Are the US bond markets a dark, treacherous moat full of monsters waiting to eat unwary governments and investors?
Or should we not be taking notice of the gyrations in bond markets at all, rather, putting them down to the understandable nervousness about huge debt burdens around the world?
Whatever view we have of this almost mythical beat the recent very sharp rise in US bond yields has finally got the attention of stockmarket investors, triggering a reversal of sentiment after the mindless surge in optimism and share prices on Tuesday.
Wall Street saw a big 2% plus fall across the board Wednesday after yields on US 10 year bonds jumped a nasty 0.23% in a day’s trading: from 3.51% to a closing 3.74%. That was the highest for six months.
But Thursday saw more ‘good’ economic news and the market jumped more than 1%. 10 year bond yields traded around 3.64%.
The auction of 7 year bonds went off without a hitch, but oil prices jumped to well over $US64 a tonne after OPEC left its production quotas alone.
New orders for long-lasting manufactured (durable) goods saw their biggest gain in 16 months in April and fewer workers filed for new jobless benefits last week.
The US Commerce Department said new orders for durable goods rose 1.9% from March, the biggest advance since December 2007.
But, March orders were slashed, revised sharply lower, falling 2.1% instead of the previously reported 0.8% easing that was a bull point when released.
A separate report from the Labor Department showed initial claims for unemployed workers dropped by 13,000 to a seasonally adjusted 623,000 in the week ended May 23, falling for the second straight week.
But, the number of people remaining on benefits after their first week of benefits increased 110,000 to a higher-than-forecast 6.79 million in the week ended May 16.
And, in another report, the Commerce Department said sales of new single-family homes rose 0.3% to a 352,000 annual pace, from 351,000 in March.
That was greeted warmly by the markets, but new homes sales were still down 34% on April, 2008.
But there’s no sign of growth and the level of durable goods orders in April was actually near 13 year lows.
Ten year bond yields have jumped from 2.9% around a month ago as investors have increasingly fretted about the $US2 trillion of bond issues this year to fund the escalating US budget deficit.
The surge in long dated bond yields has started hitting mortgage lending, hurting the Fed’s moves to free up home lending.
Since the Fed started its quantitative easing policy, yields on 10 year bonds are up 1.2% on the lows they fell to after the announcement on March 18.
Long term bond yields in Germany, the UK and Australia have been rising as well: 10 year bond yields here traded close to 5.49%, the highest since early last October. The later eased to around 5.36%
Helping drive bond yields higher was dissatisfaction with the reception given to a huge $US35 billion auction of five year bonds: while well supported, the so-called covered ratio (which describes the level of interest) was lower for the five year bonds sold overnight than for the shorter term two year notes that went the day before.
That got some investors wondering if investors preferred to keep their holdings at the short end of the yield curve rather than go long.
Not even a report from ratings agency Moody’s that it was comfortable with America’s fiscal position, budget and debt situations, was enough to calm nerves among fretting bond market investors.
Short term yields remain low because the Federal Reserve is buying short dated bonds as part of its ‘quantitative easing’ policy designed to force lending to grow again.
But mortgage bond yield have spiked as the longer dated bond yields have risen, causing a fall off in mortgage applications as home loans cost more.
US analysts now expect longer dated yields to rise as the market prices in evidence of “green shoots” in the economy, the huge US debt burden, inflation and the $2 trillion of new bond issues this year (Inflation thought isn’t a risk, that’s red herring).
Rising unemployment and falling tax revenues in all levels of government are further adding to the concern about debt levels and deficits.
The auctioning of $US101 billion of new Treasury debt this week far exceeds the Fed’s buying of $US7.55 billion to keep yields lower.
The Fed plans to buy $US300 billion in Treasuries, the Treasury will issue $2 trillion (and has sold $US800 billion so far this year).
It’s an unequal task.
Complicating matters for the bond market is the looming losses from the almost certain bankruptcy for General Motors.
GM confirmed that bond holders nixed an offer from the company to trade $US27 billion of debt for equity stakes, making it much more likely that GM will declare bankruptcy.
That $US27 billion will be lost and will rattle the credit default swap market again and add to pressures on AIG, Citigroup and other weakened financiers.
There were reports overnight that the company will go into bankruptcy next Monday.
In banking the US Federal Deposit Insurance Corporation says its list of problem banks now numbered 305 at the end of March, up from 252 at the end of December.
Some of those banks on the list at the end of March have gone bust (more than a dozen). The 305 on the list was the highest since 1994.
But the flow of news from the housing sector shows the continuing problem.
Yes, sales of existing homes rose 2.9% in April from March, yes sales of new homes rose, but other fi
