aced the shutdown of their factories and warehouses last spring in response to Covid-19. They’re botching the recovery. After carrying out an orderly retreat from assembly lines as the pandemic arrived in the U.S., many manufacturers pulled out the playbook they followed in past recessions, cutting costs and preserving cash. That left them unprepared for the sharp rebound in consumer demand that began just weeks later and never let up. Without restaurants to visit and trips to take, Americans bought out stocks of cars, appliances, furniture and power tools. Manufacturers have been trying to catch up ever since. Nearly a year since initial coronavirus lockdowns in the U.S., barbells, kitchen mixers, mattresses and webcams are still hard to find. A global shortage of semiconductors has forced many car makers to cut production in recent weeks.”

February 23 – Reuters (Rajesh Kumar Singh): “An aerospace parts maker in California is struggling to procure cold-rolled steel, while an auto and appliance parts manufacturer in Indiana is unable to secure additional supplies of hot-rolled steel from mills. Both companies and more are getting hit by a fresh round of disruption in the U.S. steel industry. Steel is in short supply in the United States and prices are surging. Unfilled orders for steel in the last quarter were at the highest level in five years, while inventories were near a 3-1/2-year low... The benchmark price for hot-rolled steel hit $1,176/ton this month, its highest level in at least 13 years. Soaring prices are driving up costs and squeezing profits at steel-consuming manufacturers, provoking a new round of calls to end former President Donald Trump’s steel tariffs. ‘Our members have been reporting that they have never seen such chaos in the steel market,’ said Paul Nathanson, executive director at Coalition of American Metal Manufacturers and Users.”

February 24 – Financial Times (Aime Williams and Claire Bushey): “What started out as ‘temporary’ lay-offs earlier this month at General Motors’ plant in Kansas City soon became ‘indefinite’. Across town, Ford slowed down production of its F150 pick-up truck, the company’s cash cow, and did the same at another facility in Michigan. The carmakers were responding to a crippling shortage of the indispensable chips that are used to build modern vehicles, for everything from automatic braking systems to airbags and electronically adjusted seats. The shortages have shone a light on a cyclical corner of the electronics industry where there is often too much or too little supply, a problem that has been exacerbated by unpredictable demand for semiconductors during the coronavirus pandemic.”

February 22 – Bloomberg: “Copper rose above $9,000 a metric ton for the first time in nine years, taking another step closer to an all-time high set in 2011 as investors bet that supply tightness will increase as the world recovers from the pandemic. Copper is surging amid a broad rally in commodities from iron ore to nickel, while oil has gained more than 20% this year.”

February 23 – Reuters (Lisa Baertlein): “As Home Depot heads into its busy spring project season - when shoppers build backyard decks and buy patio furniture - it is tangling with surging costs for goods and transportation, on top of tariffs that cost it and other U.S. importers billions of dollars. Across the United States, major retailers and makers of everything from Peloton spin bikes and La-Z-Boy recliners to Kia Sorrento SUVs are battling the same profit-squeezing pressures. They pass those costs along to home-bound consumers, who are snapping up expensive-to-ship items like appliances, furniture and exercise equipment. ‘As I think about all that’s going on now, I reflect back to the tariffs and... long for (when) that was our biggest issue,’ Home Depot President Edward Decker said…”

Biden Administration Watch:

February 22 – Bloomberg (Saleha Mohsin and Christopher Condon): “Treasury Secretary Janet Yellen said President Joe Biden favors boosting taxes on companies, and signaled openness to considering raising rates on capital gains, while steering clear of a wealth levy… The administration is looking to boost the corporate tax to 28%, Yellen said. The Treasury chief said last week that revenue measures would be needed to help pay for Biden’s planned longer-term economic reconstruction program to help address concerns about debt sustainability. Yellen also said that a hike in the capital-gains tax might be something ‘worth considering.’”

February 22 – Bloomberg (Rich Miller): “U.S. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell appear wary of signs of froth in financial markets, even as they press ahead with economic stimulus measures that are elevating the euphoria. There ‘may be sectors where we should be very careful,’ Yellen told CNBC…, when asked about possible speculative sizzle. The remarks came a day after publication of minutes of the Fed’s Jan. 26-27 policy meeting at which staff characterized the risks to financial stability as notable – an assessment Powell shares, according to a central bank official… The policy makers face a difficult dilemma. While they recognize that ultra-lax economic policies can fuel financial excesses, they believe the pandemic-damaged economy is in a deep hole and in need of substantial help.”

February 26 – CNBC (Jacob Pramuk): “Democrats cannot include a $15 per hour minimum wage in their $1.9 trillion coronavirus relief package, a Senate official ruled Thursday, derailing for now a party priority and a raise for millions of Americans. Nonpartisan Senate parliamentarian Elizabeth MacDonough determined lawmakers could not include the policy under budget reconciliation…”

February 22 – Bloomberg (Christopher Condon and Erik Wasson): “The next phase of President Joe Biden’s legislative agenda is fast taking shape, with an economic-recovery package that will potentially far surpass his $1.9 trillion virus-relief plan in size, complexity and overall ambition. The White House and congressional Democrats are busy plotting strategy for the proposal, which could be unveiled next month, kicking off a legislative process that may culminate by August. The centerpiece will be possibly the biggest infrastructure-spending commitment since the New Deal -- including roads, bridges and rural broadband internet. Progressives are eyeing much more, such as an expansion of Obamacare and a public-sector jobs program, along with tax measures including an increase in the capital-gains levy.”

February 26 – Wall Street Journal (John D. McKinnon): “The Biden administration plans to allow a sweeping Trump-era rule aimed at combating Chinese technology threats to take effect next month, over objections from U.S. businesses, according to people familiar with the matter. The rule, initially proposed in November, enables the Commerce Department to ban technology-related business transactions that it determines pose a national security threat, part of an effort to secure U.S. supply chains.”

February 22 – Bloomberg (Brian Eckhouse): “The millions of people who struggled to keep warm in Texas, with blackouts crippling life inside a dominant energy hub, have laid bare the desperate state of U.S. electricity grids. To fix nationwide vulnerabilities, President Joe Biden will have to completely reimagine the American way of producing and transmitting electricity. Biden wants to overhaul the nation’s grids so they derive all electricity from carbon-free sources by 2035—a major step toward zeroing out net emissions of greenhouse gases by mid-century. Realizing that goal will require building billions of dollars worth of new transmission lines, a challenge that might prove just as difficult as getting his climate agenda through Congress.”

February 24 – Reuters (Nandita Bose and Steve Holland): “President Joe Biden will sign an executive order on Wednesday aimed at addressing a global semiconductor chip shortage that has forced U.S. automakers and other manufacturers to cut production and alarmed the White House and members of Congress, administration officials said… Administration officials said Biden’s executive order… will launch an immediate 100-day review of supply chains for four critical products: semiconductor chips, large-capacity batteries for electric vehicles, rare earth minerals and pharmaceuticals.”

February 22 – CNBC (Jeff Cox): “Treasury Secretary Janet Yellen issued a warning… about the dangers that bitcoin poses both to investors and the public… ‘I don’t think that bitcoin … is widely used as a transaction mechanism,’ she told CNBC’s Andrew Ross Sorkin… ‘To the extent it is used I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.’”

Federal Reserve Watch:

February 23 – Business Insider (William Horobin): “Additional fiscal stimulus is expected to lift inflation, but the quarter-century trend of weak price growth will likely remain intact, Federal Reserve Chair Jerome Powell said... With Democrats plowing forward with efforts to pass a $1.9 trillion stimulus plan, the focus has shifted from the package's elements to its effect on inflation… Inflation will likely be volatile as the economy rebounds and consumer spending bounces back, the chair said. Reopening-fueled price growth is ultimately ‘a good problem to have,’ but it won’t derail the dynamics that drove decades of weak inflation, he added. ‘Inflation dynamics do change over time, but they don’t change on a dime,’ Powell said. ‘We don’t see how a burst of fiscal support or spending, that doesn’t last for many years, would actually change those inflation dynamics.’”

February 24 – Reuters (Howard Schneider and Ann Saphir): “It may take more than three years to reach the Federal Reserve’s inflation goals, Fed Chair Jerome Powell told lawmakers…, a further signal the U.S. central bank plans to look beyond any post-pandemic spike in prices and leave interest rates unchanged for a long time to come. ‘We are just being honest about the challenge,’ Powell told the House of Representatives Financial Services Committee when asked about Fed projections that inflation will remain at or below the central bank’s 2% target through 2023. The Fed has said it will not raise interest rates until inflation has exceeded 2% and ‘we believe we can do it, we believe we will do it. It may take more than three years,’ Powell said.”

February 24 – Bloomberg (Craig Torres and Reade Pickert): “Federal Reserve Chair Jerome Powell emphasized his view that the economy has a long way to go in the recovery and signs of prices rising won’t necessarily lead to persistently high inflation. ‘Our policy is accommodative because unemployment is high and the labor market is far from maximum employment,’ he told the House Financial Services Committee… ‘It’s true that some asset prices are elevated by some measures.’ Powell pointed to the example of car prices rising because of a chip shortage and supply-chain constraints in the tech industry. ‘That doesn’t necessarily lead to inflation because inflation is a process that repeats itself year over year over year,’ he said, rather than a one-time surge.”

February 23 – Wall Street Journal (Paul Kiernan): “Federal Reserve Chairman Jerome Powell reaffirmed the central bank’s commitment to maintaining easy-money policies until the economy has recovered further from the effects of the coronavirus pandemic. ‘The economy is a long way from our employment and inflation goals,’ Mr. Powell said in testimony to the Senate Banking Committee, a statement he has repeated in recent weeks. The Fed will therefore continue to support the economy with near-zero interest rates and large-scale asset purchases until ‘substantial further progress has been made,’ a standard that Mr. Powell said ‘is likely to take some time’ to achieve.”

February 23 – Bloomberg (Rich Miller): “Federal Reserve Chairman Jerome Powell signaled that the central bank was nowhere close to pulling back on its support for the pandemic-damaged U.S. economy even as he voiced expectations for a return to more normal, improved activity later this year. ‘The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,’ he told the Senate Banking Committee… He also played down concerns of an inflationary outbreak from another big fiscal stimulus package or from an unleashing of pent-up demand as a growing number of Americans are vaccinated against the virus. And he called the recent run-up in bond yields that has unsettled the stock market ‘a statement of confidence’ in a robust economic outlook… ‘The chairman ‘gave absolutely no indication that the Fed is thinking about changing its very dovish policy stance,’ Cornerstone Macro analysts Roberto Perli and Benson Durham wrote…”

February 23 – CNBC (Jeff Cox): “Inflation and employment remain well below the Federal Reserve’s goals, meaning easy monetary policy is likely to stay in place, central bank Chairman Jerome Powell said… Despite a sharp rise this year in bond yields that has accompanied heightened concern over inflation, Powell said price pressures remain mostly muted and the economic outlook is still ‘highly uncertain.’ ‘The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,’ the Fed chief said… He added that the Fed is ‘committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.’”

February 25 – Reuters (Jonnelle Marte and Howard Schneider): “Federal Reserve policymakers are shrugging off the surge in longer-term U.S. government bond yields as a sign of growing optimism about the economy… And none of the officials so far are signaling an interest in lightening up on the U.S. central bank’s accommodative monetary policy stance… The 10-year yield has tripled since last August. ‘Much of this increase likely reflects growing optimism in the strength of the recovery and could be viewed as an encouraging sign of increasing growth expectations,’ Kansas City Fed President Esther George told farm executives…, adding to a chorus of similar remarks from other Fed officials in recent days.”

February 24 – Reuters (Jonnelle Marte): “The U.S. economy remains far from the Federal Reserve’s goals for employment and inflation and monetary policy will continue to provide support until further progress has been made in boosting inflation and improving the labor market for all workers, Fed Governor Lael Brainard said… ‘Today the economy remains far from our goals in terms of both employment and inflation, and it will take some time to achieve substantial further progress,’ she said… In a comprehensive speech that laid out the history of the Fed’s dual mandate and how the central bank’s assessment of those goals has evolved, Brainard said policymakers are looking beyond the headline unemployment rate when assessing the health of the labor market, which is recovering unevenly from the pandemic.”

February 24 – Bloomberg (Matthew Boesler): “‘You might see some transitory inflation, but that’s not the kind of inflation that monetary policy would react to,’ Fed Governor Lael Brainard says. ‘If we saw an unmooring of those inflationary expectations to the upside, that would be inconsistent with our framework,’ Brainard says.”

U.S. Bubble Watch:

February 26 – CNBC (Jeff Cox): “A fresh round of government stimulus checks sent personal income up to its biggest monthly gain since April 2020 though inflation remained tame… Personal income jumped 10% after 0.6% increase in December. That was even higher than the 9.5% Dow Jones estimate. The gain came from the issuance of $600 stimulus payments that Congress approved for millions of Americans, along with enhanced unemployment benefits. Consumers took those checks and spent them quickly, sending retail sales surging and pushing overall expenditures up 2.4% for the month…”

February 24 – CNBC (Diana Olick): “Higher mortgage rates and a winter weather disaster combined to weaken mortgage demand last week. Total mortgage application volume fell 11.4% compared with the previous week… ‘Mortgage rates have increased in six of the last eight weeks, with the benchmark 30-year fixed rate last week climbing above 3% to its highest level since September 2020,’ said Joel Kan, an MBA economist. ‘As a result of these higher rates, overall refinance activity fell to its lowest level since December 2020.’”

February 23 – Yahoo Finance (Amanda Fung): “Home price growth in the U.S. accelerated in the final month of 2020 — the fastest pace in eight years. The results top off what was a record year for the housing market despite the COVID-19 pandemic. Standard & Poor’s said… its S&P CoreLogic Case-Shiller national home price index posted a 10.4% annual gain in December, up from 9.5% in November — the fastest growth rate since 2013… ‘Home prices finished 2020 with double-digit gains. The trend of accelerating prices that began in June 2020 has now reached its seventh month,’ said Craig J. Lazzara, managing director… at S&P Dow Jones Indices… He noted that the December annual gain ranks within the top decile of all of its reports, which dates back more than 30 years. ‘The market’s strength continues to be broadly-based: 18 of the 19 cities for which we have December data rose, and 18 cities gained more in the 12 months ended in December than they had gained in the 12 months ended in November,’ Lazzara said.”

February 24 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes increased more than expected in January, boosted by historically low mortgage rates and an acute shortage of previously owned houses on the market. New home sales rose 4.3% to a seasonally adjusted annual rate of 923,000 units last month… December’s sales pace was revised higher to 885,000 units from the previously reported 842,000 units… New home sales surged 19.3% on a year-on-year basis in January.”

February 25 – Associated Press (Paul Wiseman): “Orders to U.S. factories for big-ticket goods shot up 3.4% in January, pulled up by surge in orders for civilian aircraft. A category that tracks business investment posted a more modest gain… Orders for goods meant to last at least three years have now risen nine straight months…”

February 23 – Reuters (Pete Schroeder): “U.S. bank profits fell 36.5% in 2020 from the prior year as banks set aside massive amounts to guard against potential losses, but the industry showed signs of strengthening in the fourth quarter as the economy begins to recover from the pandemic, a regulator reported… The industry posted $147.9 billion in profits in 2020, a sharp decline from record 2019 profits, according to the Federal Deposit Insurance Corporation. Bank profits rose 9.1% in the fourth quarter, however, to $59.9 billion compared with the previous year as firms shrank how much cash they set aside to guard against losses.”

February 22 – Dow Jones (Katherine Clarke and Cara Lombardo): “Three Manhattan listings -- a downtown penthouse asking $39.5 million, a sprawling co-op seeking $40 million and a pair of Upper West Side condos on the market for $25 million -- share one thing in common. Their sellers are among the top brass at Elliott Management, a hedge fund that announced last year it is moving its headquarters from New York City to Florida. Real-estate veterans and hedge-fund executives believe a seismic shift is under way, one that is moving vast amounts of Wall Street wealth from New York to South Florida.”

February 24 – Bloomberg (Todd Shields and Scott Moritz): “Verizon Communications Inc. committed $45 billion for 5G wireless airwaves in a government auction that attracted record bidding as the largest U.S. mobile carriers race to build faster networks. At $23 billion, AT&T Inc. was the second-highest bidder… Participants also included T-Mobile US Inc. and pay-TV providers such as Dish Network Corp., Comcast Corp. and Charter Communications Inc. Some have already tapped the debt market to help pay the tab. The auction started in December, and within days the tally exceeded analysts’ estimates of $47 billion before settling at $81.2 billion.”

February 22 – Bloomberg (Alexandre Tanzi): “U.S. college enrollment of first-time undergraduates declined at the fastest pace in decades last year, according to research… by the Federal Reserve Bank of St. Louis. …Freshman enrollment plunged 13.1% in the fall of 2020 and that college enrollment overall was down almost 3%. ‘This is especially noteworthy because, in a typical recession, enrollment tends to rise as job prospects… fall,’ wrote authors Oksana Leukhina and Devin Werner. Perceived benefits from the ‘hallowed college experience’ and the perceived decline in value as classes moved on-line pushed attendance lower, the researchers said.”

February 25 – CNBC (Robert Frank): “More and more wealthy art collectors are cashing in on low interest rates to borrow against their Picassos and Basquiats, adding to risks of a leveraged boom and bust in the art market. The Fine Art Group, an art advisory and finance firm, said loan requests surged by 30% in 2020 compared with 2019 as collectors sought to borrow against their collections to invest in more art or other businesses. Bank of America, a leading art lender, saw its art loan business surge 30% last year, while JPMorgan and Goldman Sachs also saw strong growth…”

February 24 – Bloomberg (Mike Dorning): “The Trump administration’s farm bailouts steered an expanding share of subsidy payments to the nation’s biggest farms, according to an analysis by an environmental advocacy group… Just 1% of farm aid recipients collected 23% of subsidy payments in 2019, up from 17% in 2016, as former President Donald Trump’s trade bailout swelled payments to farmers. Their portion crept up to 24% in the first half of 2020, the most recent period covered in the data…”

Fixed Income Watch:

February 25 – Bloomberg (Jesse Hamilton): “The Federal Reserve and other bank regulators are flashing a new warning sign for the U.S. economy: Businesses ravaged by Covid-19 are sitting on $1 trillion of debt and a high percentage of it is at risk of going bust. Watchdogs flagged 29.2% of complex corporate lending as troubled in 2020, up from 13.5% in 2019, according to a report released Thursday by the Fed and other agencies. Real estate, entertainment, transportation, oil and gas, and retail were cited as particular problem areas. A ‘disproportionate share’ of the riskiest loans were held by nonbanks, such as investment funds that engage in leveraged lending, insurers and pension funds, the regulators added.”

February 24 – Bloomberg (Katie Greifeld): “A breakneck selloff in the bond market left one of the biggest Treasury exchange-traded funds bleeding. The $14 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has plunged 11% this year as long-dated Treasury yields climbed, fueled by building wagers on a rebound in inflation. Investors have yanked over $3.2 billion from the fund so far in 2021, whittling TLT’s total assets to the lowest level since mid-2019…”

February 25 – Bloomberg (Allison McNeely): “Good news about vaccines and rallying financial markets suggest the end of the coronavirus pandemic is in sight, but the worst may still be to come for commercial properties. The coronavirus outbreak helped push about $146 billion of commercial real estate into distress, serious risk of bankruptcy or default at the end of last year, concentrated in hotels and retail, according to… Real Capital Analytics… Troubled borrowers secured breaks of six to 18 months on their debt last spring as the pandemic shut large of parts of the economy and revenue dried up. But nearly a year later, some lenders are running out of patience and don’t have the ability to keep extending credit.”

China Watch:

February 22 – Bloomberg: “China’s home-price growth accelerated in January as low inventory stoked a fear of missing out among buyers, even as authorities widened curbs. New home prices in 70 major cities, excluding state-subsidized housing, rose 0.28% last month from December, after climbing 0.12% in each of the previous two months… Values in the secondary market… gained 0.37%, the fastest in 18 months. Buyer enthusiasm has persisted in the face of stricter curbs imposed in some large cities last month, as available housing stock continued to fall.”

February 22 – Wall Street Journal (Xie Yu): “China’s banking regulator formalized rules that will force Ant Group Co. and other online lenders to have more skin in the game when they make loans with banks, dealing a blow to a burgeoning business that helped drive Chinese consumer spending in recent years. Starting in 2022, internet-lending platforms in the country will have to fund at least 30% of every loan they make jointly with commercial lenders… Individual banks will also be subject to new caps on how much they can lend together with online partners, according to regulations… by the China Banking and Insurance Regulatory Commission. Several analysts… said the rules are aimed at large technology companies including Ant and WeBank…”

February 23 – Bloomberg: “Chinese bondholders are gaining more power in the corporate restructuring process, underscoring a renewed push by authorities to reform the nation’s $5.2 trillion credit market. Following a slew of defaults late last year that rattled markets, disgruntled creditors have successfully pushed for borrower concessions that would have seemed out of reach in China only a year ago. They reversed a major automaker’s plan to make a profitable unit less accessible to bondholders, forced an energy producer to sweeten a debt swap offer and secured an unprecedented court ruling that required a construction company’s underwriter, rating firm and auditor to compensate individual bondholders.”

February 23 – Bloomberg (Adam Minter): “In December, China announced that it planned to inoculate 50 million people against Covid-19 by Feb. 11. Although it was an ambitious goal, it wasn’t outlandish for a country that seemed to have done better than most in bringing the pandemic under control. Yet vaccination turns out to be the one Covid benchmark where China has fared badly: As of Feb. 22, it had managed just 2.89 doses per 100 people (or 40.5 million shots)… By contrast, the U.S. has administered 19.33 doses for every 100 people (a world-beating 64.18 million). Manufacturing issues and vaccine export diplomacy have certainly played a role in this underperformance. But a far more important factor is longstanding Chinese concerns over vaccine safety and side-effects.”

Global Bubble Watch:

February 25 – Bloomberg (William Horobin): “Government borrowing from markets in the world’s richest economies surged by a record 60% in 2020, with an increasing reliance on short-term funding that intensifies refinancing risks, the Organization for Economic Cooperation and Development said. The jump is almost double that recorded in the 2008 financial crisis, and borrowing is expected to increase further still in 2021, albeit at a slower pace, to reach $19.1 trillion…”

February 25 – Wall Street Journal (Paul Hannon): “Rich countries’ governments borrowed $18 trillion from bond markets in 2020—more than ever before—but their borrowing costs hit a record low, due to a big rise in bond purchases by central banks, as well as a lack of concern about public debt levels among private investors. The jump in government bond sales during the first year of the coronavirus pandemic was almost twice that recorded when the global financial crisis struck… In contrast to the years that followed the collapse of Lehman Brothers in September 2008, there was no rise in bond yields in 2020, and governments faced a lower interest bill than they did before the financial crisis, the OECD said.”

February 24 – Bloomberg (Enda Curran, Matthew Boesler and John Ainger): “The unprecedented $9 trillion rescue mission by central banks to haul the world economy from its coronavirus recession is being tested as rising bond yields and inflation bets threaten their ability to keep borrowing costs down. While Federal Reserve Chairman Jerome Powell this week called the recent run-up in bond yields ‘a statement of confidence’ in the economic outlook, other counterparts are sounding less sanguine… European Central Bank President Christine Lagarde said… she and colleagues are ‘closely monitoring’ government debt yields. The Bank of Korea warned it’ll intervene in the market if borrowing costs jump, Australia’s central bank has been forced to resume buying bonds to enforce its yield target and the Reserve Bank of New Zealand… promised a prolonged period of stimulus even as the economic outlook there brightens.”

February 23 – Bloomberg (Faseeh Mangi): “China’s overseas energy financing dropped to the lowest level since 2008 after the pandemic hampered deal-making in developing nations. Financing for foreign energy projects, including power plants and mines, fell by 43% to $4.6 billion, according to Boston University’s Global Energy Finance Database… The impact of coronavirus added to a trend of dwindling project financing for the energy sector from President Xi Jinping’s Belt and Road Initiative. Infrastructure projects funded by China’s program in developing nations, such as Pakistan and Sri Lanka, have suffered issues including heavy debt loads.”

February 23 – Wall Street Journal (Jing Yang): “Thousands of miles from Wall Street, the boom in blank-check companies is taking hold in a region where major stock exchanges don’t let firms raise money for unspecified uses. In mainland China, Hong Kong and Singapore, investment firms controlled by tycoons and money managers have collectively raised billions of dollars on the New York Stock Exchange and Nasdaq Stock Market over the past year via special-purpose acquisition vehicles, showing how far-reaching the SPAC boom has been.”

Social, Political and Environmental Instability Watch:

February 22 – Reuters (Kanishka Singh): “Over 7.9 million people in Texas still had issues with their water supply as of Monday evening, authorities told Reuters, after a record-breaking freeze knocked out power stations last week.”

February 23 – Bloomberg (Mark Chediak, Naureen S. Malik and Josh Saul): “Now that the lights are back on in Texas, the state has to figure out who’s going to pay for the energy crisis that plunged millions into darkness last week. It will likely be ordinary Texans. The price tag so far: $50.6 billion, the cost of electricity sold from early Monday, when the blackouts began, to Friday morning, according to BloombergNEF estimates. That compares with $4.2 billion for the prior week. Some of those costs have already fallen onto consumers as electricity customers exposed to wholesale prices wracked up power bills as high as $8,000 last week. Other customers won’t know what they’re in for until they receive their gas and power bills at the end of the month.”

February 24 – Financial Times (Gregory Meyer and Justin Jacobs): “The Texas electricity crisis last week has morphed into a credit crisis in the state’s wholesale power market, where participants have begun defaulting on a portion of the $50bn in energy purchases made during record cold weather, according to… the grid operator. The Electric Reliability Council of Texas (Ercot)… said… it had tapped emergency funding to cover failed payments.”

February 23 – Wall Street Journal (Russell Gold and Katherine Blunt): “The Texas energy crisis is over, but the settling of the massive bills left behind has just begun. Residents, businesses and cities face soaring bills from the deep freeze that last week gripped the second most-populous U.S. state after California, sending electricity and natural gas prices skyrocketing and triggering blackouts that lasted in places for four days. Wholesale power prices on Texas’ main power grid hit the ceiling price of $9,000 per megawatt hour for parts of five straight days. That was exponentially higher than the average price, which was $21.18 per megawatt hour in 2020… Now power retailers and municipal utilities are trying to figure out how to pass on the billions of dollars in costs to customers, some of whom face bills in the thousands of dollars that may need to be stretched out over time.”

February 20 – Bloomberg (Rachel Morison): “Home heating systems shutting down. Hospitals facing water shortages. Oil refineries going offline. The freezing, snowy weather in Texas exposed how quickly an energy system can be brought down and how widespread the chaos can be. That raises questions about the vulnerability of power grids around the world just as more parts of our everyday lives electrify. Grid operators model the reliability of their systems to handle harsh weather, and climate change is triggering more of those events at both ends of the thermometer. Electrifying sectors such as transportation and heating is considered vital for reducing the emissions contributing to global warming, yet the grids may not be able to handle the load.”

Central Bank Watch:

February 22 – Bloomberg (Alexander Weber): “European Central Bank President Christine Lagarde said her institution is ‘closely monitoring’ the market for government bonds, in a sign that she might act to prevent rising yields undermining the economic recovery from the pandemic… ‘Sovereign yields are particularly important,’ Lagarde… ‘Banks use those yields as a reference when setting the price of their loans to households and firms,’ she said. ‘Accordingly, the ECB is closely monitoring the evolution of longer-term nominal bond yields.’”

February 25 – Financial Times (Martin Arnold): “The European Central Bank has indicated it will increase the pace of its emergency bond purchases to counter the recent sell-off in eurozone sovereign debt markets if borrowing costs for governments, companies and households continue to rise. Philip Lane, chief economist of the ECB, said… the central bank was ‘closely monitoring the evolution of longer-term nominal bond yields’ and its asset purchases ‘will be conducted to preserve favourable financing conditions over the pandemic period’.”

EM Watch:

February 26 – Bloomberg (Livia Yap and Lilian Karunungan): “Emerging markets are bracing for an exodus of funds as a surge in Treasury yields evokes memories of the taper tantrum of 2013. After rallying at the start of 2021, developing-nation assets have slumped during the past two days as U.S. Treasury yields jumped to the highest level in more than a year, sounding a warning about the outlook for interest rates and inflation. The MSCI Emerging Market Index of shares tumbled as much as 3% on Friday, while the South African rand and Mexican peso have both fallen nearly 3% from Wednesday’s close. Emerging-market assets are falling out of favor as expectations for tighter global monetary policy and a revival of inflation reduce the relative appeal of risk assets.”

February 22 – Bloomberg (Aline Oyamada): “The plunge in Brazilian markets Monday was unlike any the country has seen since the early days of the pandemic last year. Investors unloaded everything from state-run companies to bonds and the currency after President Jair Bolsonaro ousted the head of oil giant Petrobras, sparking worries of government meddling and a break with his administration’s market-friendly pledges. The real was among the worst performers in the world even after the central bank stepped in to prop it up. Stocks also lagged major peers, falling 4.9%, the most since April, and sovereign dollar bonds led losses among emerging markets. Petrobras shares tumbled 22%, the most in almost a year, leading state-controlled companies lower.”

February 23 – Wall Street Journal (Samantha Pearson and Luciana Magalhaes): “The financial future of Brazilian oil giant Petrobras hung in the balance Tuesday as its board moved forward with plans to approve President Jair Bolsonaro’s controversial appointment of an army general to the company’s helm in an apparent bid to force the firm to subsidize fuel prices. Mr. Bolsonaro’s nomination of Gen. Joaquim Silva e Luna, who served alongside him under Brazil’s 1964-85 dictatorship and has no experience in the oil industry, has roiled markets, wiping billions of dollars off Petrobras’s market value and raising fears about government meddling in the economy. The right-wing president’s intervention at Petrobras was widely seen among investors as a pivotal moment in his two-year-old administration, a sign that he was going to put politics above economics ahead of his 2022 re-election bid… ‘The government is stepping away from plans to implement structural reforms aimed at reducing mandatory government spending and liberalizing the economy,’ said analysts at Capital Economics… Political concerns are largely to blame for the underperformance of Brazil’s currency…”

February 22 – Bloomberg (Davison Santana): “Brazil’s market selloff put the central bank in a tough position and raised the stakes for its next policy meeting. The monetary authority’s independence will be put to the test after Jair Bolsonaro replaced Petrobras’ chief executive officer… While traders are increasing bets on a more aggressive rate hike in March, the government may pressure officials to keep rates low for longer as the economy struggles to rebound. ‘I think they have to deliver at least a 50 bps hike,’ said Gustavo Pessoa, partner and money manager at Legacy Capital in Sao Paulo. ‘Otherwise, the currency will depreciate much further.’”

February 24 – Bloomberg (Subhadip Sircar and Anirban Nag): “Bond traders are upsetting India’s efforts to pull the economy out of its worst recession since 1952. The government wants to sell a near record 12.1 trillion rupees ($167bn) of bonds in the next fiscal year to support its spending program. Such supply is putting pressure on yields to rise, along with a global selloff in bonds. Yet central bank officials are reluctant to let the 10-year yield increase because of its importance as a benchmark rate for borrowing. The result is failed bond auctions, repeated interventions by the central bank and a growing sense of frustration by officials and bond investors alike.”

Europe Watch:

February 25 – Reuters (Balazs Koranyi): “Lending to euro zone companies slowed last month as the flow of fresh credit came to a halt with the bloc back in recession and banks tightening access to credit, European Central Bank data showed… Lending to non-financial corporations in the 19-country euro area slowed to 7.0% in January from 7.1% month earlier, a relatively high level not far from a 10-year high of 7.4% hit in May.”

Japan Watch:

February 24 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said the central bank is already buying exchange-traded funds (ETF) flexibly, but will seek ways to make the programme more effective and sustainable in a scheduled review of its policy tools in March. Kuroda said the BOJ is mindful of the need to address the side-effects of its massive stimulus, adding that he was aware of criticism its ETF purchases were distorting stock prices… ‘We’re already buying ETFs in a nimble and flexible manner,’ Kuroda told parliament… ‘The BOJ’s various tools, including its ETF buying, will be the target of the March review,’ he said. ‘We’ll examine how our tools are affecting markets and look at what we can do better.’”

Leveraged Speculation Watch:

February 22 – CNBC (Robert Frank): “The 25 highest-paid hedge fund managers made a record $32 billion in 2020, up more than 50% over 2019, according to Institutional Investor’s Rich List. A total of 15 hedge fund managers made $1 billion or more, compared with only eight in 2019.”

Geopolitical Watch:

February 24 – Reuters (Yew Lun Tian): “The Chinese military criticised the United States on Thursday for undermining regional peace and stability after a U.S. Navy warship sailed through the Taiwan Strait a day earlier.”

February 24 – Reuters (Patricia Zengerle and Mark Hosenball): “U.S. President Joe Biden’s nominee to be director of the CIA, William Burns, told a Senate committee… he saw competition with China - and countering its ‘adversarial, predatory’ leadership - as the key to U.S. national security… Testifying to the Senate Intelligence Committee, Burns outlined his four top priorities – ‘people, partnerships, China and technology’ - if he is confirmed. ‘Out-competing China will be key to our national security in the days ahead,’ Burns said. He called China ‘a formidable, authoritarian adversary,’ that is strengthening its ability to steal intellectual property, repress its people, expand its reach and build influence within the United States.”

February 22 – CNBC (Evelyn Cheng): “China’s Foreign Minister Wang Yi… called on the new U.S. administration to stop the ‘suppression’ of Chinese technology companies, as he laid out conditions for U.S.-China cooperation going forward… China would like the U.S. to remove tariffs and sanctions on companies, and ‘abandon irrational suppression of China’s technological progress, so as to create necessary conditions for China-U.S. cooperation,’ Wang said…”

February 19 – Bloomberg: “China may ban the export of rare-earths refining technology to countries or companies it deems as a threat on state security concerns, according to a person familiar… The Chinese government is currently conducting a review of its rare-earths policy. Officials view the technology needed to refine and purify the raw materials as a more powerful weapon in protecting state interests than the actual minerals, and is looking at banning sales of the technology to some countries or companies, according to the person…”

February 26 – Associated Press (Eric Tucker and Aamer Madhani): “Saudi Arabia’s crown prince likely approved the killing of U.S.-based journalist Jamal Khashoggi inside the Saudi consulate in Istanbul, according to a newly declassified U.S. intelligence report released Friday that instantly ratcheted up pressure on the Biden administration to hold the kingdom accountable for a murder that drew worldwide outrage.”

Friday Evening Links

[Yahoo/Bloomberg] U.S. Tech Stocks Rebound as Global Bond Rout Eases: Markets Wrap

[Reuters] Treasuries - U.S. yields soften after vaulting to one-year highs; sentiment wary 

[Reuters] Globals stocks slide on inflation fears, dollar gains

[Yahoo/Bloomberg] ‘Dude, Get Back to Your Desk’: The Week That Roiled Bond Markets

[Reuters] House Democrats move closer to pushing through Biden's $1.9 trillion COVID plan

[Reuters] G20 promises no let-up in stimulus, sees tax deal by summer

[Reuters] Brazil's capital goes into lockdown to quell COVID-19 surge

[AP] US implicates Saudi crown prince in journalist’s killing

[WSJ] U.S. to Impose Sweeping Rule Aimed at China Technology Threats

[WSJ] SPAC Frenzy Emboldens Silicon Valley Startups to Forgo Venture Funding

[FT] Return of the bond vigilantes: will inflation fears spoil the post-pandemic party? 

[FT] Treasury yields fall after savage bond sell-off abates