Exhibit A: Switzerland’s central bank just announced it will be selling a 13-year bond at a yield of … zero. That has never, ever happened. If you want to earn a positive yield on Swiss debt, you have to go out to 20 years.
Exhibit B: The finance arm of Toyota Motor (TM) just sold a three-year, unsecured note with a yield of 0.001%. If that was your yield on a savings account, you would double your initial investment in approximately 69,300 years. Sweet!
Exhibit C: Germany’s Bundesbank publishes a measure of the average yield on that country’s government debt. Guess what? It just dropped below 0% for the first time in history.
Exhibit D: Looking to pick up some extra yield in Europe by purchasing corporate bonds? Thanks to European Central Bank President Mario Draghi’s latest QE plan, you can only earn 1.002% on average. That’s within a whisker of the lowest level ever.
|Falling toward zero in Switzerland.|
Bond investors openly admit “the ECB is distorting the market,” in the words of one strategist quoted by Bloomberg, and that the bond-buying program is making it so “investors are being pushed outside their comfort zone.” But just like partygoers during Mardi Gras, the ECB is saying: “Laissez les bons temps rouler.”
Exhibit E: Here in the U.S., it’s “all stocks, all the time” on CNBC. But if everything is so peachy, why are U.S. Treasury bond futures on the verge of one of the biggest technical breakouts ever?
Why isn’t anyone pointing out the inconvenient truth that the iShares 20+ Year Treasury Bond ETF (TLT) is showing a year-to-date return of around 11% … two-and-a-half-times the return of the S&P 500?
Heck, you’ve made almost as much money on municipal bonds this year as you have on stocks. The iShares National Muni Bond ETF (MUB) is up around 2.5% year-to-date — before taking into account tax considerations.
Exhibit F: While I’m at it, why is the U.S. Dollar Index looking dangerously close to breaking down from a topping pattern that dates all the way back to January 2015? Punch up a chart of the PowerShares DB US Dollar Index Bullish Fund (UUP) and you’ll see an ETF that’s making a series of lower highs and lower lows … with moving averages rolling over … and a support zone between $24 and $24.50 that looks like it’s going to give way.
|“You simply don’t load up on Treasuries and munis, and dump the dollar, if you think we’re firing on all cylinders.”|
Stocks are definitely holding their own, and well off their February lows. I’ll be the first to admit I underestimated the vigorousness of this bounce.
But the action elsewhere in the capital markets sure looks incongruous with a strengthening U.S. economy, a resurgence in profit growth and strong optimism about the future. You simply don’t load up on Treasuries and munis, and dump the dollar, if you think we’re firing on all cylinders.
So is something going to give soon? Is the bond market saying something worrisome here? Or are stock prices the best indicator of economic health? Stated another way: Who’s right, who’s wrong, and what should investors do about it? I’ve been sharing my opinion here in Money and Markets – now I want to hear yours in the comment section below.
Meanwhile, Federal Reserve Chairman Janet Yellen had an opportunity to clarify her thoughts on the economy yesterday. But judging from your comments, it doesn’t sound like many of you agreed with her assessment of conditions.
Reader Justin said: “Yellen calls the economic glass half full because her head is half empty. Too much D.C. Kool Aid over too long a period. She obviously refuses to allow herself to be confused by the facts.”
Reader Martin added: “She will do anything necessary to keep the stock market high, regardless of the fundamentals of the country or the corporations, until the election is over. Then watch out for an overvalued stock market to do what it should have done a long time ago – trade at true value.”
Reader Keith said: “It is too bad you even have to give her inclusion in your writings. It’s all garbage. Take inflation. The real numbers for the things we survive on are running well over 10%. Is that really too slow/low for her? Get out of the ivory castle and in among the people.”
And Reader Joe said: “Federal Reserve officials are bankers who are looking out for bankers, their business customers, and Wall Street at the expense of the little guy, especially retirees who need some interest income. Anyway, banks and Wall Street are counting on being bailed out again by the Fed no matter what, so stocks will keep climbing.”
Finally, Reader Ilan K. said: “The Fed and other government officials have to sound positive lest the public and markets panic. Therefore, there is nothing new to hear. Short-term rates should be normalized once economic conditions return to normal. But growth of around 2%, inflation of less than 2%, and REAL unemployment of much more than 5% is not normal.”
Thanks for weighing in, and be sure to keep those comments coming. I’ll address as many as I can in the days ahead.
It’s official: Hillary Clinton has enough delegates to secure the Democratic presidential nomination, according to the Associated Press. She crossed the 2,383 threshold late yesterday, making the results of today’s primaries in California and five other states essentially irrelevant to competitor Bernie Sanders.
Turkey suffered yet another terrorist attack, with a car bomb detonating in Istanbul as a police shuttle bus drove by. Eleven people were killed and dozens were injured in the strike, which occurred in a tourist-friendly historic district.
Remember all the hubbub about Chinese foreign-exchange reserves from earlier this year and last summer? Turns out they are dropping again – by $28 billion to $3.19 trillion in May. That leaves them at the lowest level since 2011, and the decline comes as the Chinese yuan is slipping again. Investors don’t seem to care as much … yet … but given the turmoil this trend set off twice before, it bears watching.
Do you have any thoughts on the news about Chinese reserves? Are you happy Hillary Clinton has now managed to lock down the Democratic nomination? Are there other important issues you want to sound off about? Use the comment section to add your voice to the mix.
Until next time,