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Home / Business / This red alert now flashes on Bond Traders radar screen

This red alert now flashes on Bond Traders radar screen



(Bloomberg) – A warning light on the bond market that glows green for years suddenly flashes red. The bad news for bondholders is that the last time this happened, it was accompanied by the biggest sales situation since the wake of the global financial crisis.

That indicator is the term premium, as for both treasuries and German funds. has rebounded from the previous quarter's record low. The US meter is now on track for the largest increase in three months since the end of 2016.

After a fantastic meeting through August, global bonds have resigned in recent weeks after thawing trade tensions eased global economic gloom, reducing demand after collateral for government debt. Round futures premiums now signal that sales have continued to run – the goal of extra compensation for having long-term debt versus just rolling over a short tenor security for several years is in a trend that investors and strategists say has just begun.

The 10-year Treasury yield, a target for world markets, climbed to a three-month high on Thursday, as investors' animal husbandry was triggered by the ebb of the biggest headwind to global growth – the US-China trade war. That came when the German counterpart rose to levels not seen since mid-July, and levels in France and Belgium climbed back above 0%. The Japanese equivalent jumped Friday to the highest since May.

The investor is increasingly concerned about holding on to long-term debt, as relief from economic turmoil increases the prospect of a capital flight from the port to risky ones. Such a trend is already increasing returns, which, combined with the Federal Reserve's signal that it will hold interest rates for the time being, is raising premium money. In Europe, a still accommodating policy strengthens the inflation outlook and increases the upward pressure on the meter.

"The futures premium was extremely depressed due to trade uncertainty, Brexit and you name it," said Roberto Perli, a partner at Cornerstone Macro LLC. "These risks have been reduced, so there is room for a 50-point move higher in the premium premium. And given that the Federal Reserve is on hold – without a chance to raise interest rates – there is a lot of incentive for investors to take the risk."

Ten-year Treasury premiums have risen about 42 basis points since late August, en route to the largest three-month increase since 2016, according to the widely followed New York Fed ACM model created by Tobias Adrian, Richard Crump and Emanuel Moench. fell this week to as little as minus 0.84% ​​- from a record low of minus 1.29% in August, the least for NY Fed data given back to 1961.

Understanding the evolution of premiums is not just an academic one This security margin is one of three components that constitute the return on a given bond, according to former Fed Chairman Ben S. Bernanke – the two These are the market's expectations of monetary policy and inflation. Basically, there is an extra cushion against risk during the relatively long life of the security.

To be sure, a US-China trade dispute resolution still looks far, with President Donald Trump shading Friday the amount of progress made in the talks. [19659010] In Germany, the 10-year premium started a swoon in mid-2014 after playing back from 100 to 250 basis points since the euro was introduced in 1999, according to estimates by UniCredit SpA strategist Luca Cazzulani, using the methods used in ACM model.

The tape measure fell to a record minus 100 basis points in late September before rising to minus 88 in October, according to UniCredit data updated at the end of each month. It has probably increased further this month.

"We have seen a continuation of the upside in the bottom yield this month, and it should be linked to higher premiums over the longer term," Cazzulani said.

Long-term debt has a higher duration than those with shorter tenors. This means that the prices for each increase in interest rates will fall more sharply than for the short-term counterparts, which increases the risk of long-term debt.

QE Effect

The European Central Bank's resumption of fresh bond purchases this month will exert a marginal downward pressure on the premium premium, but will not be "a game changer," according to Cazzulani. He estimates that quantitative easing will only cause a five-point setback in the meter, which will be too little to counteract forces that push it upwards.

After cutting interest rates and unveiling debt purchase plans last month, the ECB has been pushing for the authorities to add budget support for growth. The prospect of fiscal stimulus coupled with ongoing pressure for more European bank integration bid for more upside for forward premiums and returns in the region, according to Ronald van Steenweghen, a fund manager in a portfolio manager at DPAM.

was driven to levels that were difficult to explain unless you think the economic outlook is very bleak, something we do not agree with, says DPAMs van Steenweghen during an interview at the firm's Brussels office. “And the potential positive feedback loop on fiscal stimulus economics is very, very high. This, with stable ECB policies, improved growth and reduced uncertainty, will all work to push returns higher. "

The 10-year bond rate is on course to rise from about minus 0.26% to between 0.50% and 1% over the next one to three years," van Steenweghen predicted.

It leaves him to be "more confident of having a shorter duration."

To contact the reporter about this story: Liz Capo McCormick in London at emccormick7@bloomberg.net [19659022] To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Anil Varma, Debarati Roy

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