From T.I.N.A (There is No Alternatives to risk assets) to T.A.R.A (There Are Reasonable Alternatives, i.e bonds)
Three years ago in August 2020, the S&P’s dividend yield (in red below) was 1.8%, almost 50 bps higher than the highest yield on the treasury curve. Every treasury note with a duration shorter than 5 years had a yield below 0.2% and the 1-month was almost ZERO. Fast forward to today and the S&P’s dividend yield of 1.55% is 260 bps lower than the lowest point on the treasury curve right now (the 10-year at 4.15%). And the 1-month T-bill yielding at 5.34% is 380 basis points higher than the S&P’s dividend yield. Source: Bespoke
The comeback of bond vigilantes: US 10y real rates have jumped to 1.77%, almost the highest level since 2009
Source: Bloomberg, HolgerZ
US Treasuries yields keep going up despite record INFLOWS. As shown by BofA, US Treasuries are on track for the largest inflow EVER ($127bn YTD is equivalent to $206bn annualized)
Yet, yields don’t fall as US 10-year hit 4.13% this week as inflation reports failed to reverse the trend. What will happen to yields if investors start to panic and dump their US Treasuries? Or should we on the contrary see the hefty yield paid by US Treasuries as a buffer which continues to attract yield chasers and thus prevent yields to rise too high and too quickly? Source: BofA
WeWork bonds yield almost 90%
When they mature in 2025, what will #wework do? Borrow again or sell its assets? tThere doesn't seem to be any 'soft landing' for US office space... Source: Joe Consorti, Bloomberg
The evolution of fixed income ETFs in one picture...
This chart really shows off how far things have come in 20 years and how far the ETF industry goes with an asset class. Source: Todd Sohn thru Eric Balchunas
Moody's has cut credit ratings of several small to mid-sized US banks on Monday
Moody's said it may downgrade some of the nation's biggest lenders, warning that the sector's credit strength will likely be tested by funding risks and weaker profitability. This does not come as a surprise to us as US banks are facing several headwinds at the time being: 1) Inverted yield curve and lower trading / M&A activity weighing on profitability; 2) Deteriorating loan book quality due to Commercial real estate exposure but also US consumers starting to being hit by rising debt costs (credit card, mortgages, etc.); 3) Deposits withdrawals. Source: reuters
Market-implied inflation expectations over the next 5-10 years have risen to the highest levels in more than a year
Traders are starting to game out a future with sustainably higher inflation and higher long-term bond yields. Source: Bloomberg, Lisa Abramowiz
Why is the German Yield Curve Sharply Steepening?
The German yield curve has experienced an impressive steepening of almost 60bps in just one month! This significant movement can be attributed to several key factors that are driving the shift: Fundamentals and Economic Outlook: One of the primary drivers behind this steepening is the market's reassessment of the potential avoidance of a recession. There's a positive repricing of economic fundamentals, suggesting improved prospects for growth and stability. Additionally, there's growing concern about structural inflation running higher than initially expected. Notably, the German 5-year breakeven rate has surged to 2.63%, reaching its highest level since 2009, which has translated into higher long-term yields. Front-End Yield Curve Repricing: The recent decisions made by the European Central Bank (ECB) have also played a role in the steepening. Firstly, the ECB chose to no longer remunerate the bank's minimum reserve held at the central bank. Additionally, today's surprise decision by the Bundesbank's Executive Board further impacted the market. The decision was to remunerate domestic government deposits held with the Bundesbank at 0%, starting from 1 October 2023. Both of these developments could potentially increase demand for German short-term papers. Source: Bloomberg.
