I’ll say again, the epic move in bonds is about to get tested

Hopefully the upcoming talks will result in something more than just ‘productive’ because ‘productive’ of course hasn’t gotten us anywhere. I know business and investors certainly don’t want another Lucy and Charlie Brown football thing here, especially during football season (Go Jets!). Again, unless there is notable compromise on both sides, with China accepting that all the tariffs won’t go away immediately and the US realizing that there is no chance the Chinese are codifying into law IP protection just as we wouldn’t put something in the US Constitution on the demand of a foreign nation, there will be no deal of substance.

I want to tie these talks and its outcome with the upcoming central bank meetings this week all in the context of the epic drop in global rates, particularly in August which I reiterate my belief that could have been a major blow off, at least for now.

If we can have a substantive deal, FINALLY, that would be great for business confidence and growth but we’d potentially see a sharp rise in rates. As for the center of bond yield madness, Europe, we now have 6 members that do not want more QE, while likely accepting another modest rate cut however ridiculous. If all we get is a 10 bps rate cut, along with tiering in order to mitigate the impact on banks, we could see a rather violent sell on the news in bonds.

In Japan, we saw yesterday the former head of Sumitomo bank said cutting rates again to further below zero would be “outrageous” and “meaningless.” He also said “Monetary policy isn’t a cure all economic remedy to start with, and the negative abstract nuance attached to the negative rate only discouraged consumer activity, outweighing the positive impact from lower interest rates.” This is after a BOJ member last week pushed back against more easing. The calls are getting more vocal.

Maybe, just maybe, Japanese and European bank stocks are sniffing this out because the indices for both are at 4 week highs. What a sharp selloff in global bonds, if it occurs, would do for the rest of the world’s stock markets I really don’t know but the potential money lost in fixed income, if I’m right, could be substantial in light of what is the biggest bubble the world has ever seen. I’m not trying to be hyperbolic here, I’m just pointing out that if there is something that would pop this it is the world’s central banks saying we can’t go anymore negative, after the moves in September, and we’re out of QE bullets. Yes, the Fed will still ease but stopping the negative rate madness and ending QE overseas will matter most right now.

The Riksbank, another that has experimented with negative rates, has been trying to get out from underneath it. They raised rates earlier this year to -.25% from -.50% and today said they still want to get back to at least zero and for sure does not want to cut rates. “Even though economic activity has slowed down a little faster than expected, resource utilization continues to be higher than normal and is helping inflation stay close to the target.” They are hoping to raise rates again by year end. In response, the Krona is rallying almost 1% for the 2nd day.

The Japanese 10 yr yield rose almost 2 bps to -.26%, the least negative in a few weeks, the German 10 yr yield is higher by 5 bps to -.62%, the least since mid August and the US 10 yr yield is back above 1.50%. The dollar is also weaker, particularly against the pound again. The pound I believe is still dirt cheap.

Now I want to emphasize that this bond selloff would happen in part to the endgame we are on the cusp of in terms of ECB and BOJ NIRP and massive QE policy and would have nothing to do with the economic data or what the Fed does. On the data, German factory orders in July was weaker than expected, falling 2.7% m/o/m, about double the estimate of a 1.4% drop. On a y/o/y basis, orders have fallen for 14 straight months. Most of the weakness was a drop in non Eurozone orders.