Option traders brace for volatility in China"s stock markets

Options markets continue to suggest bearish investors fear a correction for China"s red hot stock markets.... more

APAC Financial Markets • #China, #Equities, #MSCI, #Options, #StockMarket, #Volatility #MarketNews

Bond-Market Game of Chicken With Fed Is More Dangerous Than Ever

(Bloomberg) If the Federal Reserve is really so intent on raising interest rates this year, why is Wall Street chopping its forecasts for bond yields?

For all the hand-wringing over the recent selloff that wiped out about $1.2 trillion in value from the global bond market, the fixed-income market’s best and brightest have actually taken down their year-end estimates for Treasuries in four of the past five months.

It amounts to a dangerous game of chicken, in which many analysts and investors are betting the Fed won’t lift rates too fast because of the damage it may inflict on the economy — even after last week’s stronger-than-expected jobs report. And the stakes have never been higher for holders of debt globally, who are more exposed to the potential for big losses than at any time in history, based on a metric known as duration.

“When things have settled down, as they inevitably will, the U.S. will trade on fundamentals again,” said Chris Low, the chief economist at FTN Financial in New York.

Low, one of the few who correctly predicted last year’s rally in Treasuries, cut his year-end yield forecast for 10-year notes in April to 2.1 percent from 2.5 percent. They ended at 2.41 percent on Friday.

When it comes to Treasuries, Low has been among the most bullish on Wall Street, even as forecasters in a Bloomberg survey consistently reduced their yield estimates this year to a median of 2.5 percent from 3.01 percent in December.

The risk, of course, is that those projections get overrun as money managers start to question whether the more than three-decade bull market in bonds has finally run its course.

Global Consequences

That has real-world consequences for everyone from governments to businesses and consumers since Treasuries serve as the benchmark for borrowing costs on trillions of dollars of debt worldwide.

Bonds globally have tumbled in the past month, causing yields to soar from historical lows, as deflation worries ebbed in Europe and U.S. economic data pointed a resurgent labor market following a surprise first-quarter contraction.

Since April, yields on U.S. 10-year notes have surged a half-percentage point. The selloff accelerated last week after a report showed wages in May rose by the most since August 2013 as hiring surged, strengthening the Fed’s case for higher rates.

Fed Chair Janet Yellen, who said in May that she expects to raise borrowing costs this year if the economy meets her forecasts, also warned yields may soar once that happens.

‘Tough Go’

The data “really confirms what Janet Yellen’s been signaling,” said Christopher Sullivan, who manages $2.4 billion as chief investment officer at United Nations Federal Credit Union. “Bonds could be in for a further tough go from here.”

After all, the potential for losses is now greater than at any time on record, based on duration levels for $50 trillion of debt tracked by Barclays Plc. If yields on 10-year Treasuries rose to 3 percent by year-end, investors today would face losses of 3.6 percent, data compiled by Bloomberg show.

While there’s little doubt the U.S. economy is the world’s bright spot, growth is still far from booming. And there’s lingering concern the recent slowdown was more than just the result of some bad weather.

That suggests there’s room for Fed officials to remain patient when it comes to how soon, and perhaps more crucially, and how much they need to increase borrowing costs, according to Peter Yi, the director of short-term fixed income at Northern Trust Corp., which oversees $960 billion.

Diminished Expectations

Even as the labor market showed signs of improvement, household spending and retail sales have fallen short of economists’ estimates every month in 2015.

If the Fed does decide to raise rates before January, it would be doing so when U.S. corporate earnings are forecast to grow less than at the start of any tightening cycle since 1980.

“Unless you start hitting on all cylinders, it’s really difficult to see the Fed raise rates more than the market is expecting today,” said Yi.

Traders in the futures market are still largely divided on a September rate boost even after last week’s jobs report, and most expect the Fed will hold off until December.

Regardless of when exactly the first increase comes, the market doesn’t foresee rates exceeding 1.25 percent before the end of 2016, versus the Fed’s own estimate of 1.875 percent.

For many bond investors, those diminished rate expectations reflect just how little inflation the economy has been able to generate over the course of the expansion.

Flip-Flop

Using the Fed’s preferred measure, inflation reached just 0.1 percent in April from a year ago — the 36th straight month the gauge has fallen short of the central bank’s 2 percent goal.

It’s this lack of price pressure that has prompted so many investors to pour into longer-term debt to generate higher real returns as yields hover close to their historical lows — a decision that’s roiled the market as bonds tumbled.

Cathy Roy, the chief investment officer for fixed-income at Calvert Investments, which oversees $13 billion, is convinced the most recent bond-market hiccup is just that.

Put into context, the 0.38 percentage point jump in 10-year yields since the end of April still pales in comparison to the surge during the start of the “taper tantrum” in 2013, while absolute levels are well below last year’s peak.

And just this February, yields actually jumped about twice as much before falling back again.

“Every day you come in and there’s been a complete flip-flop on the consensus view on where interest rates are going,” Roy said. “We’re staying the course with our long-term outlook of lower rates for longer and then trying to take advantage of this volatility.”

by Daniel Kruger and Liz McCormick

APAC Financial Markets • #BondMarket, #Bonds, #FED, #GlobalBonds, #RateHike, #Volatility #MarketNews

Some wider implications of bond volatility

Bond market volatility is something we will become accustomed to and the gaps in market illiquidity will likely be eventually filled.

The more immediate implications are however that it will:

1) make those central banks that are itching to normalize policy cognizant of the risks of sparking a 1994 style bond selloff and

2) the prospect that the volatility helps to shift the investment pendulum from bonds toward equities.

It is too early for a wider asset allocation shift from bonds into equities to occur largely because a bond selloff does not equate to a bear market for bonds.

But for the Fed and BoE there will be a desire to communicate their intentions well in advance of any liftoff, which makes a surprise rate hike very unlikely.

By Divyang Shah, IFR Senior Strategist

APAC Financial Markets • #BoE, #BondMarket, #Bonds, #Equities, #FED, #RateHike, #Risk, #Volatility #MarketNews

Euro-Area Bonds Wipe Out 2015 Profit as ECB Confronts Volatility

For the first time in 2015, investors in European bonds are sitting on a loss.

The securities tumbled on Tuesday, as a report showed euro-area consumer prices rose in May more than economists forecast, leaving them down 0.1 percent this year, according to the Bloomberg Eurozone Sovereign Bond index. As recently as April 15, the index was up 4.6 percent.

German government bonds extended their biggest drop since 2012 on Wednesday before European Central Bank officials gather in Frankfurt to set monetary policy. Datathis week showed the ECB quickened its 1.1 trillion ($1.2 trillion) asset-buying program in May, meeting a pledge to accelerate purchases ahead of the region’s summer vacation period. Reports on euro-region retail sales and unemployment are also due Wednesday.

“Although we feel the market is cheap here, we think there could be more weakness this morning,” Peter Chatwell, a rates strategist at Mizuho International Plc in London, wrote in an e-mailed note Wednesday. “Any further signs of strength in this morning’s data could generate more selling.”

The yield on Germany’s 10-year bunds, the euro area’s benchmark sovereign securities, climbed one basis point, or 0.01 percentage point, to 0.72 percent, as of 8:10 a.m. London time. The yield rose 17 basis points on Tuesday, the most since August 2012. The 0.5 percent security due in February 2025 fell 0.09, or 90 cents per 1,000-euro face amount, to 97.91.

Inflation Surprise

Tuesday’s inflation figures, which showed prices increased on an annual basis for the first time in six months, may ease concern among ECB policy makers that the region will suffer from deflation, one of the threats that prompted them to unleash its quantitative-easing program this year. Bund yields have surged from a record-low 0.049 percent on April 17.

The ECB will keep all three of its key interest rates unchanged at record-low levels at Wednesday’s meeting, Bloomberg surveys of economists show. President Mario Draghi will hold a press conference at 2:30 p.m. Frankfurt time to explain the decision.

“If the market believes the ECB will ultimately be effective, and that inflation expectations should revive and nominal growth will revive, then bond yields should keep going up,” Laurence Mutkin, global head Group-of-10 rates strategy at BNP Paribas in London, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton.

Spain’s 10-year bond yield was at 2.07 percent and reached 2.11 percent earlier, the most since November. Ten-year Italian bond yields were at 2.10 percent and touched 2.14 percent, also the highest since November.

ECB Executive Board member Benoit Coeure said on May 18 that the pace of buying would pick up “moderately” in May and June to counter lower liquidity in July and August. Purchases of public and private debt rose to 63.1 billion euros last month, compared with 60.3 billion in April, data released on June 1 showed.

Market analysts are divided on whether this pickup is the increase Coeure suggested or if there is still significantly more to come. Strategists at ABN Amro Bank NV said frontloading will need to accelerate in June, while DZ Bank said the strategy is already working.

by David Goodman

APAC Financial Markets • #ECB, #EuroBonds, #Investors, #Profitability, #Volatility, #WipeOut #MarketNews