As we begin our discussion of the yield curve for sovereign debt, it is important to understand who actually owns US Treasury debt.
Of course, The US Federal Reserve owns the largest share of US Treasury debt outstanding, followed by China and Japan.
Following Japan, tiny Belgium and the even tinier Caribbean follow in 4th and 5th place. Belgium has become a financial center for Treasuries owned by other countries, or that it at least has become a transit point for them (for example, Euroclear).
Then there is the Caribbean (El Caribe). These are largely off-shore banks investing on behalf of American and foreign investors.
Now to the US sovereign yield curve, a measure of yield by maturity. It is currently upward sloping (longer maturity bonds and notes have higher yields than shorter maturity bills and notes).
The US (green) and the UK (blue) have the highest sovereign yields among a group from Europe and Japan. France (red) and Belgium (orange) have lower sovereign yields, followed by Germany (purple) and Japan (pink).
The relatively higher US Treasury yields has resulted in a relatively higher Fannie Mae current coupon for their mortgage-backed securities. The following chart is the spread of the Fannie Mae current coupon against the popular 10 year Treasury yield.
C’mon! Sing a-long! “Yo ho, yo ho, a pirate’s life for me!”
Over the past 3 months, the number of short positions on US Treasuries has grown with virtually no country going long. Australia is taking small long positions in US Treasuries.
According to Citi’s Amitabh Arora:
Flow Analysis: Over the last 3 months we have seen good appetite for European Government Bonds (EGBs), net buying of United States Treasuries (USTs), and flat demand for Japanese Government Bonds (JGBs). However, the buying of USTs hasn’t been in 10s where the main short is located. Hedge funds are accelerating their buying of EGBs (across the curve) and decreasing their selling of USTs. Real money has resumed their buying of USTs and has started to sell EGBs.
Futures Positioning in US. Since 2010, the CFTC has published a supplement to their weekly commitments of traders report specific to financial products. Asset managers are long, while dealers, hedge funds, and other buy side investors are short. Using alternative positioning indicators, we assess where we can give credence to the CFTC data, and where there is more to the picture than the CFTC data reveals.
The clearest position concentration is short USTs (Figure 1). As the grey shaded squares indicate, the short has increased materially over the last 3 months. Equally importantly, there is an absence of corresponding longs in any client group to balance these shorts. Together that points to the prospect of even lower UST yields.
With US inflation running at about 2%, the real yield on the US Treasury 10Y is about 0.33% or 33 basis points.
Fed Presidents Lockhart And Fisher were active personal asset traders in 2013. I wonder if they were big shorters?
At least Australia is showing “Lady Liberty” some affection.
Washington, D.C. – The Federal Housing Finance Agency (FHFA) today proposed a rule that would establish housing goals for Fannie Mae and Freddie Mac (the Enterprises) for 2015 through 2017. FHFA is requesting comment on all aspects of the proposed rule. The Housing and Economic Recovery Act of 2008 requires FHFA to establish annual housing goals for both Enterprises, and FHFA’s current housing goals rule is effective through the end of 2014.
The biggest change for residential mortgages is for Low Income Families Refinance Goals.
On the multifamily side, smaller units (5-50) for low income families rises 50% by 2017 for Fannie Mae and triples by 2017 for Freddie Mac.
Perhaps FHFA and their Director Mel Watt are conceding that low-income households would be better off renting than trying to own a home. At least according to the data which shows that real income and wage growth have stagnated while homeownership drops along with labor force participation.
It’s now a Renter’s Life!
The resurgence of non-agency residential mortgage-backed securities (PLRMBS) is floundering with much of the trading in Freddie Mac’s STACR deals. STACR is the risk-sharing RMBS from Freddie Mac, not the typical Participation Certificates (passthrough) bonds.
Aug. 29 (Bloomberg) -By Jody Shenn- Non-agency RMBS holdings fell $2.4b to $15.8b in week ended Aug. 20, largest drop since disclosure series began in April 2013, latest NY Fed data show.
• Followed jump by $1.7b to high of $18.1b previous week
• Earlier Trace data signaled unwind was likely, Brean Capital strategist Scott Buchta writes in note to clients
• “Much of this trading activity has been in the STACR/CAS sector and in addition we have seen some investors opportunistically adding on weakness”
• August returns for legacy subprime seniors averaging ~0.4%, lifting YTD to 10.4%, according to Barclays index
• STACR 2014-DN2 M3 last traded at 101-31 on Aug. 27, up from ~97-12 on Aug. 6, down from 3-month high of 107-28+ on June 23, according to Trace data.
Here are the STACR bonds and their ratings. starcprosupp
Pending home sales are out this morning and they rose 3.3% in July!
The bad news? Pending home sales dropped 2.7% YoY. It is the 10th straight month of YoY declines.
Not really surprising given that REAL WAGE GROWTH IS ZERO.
And mortgage purchase applications in “Death Valley” along with nominal earnings growth of 2% and stagnant real median household income.
Here is our dormant wage growth (nominal growth of 2% which is the same as the inflation rate = NO REAL GROWTH IN WAGES) after all the stimulus thrown at the problem by The Fed.
Why is Fed Chair Janet Yellen laughing?
The Bureau of Economic Analysis (BEA) has released their adjustment to the Q2 GDP report of 4.0%. It has been revised upward to 4.2%! Just in the nick of time too since the midyear elections are just around the corner!
Here is an interesting piece of information. Personal Consumption Expenditures (typically about 70% of GDP) rose by only 2.5%. But Durable Goods Expenditures rose by 14.3%, the largest increase since 2009. Lots of aircraft orders for Boeing!
Fixed investment rose 17.5% in Q2, the largest increase since Q4 2011.
Although not in the GDP report, real wage growth is 0%. That is correct. NO WAGE GROWTH!
So, Personal Consumption Growth rose only 2.5%, but Durable Good Expenditures rose by 14.3% and fixed investment rose by 17.5% with NO REAL WAGE GROWTH.
The reaction in the bond markets? US Treasury 10 year yield dropped to 2.330%.
The BEA spokesman announcing the Q2 GDP revision and sees nothing but untapped economic potential.
France has some unwanted (although expected) labor news. French jobseekers climbed to 3.424 million, a new record high.
And here is the chart of French jobseekers against the French 10 year government yield. Isn’t it supposed to be going in THE SAME DIRECTION?
Now here is something you don’t often see. ALL global sovereign yields are declining, not a sign of an improving global economy.
I’ll bet French Prime Minister Francois Hollande wishes this was a barrel of wine instead of herring.