Recap 2015-02-27


On EUR fixed income demand destruction: The NYT ran an article on it today. Highlights:

German bonds maturing in seven years traded at a negative interest rate for the first time on Thursday, meaning investors are willing to temporarily lose money for the privilege of owning the bonds. And the German insurance giant Allianz, which traditionally invests mainly in bonds and other securities, announced on Thursday that it would invest billions of euros more in property, adding to a portfolio that includes a British military garrison and a French shopping mall… “Negative yields are for me a typical sign of bubble mania,” Maximilian Zimmerer, the chief investment officer of Allianz, said by telephone on Thursday. So beginning several years ago, when interest rates began their slide, the company began looking for alternatives. Among other things, Allianz, based in Munich, invested in wind parks; a shopping mall in Nice, France; and a military garrison in Colchester, England, which it owns and operates for the British Ministry of Defense. Allianz said on Thursday that it would aim to increase its alternative portfolio to €110 billion, up from €74 billion at the end of 2014. “I would like to do even more,” Mr. Zimmerer said, but noted that the company was limited by regulations.

In addition to stories like these, note that the EU deflation forever story is facing a setback. German HICP was much stronger than expected, ticking up to -0.1% YoY vs -0.5% exp. Italy HICP rose to +0.1% YoY vs -0.3% exp. Spain HICP surprised to the upside at -1.2% vs -1.5% prev. In aggregate, these are some of the largest upside inflation surprises in years.

Finally, Dudley made some pretty interesting remarks today:

“The fact that market participants have set forward rates so low has presumably led to a more accommodative set of financial market conditions, such as the level of bond yields and the equity market’s valuation, that are more supportive to economic growth,” Mr. Dudley said. If those very low market-based rates were to continue after the Fed began raising rates, “it would be appropriate to choose a more aggressive path of monetary policy normalization as compared to a scenario in which forward short-term rates rose significantly, pushing bond yields significantly higher,” he said… But he did say “I believe that the risks of lifting the federal funds rate off of the zero lower bound a bit early are higher than the risks of lifting off a bit late,”

He also said to not overemphasize uncertainty to justify low rates.

Fischer also spoke, noting that one their studies’ “results suggest that the Fed’s balance sheet programs are currently depressing 10-year Treasury yields by about 110 basis points. And, with the Fed continuing to hold these securities, they should apply downward pressure on rates for some time.”

That is quite interesting. The forward US treasury curve is essentially discounting a similar but smaller rise. In other words, the current forwards are pricing in less than a normalization of the term premium estimate above, even before adjusting for the rise in Fed Funds.


  • Chicago PMI dropped to 45.8 vs 58 exp and 59.4 prev. The commentary released with the survey results suggests that harsh winter weather in the Midwest and the strike at West Coast ports were at least partially to blame for unexpected drop.
  • US Pending Home Sales rose 1.7% MoM vs 2.0% exp
  • German CPI rose to -0.1% vs -0.5% exp and prev
  • UK GfK Consumer Confidence was stable at 1 vs 2 exp
  • Japan Jobless Rate ticked up to 3.6% vs 3.4% exp and prev
  • Japan IP declined to -2.6% YoY vs -3.1% exp and 0.1% prev
  • Japan CPI was stable at 2.4% YoY, with the core measure stable at 2.1% as exp
  • NZ Business Confidence ticked up to 34.4 vs 30.4 prev
  • Fed’s Williams said there is a “disconnect” between Fed officials’ and markets’ expectations for the path of short-term rates. He said he hopes that can be bridged by effective communication explaining central bank policy choices. WSJ
  • ECB QE-induced yield collapse in Europe creates headaches for buyers of safe assets. Massive insurers such as Allianz are reducing their allocations to gov’t bonds and seeking out assets such as property. NYT


  • Weekend: ChinaMfg PMI, Australia Mfg PMI, New Home Sales, Japan Markit Mfg PMI
  • Mon: Italy Mfg PMI, EU Final PMI, UK Mfg PMI, EU Unemployment, CPI estimate, US Personal Income, Canada Mfg PMI, US Markit PMI, ISM, RBA, AU Building Approvals
  • Tue: Canada GDP, Australia GDP, Japan Services PMI, China HSBC Services PMI
  • Wed: Italy Services PMI, UK Services PMI, US ADP Employment, Markit Services PMI, ISM Non-Mfg, BoC, AU Retail Sales, Trade Balance
  • Thu: BoE, ECB,
  • Fri: