US yields edge up as Greece funds at negative rates
Oct 10, 2019
–Rates backed up a bit more on Wednesday, as stocks firmed on renewed hopes of progress in US/China trade talks. Tens rose nearly 5 bps to 1.585% and EDU0 and EDZ0, the weakest ED contracts on the board, settled -7.5. The curve was a bit flatter. On Monday, the ten-year inflation indexed note had a yield of half a basis point. In the two sessions since then it leapt to a ‘real’ yield of 10 bps. EDZ9/EDH0 jumped 4 bps to -28.5 as Z9 is underpinned by expected near term rate cuts.
–News today includes CPI with yoy Core expected 2.4% (following weaker than expected Core PPI of 2.0% on Tuesday). Thirty year auction today as well. It’s worth noting that Greece just issued 10’s at 1.5%, a shade under the US rate, and issued 13 week bills at a slight negative yield. That makes perfect sense, right?
–Back in the financial crisis, when no one thought housing prices could ever fall, the issue was excessive debt, without much of an equity cushion. Short term rates were adjusting higher, making cash flows unambiguously negative. If, at that time, the Fed gave anybody with a mortgage a locked rate of, let’s say 1%, the negative asset spiral probably wouldn’t have occurred. Without interest carrying costs, perhaps rents and other income could have covered property taxes and maintenance. Of course, when lenders are private, they worry about things like resale value, and incomes (or at least they do now). Rates tend to be higher for borrowers who seem stretched.
–Currently we have a giant edifice of debt, both government and corporate, which doesn’t throw much off in terms of income. Short term yields are very close to long term, so there is little in the way of positive carry. The recent surge in repo is an indication that the private market is uncomfortable. So the Fed has stepped in to GUARANTEE cheap funding, and indicates that rates will become cheaper yet, rather than risk letting the market clear. That keeps the plates spinning, even in a world of extended valuations.
