Stockmarket investors were happy for exactly one day with Janet Yellen’s decision to raise US interest rates earlier this week. But they won’t be laughing if the Fed rate hike pops the bond bubble. They won’t be happy with a deflationary depression in 2016. And they weren’t happy yesterday, with the S&P 500 falling by 1.5%.
If you want to know what Yellen and Carney and Draghi will do next year, look at what Bank of Japan governor Haruhiko Kuroda did yesterday. It was more of the same from the world’s leader in zombifying an entire economy. More quantitative easing (QE) extended to longer-dated government bonds and other assets such as exchange traded funds (ETFs).
The Japanese story is the antidote to the Fed’s feel-good rate rise
It suggests that Yellen has changed nothing. She’s merely given traders a nice end-of-the-year bounce in the dollar and stocks. Next year, it will be more QE and, eventually, negative rates. According to Marketwatch:
“The Bank of Japan… said it will lengthen the average remaining maturity of the Japanese government bonds it purchases to seven to 12 years from seven to 10 years. It said it would maintain its overall target of annual asset purchases at around ¥80 trillion ($650 billion). The BOJ also said it will buy another ¥300 billion of exchange-traded equity funds, in addition to the ¥3 trillion in ETFs it has purchased annually since late 2014.”
Meanwhile, the rot in the junk bond market has spread to higher-quality, investment-grade bonds. Over $5.1bn in retail money left investment-grade bonds funds, according to fund flow tracker Lipper and reported in the FT. This follows the closure of two junk bond funds in the last week and net outflows of over $3bn from junk funds this week (and $7bn over two weeks, according to Bloomberg).
Market interconnection
It’s not that ‘experts’ are lying when they say the rout in a particular asset class is contained or quarantined. It’s that they’re talking about something they can’t possibly understand. No one knows how interconnected these markets are. And no one can ever know how investors will react to a given piece of news.
There’s over $5.6trn in US corporate debt, a 59% increase since 2010. Janet Yellen’s low-rate dance party created a borrowing binge. Corporations financed projects that would have been unaffordable at higher interest rates. And many of them spent the borrowed money buying back their own stock.
At some point, when things are really cheap (distressed) bonds will be a ‘buy’ again. In the meantime, you should watch to see if investors simply bail on bonds and stocks. Or, they bail on bonds and pile in to the only asset class capable of delivering growth in 2016 (which may or may not be socks).
Category: Central Banks