US yields are taking a breather being little changed after a pretty persistent rise with 4 weeks of gains. A close in the 10 yr yield above 3.11% would put it at the highest since 2011. The rise in rates I guess wouldn’t matter that much if it wasn’t for all the debt out there (global debt is $247 Trillion, 318% of GDP), particularly on the corporate side. Total US business debt as a percent of GDP is at a record high in an expansion. The peak was in the economic trough in Q1 2009. There is a lot of cash on corporate balance sheets but most of that is at a select few technology companies. I read a stat on cnbc.com yesterday that of high yield companies, the cash to debt ratio closed 2017 at 12%, below the 14% level seen in 2008.
In a recent report McKinsey said “almost 40% of all non financial corporate bonds are now rated BBB” vs 22% in 1990 and 31% in 2000. According to PIMCO, “the net leverage ratio for BBB issuers rose from 1.7 in 2000 to 2.9 in 2017.” In the last cycle it was household debt that was the problem, this time around it’s on the corporate side, along with the government.
As expected, the Norwegian central bank joined the rate hike club with a 25 bps raise to .75%. It is their first interest rate increase since 2011 and they will likely do so again in Q1 2019.
In contrast, the Swiss National Bank remains trapped at -.75% with its policy as they left things unchanged. They remained obsessed with weakening the Swiss Franc. Switzerland will remain with NIRP even after the SNB raised its growth estimate for 2018 to 2.5-3% from 2% seen in June.
UK retail sales ex auto fuel rose .3% m/o/m in August, better than the estimate of down .2%. The ONS said sales were helped by household goods like electrical appliances and furniture. The pound is getting a lift in response and it’s at a 2 month high vs the US dollar and the US dollar index is quietly at the lowest level since late July. The recent dollar strength has really only been against EM. If the dollar can’t rally under the current circumstance of rising real rates with a central bank far ahead of others in their tightening cycle, I’m not sure what will get it to rally significantly against developed currencies.
Lastly, Shinzo Abe in Japan will get another 3 yr term as expected. After saying last week that the BoJ should not be easing forever, he said today that he will “leave monetary policy up to the Bank of Japan.” Yesterday the BoJ said they’ll keep easing but it’s obvious that a stealth taper has been going on. Yesterday Kuroda said “Whether it’s monetary easing or tightening, no one wants to continue it forever. It’s the same with central banks everywhere. They want to achieve their objectives as quickly as possible, and then start the normalization process.” The 10 yr JGB yield closed overnight at .12%, matching the highest level since early August. I expect this to eventual get to .20%, the upper end of the YCC range that the BoJ will tolerate. The 40 yr yield is just below the highest since January.