In the closing lines of yesterday’s column I wrote: “Best to continue to trade the momentum, to buy what’s going up, to sell what’s going down and if it’s going nowhere, to go for a long lunch.”
It seems bond traders across markets heeded the advice for bonds came in for wholesale slaughter.
It can’t be more than 10 days ago that the FT decided to track Bunds’ progress towards zero which must have been what broke the spell for yesterday they backed up a further 12bp to yield 0.28% by the close. That might, to the uninitiated, not sound like a lot but this translates as a fall of around 2% in price terms over the past two weeks and as the bond only bears a 0.5% coupon, that wipes out four years of interest income. Another 50bp or four point move in the price which still has the 10-year yield at only 0.75% and the entire interest for the life of the bond will be gone for those who bought at the top.
The rout gripped the entire curve with the 5-year bonds rising by 8bp and the 2-year by just under 4bp. The move was reflected across the euro denominated bond complex with more or less identical moves in all but the likes of Greece. Thus, by the close of play, Germany was the only principal country which still sported negative yields in the 5-year sector and in the 2s it left both Italy and Spain with positive yields for the first time in weeks. To call the day horrid would be understatement of the year. 10-year Bund yields have now quadrupled in just two weeks.
Headless chickens have nothing on the behaviour of all those MBAs, PhDs and CFAs who now populate our industry and we once again saw the effect which the investment management industry’s obsession with relative performance over absolute performance can have, not to mention the algorithmic guys who don’t give a toss but who have programmes which trigger trades with no regard at all for the market liquidity or lack thereof which surrounds their clever maths.
I’m sure someone will now try to blame the rout on some poor sod who was sitting in his mothers back bedroom with a laptop and a cup of tea but I’m afraid that won’t wash. What we saw was the effect on an investment environment created by a central bank, the interventions and machinations of which have removed any form or reality from what were supposed to be markets driven by demand and supply with no more than a bit of guidance by the monetary authorities.
I yesterday lunched with a former government bond trader and we together remarked on the day in August 2004 when the European government bond traders at Citi took on the MTS platform and won. They revealed the false liquidity which trading platforms purported to provide but which we all knew wasn’t really there. Instead of being lauded for unmasking a lie, they were pilloried and driven out of the markets. Had the authorities at the time acknowledged that liquidity is an organic creature and not something which can be created or removed by decree, we might now not be in the lamentable state in which we find ourselves.
That said, the near-zero interest rates which the ECB has visited upon us with the tiny margins for error which they leave might one day be seen as the biggest case of market manipulation and creating a false market in human history – one for which mere mortal like you and me would be sent to prison for the rest of our natural lives and for which the SEC would be fining it sums which would make the US$2.5bn which Deutsche Bank is about to be relieved of look like pocket change.
I suspect markets will try to rebound small today but the magic seems to have gone and the 0% Bund will most probably now remain something which we talk to future generations about as a nearly but not quite.
Frozen
Meanwhile, the FOMC had its meeting and a pretty interesting one it must have been too on the back of the release of US Q1 Advanced GDP. This first cut shocked with annualised Quarter over Quarter growth reporting at 0.2%, a country mile away from the consensus forecast of 1.0% and even further away from the previous quarter which had read at 2.2%. We all know of the debilitating effect of the harsh winter, but even with the weather effect, this is a scary number.
I shall let the FOMS speak for itself as this is how it opened its post meeting statement:
“Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.”
If you had a big bet on a June or July rate move, you’re stuffed. On this form, I’d start to hedge against a September rise as well.
The question which we need to ask ourselves is how much of the activity which Q1 did not bring is merely postponed and how much is gone forever? Slow quarters which are brought about by weather effects usually bring with them a rebound in either the following quarter or the one after that – it depends on how early or late in the respective quarter the disruptions occur.
This year the poor weather stretched across the entire first quarter so some postponed activity won’t pick up again until Q3, should it at all. I am surprised that they cite high consumer confidence on the back of Tuesday’s shockingly poor 95.2 release but they might be thinking deeper than I am.
Thus we go into the last day of April trading having been properly shaken up. They say that April comes in like a lion and goes out like a lamb. This year, both in terms of the weather (in Europe) and in terms of the bond market, nothing could be further from the truth.
