S&P cuts Russia's ratings to 'CC' on debt default risk

S&P on Thursday lowered its long-term sovereign credit rating on Russia to "CC" from "CCC-", as the country reported difficulties meeting debt-service payments on the due date on its US dollar-denominated 2023 and 2043 Eurobonds.

"Although public statements by the Russian Ministry of Finance suggest to us that the government currently still attempts to transfer the payment to the bondholders, we think that debt service payments on Russia's Eurobonds due in the next few weeks may face similar technical difficulties," the ratings agency said.

-reuters-

Pandemic propels old-school bond traders towards an electronic future

LONDON - The mammoth bond market has long been the old-school bastion of the financial world, but the COVID-19 pandemic has cast a light on its future - and it looks electronic. Well, mainly.

At the height of the market panic in March, Seattle-based Brandon Rasmussen, a senior fixed-income trader at $300 billion asset manager Russell Investments, had a client order to sell $2.5 billion worth of US Treasuries.

He found, though, that such a transaction was near-impossible in a highly volatile market that made no exceptions for even one of the world's most sought-after assets.

Dealers refused to quote prices by phone, adding to the stress of executing a large order without distorting the market.

The solution Rasmussen eventually settled on was to break the order up into smaller chunks and process them electronically - something he may not have considered a few weeks earlier.

"The feedback that we got from dealers was that they were not quoting on the phone. They couldn't do that, they couldn't keep up with that," he said. "I think what this crisis has shown is that really if you weren't trading electronically, you should be trading electronically."

His experience illustrates how the volatility caused by the crisis, along with a new remote mindset of working from home, has pushed more traders to go digital in a market that has historically lagged stocks and forex in electronification.

That trend is reflected in the business on electronic bond-trading platforms.

For example MarketAxess, one of the biggest players, enjoyed record trading volumes in March. At rival Tradeweb, average daily turnover hit a record aggregate $1 trillion in that month, a more than 41 percent year-on-year increase.

Meanwhile MTS, part of the London Stock Exchange Group , said it won several large asset managers in Europe as clients during the crisis.

Yet traders stress that dealers and clients speaking to one another will long remain a key component of the industry, especially at times of heightened volatility.

Even as Rasmussen went electronic to push through his trade, for example, he was also talking to buyers to agree "switches" - swapping one type of US bond for another to share risk.

The jump in electronic trading activity coincided with both a rush into government bonds as the coronavirus sparked demand for safe-haven assets, and then a sharp selloff as investors sold their most liquid assets to make up for losses elsewhere.

LIQUIDITY & TRANSPARENCY

Electronic trading - where transactions are carried out using software on online platforms, rather than via dealer-client "voice" trades - can carry major benefits for the $100 trillion-plus world of government and corporate debt.

Regulations such as MiFID II in Europe to improve transparency have also boosted electronic trading.

For one, traders executing deals can quickly gauge market depth on their screens, freeing time for more complex trades. For another, it offers lower costs for investors; two dealers estimated it to be 10 percent to 30 percent cheaper than traditional voice trades.

Nonetheless, while most bond industry players acknowledge that much of the future is digital, many have been reluctant to go fully electronic.

Around 45 percent of the European fixed-income market is electronically traded, versus 38 percent a year ago, consultancy Greenwich Associates estimates. In the $6.6 trillion-a-day currency market, 90 percent of spot trading is conducted digitally.

However the COVID-19 crisis is accelerating the electronification of the bond market, according to industry players.

Many such as Tony Rodriguez, US-based head of fixed income strategy at Nuveen Asset Management, said a need for greater liquidity had boosted electronic trading activity.

"A lot of trades were pushed electronically because of greater liquidity and transparency - so the crisis pushed what was already in place," he said.

Andrew Falco, global head of FX and fixed income trading at Fidelity International in London credits electronic trading with allowing connectivity in a market suddenly dispersed by remote working.

This kind of technology enabled the transition from working in an office to working from kitchen tables, he told Reuters.

He said some lessons had been learned about this last year when Fidelity's Hong Kong team struggled to work in the office because of the unrest roiling the city.

"So for us in 2020, we finessed the e-trading home set-up and ensured it worked well, whether it was in HK, Shanghai, Dublin or the UK," he added.


'IMAGINE THIS 25 YEARS AGO' 

For the banks who provide dealer and execution services, though, the electronic shift may be eating into fixed-income revenues; during the March quarter, earnings from bond trading at the world's biggest 12 banks remained below levels seen in 2014, research firm Coalition calculates.

But they too are accelerating the push to digital services, particularly for the automation that helps them when volatility spikes.

JP Morgan, for instance, uses an algorithm to help generate price quotes on its forward FX platform, which includes bonds, fielding "hundreds of thousands of enquiries" and transacting "thousands of trades a day" during the crisis, said Tom Prickett, co-head of EMEA rates at the bank.

Another big player, Goldman Sachs, said clients ramped up calls for the electronification and automation of companies' bond sales, until now a slow process conducted manually.

"The crisis revealed some of those shortcomings in bright lights," said David Wilkins, Goldman's head of FICC execution services in EMEA.

Investors and traders acknowledged that digital technology had been a savior during the pandemic, a view expressed across a host of industries.

"Imagine something like this happening 25 years ago, when emails didn't exist, electronic communication was not really there," said Zoeb Sachee, head of euro linear rates trading at Citibank who oversees government bond trading in European markets.

THE OLD AND THE NEW

But, for the foreseeable future at least, the bond market is likely to encompass the old and the new: technology as well as traditional trading models based on dealer-client relationships.

Traders of European investment-grade corporate bonds during the crisis often negotiated deals by phone before using a platform to settle, according to an International Capital Market Association (ICMA) report.

"Bond markets are very much relationship-driven and I don't see how that goes away," said report author Andy Hill.

This was echoed by Falco at Fidelity.

"The view that we felt as a team was that we would use technology where we had confidence in the price that we could see on the screen, and when we didn't have the confidence in the price, we would execute manually."

-reuters-

Jollibee raises $600 million from first ever bond sale

MANILA -- Jollibee Foods Corp said Friday it raised $600 million (P30.5 billion) from its first ever bond issue, which will help fund its overseas expansion.

Proceeds from the sale will be used primarily to finance short-term debt from its acquisition of The Coffee Bean and Tea Leaf, the Philippines' largest fastfood operator told the stock exchange.

It was the first bond issue since Jollibee listed on the stock exchange in 1993. The offer was upsized from $400 million due to strong demand, Jollibee said. The securities will be listed in Singapore.

"The objective of management for this issuance is to further strengthen the balance sheet of JFC to build a stronger foundation for accelerating its growth in order to achieve its vision to become one of the top 5 restaurant companies in the world.

source: news.abs-cbn.com

Inverted what? Searches for obscure financial term spike on Google

Searches on Google for "inverted yield curve" have spiked after the unusual bond market phenomenon presented itself last week for the first time in over 12 years and helped tank Wall Street amid chatter that an economic downturn was imminent.

Following a tweet from US President Donald Trump referencing the "CRAZY INVERTED YIELD CURVE!", the term made its way onto news websites and radio and television reports that rarely delve into financial topics. 

Even late-night TV star Stephen Colbert devoted a portion of his show trying to decipher what it means when the yield on 10-year US Treasury notes falls below those for 2-year notes.

As it happens, that abnormal bond market dynamic often precedes US recessions, and when it appeared last Wednesday for the first time since 2007, it rattled investors worried that a US-China trade war might kill both a record-long economic expansion and a decade-long bull market for stocks.

US web searches for "inverted yield curve" are on track in August for their highest month on record, and more than double the next highest month December 2005, according to Google's Google Trends analysis tool. 

December 2005 was the last time 2-year and 10-year Treasury notes entered an inversion trend, one that would continue through 2007 and be followed by the global financial crisis and the harshest recession since the Great Depression.

Bond yields are a main measure of the return the securities deliver to investors, and they are also a proxy for interest rates.

When the yields on bonds of different maturities are plotted on a graph, it produces a curve that typically has an upward slope because investors expect greater compensation for the risk of owning longer-maturity debt. An inversion, when shorter-dated yields are higher than longer-dated ones, implies that investors see greater risks in the near future.

Google Trends provides data on the frequency of searches during a time period relative to other time periods. It does not provide actual numbers of web searches.

After Google searches for "inverted yield curve" spiked in 2005, searches for the term entered a lull for over a decade until December 2018. That is when yields on 5-year notes dropped below yields on 2-year notes, setting off talk of a potential recession and questions about whether the more closely watched 10-year yield would invert, as it eventually did last week.

The US yield curve has been slowly flattening since 2013 or earlier, and while economists and central bank policy makers have hotly debated its significance, the trend has mostly gone unnoticed by the public.

The spread between US 2-year and 10-year note yields has slipped below zero before each of the last five US recessions, although it has taken anywhere from 12 to 24 months for the recession to occur. The curve's inversion often ended before a recession began, and the inversions did not predict the length or severity of an economic downturn.

The US yield curve has returned to its normal since last Wednesday's inversion, with benchmark 10-year notes on Monday yielding 1.611 percent, about 0.05 percentage points more than equivalent 2-year notes.

Economists and investors are watching to see if the yield curve again reverts and enters an inverted trend, which would increase concerns across Wall Street and put more pressure on the Federal Reserve to cut interest rates to bolster the economy.

(Reporting by Noel Randewich Editing by Dan Burns and Lisa Shumaker)

source: news.abs-cbn.com

Japan overtakes China as largest foreign holder of US treasuries: data

NEW YORK -- Japan overtook China as the largest non-US holder of Treasuries in June, after raising its holdings to a nearly 3-year high, according to US Treasury department data released on Thursday.

Japan's holdings of US Treasuries rose to $1.122 trillion in June, from $1.101 trillion in May, and were its largest since October 2016.

It was not the first time that Japan supplanted China as the largest non-US Treasury holder. From January to May 2017, Japan held more Treasuries than China, data showed.

"The generally low- and negative-yielding sovereign debt market make Treasuries comparatively more attractive than European and Japanese debt," said Benjamin Jeffery, rates strategist at BMO Capital Markets in New York.

The steepening of the yield curve -- when rates on long-term bonds are higher than short-term notes -- in June made currency hedging costs "a bit less onerous for foreign buyers," he added.

China was the second largest owner of US Treasuries with $1.112 trillion in June, compared with $1.110 trillion the previous month.

Overall, major foreign holders of Treasuries had $6.636 trillion of US government debt in June, up from $6.539 trillion in May, suggesting continued demand for the safe-haven asset.

Foreign flows of US Treasuries showed an outflow of $7.71 billion in June, from net selling of $32.785 billion in May. Foreign official institutions sold $14.605 billion during the month, compared with outflows from the same group totaling $21.998 billion in May.

Offshore private investors purchased Treasuries amounting to $7.071 billion in June.

Data also showed that after 13 straight months of selling, foreigners finally bought U.S. stocks in June to the tune of $26.589 billion, after outflows of $1.445 billion in May.

Foreigners also bought $99.1 billion in net long-term securities in April, after buying $4.6 billion in May, the report showed.

source: news.abs-cbn.com

Asia stocks paralyzed, bonds electrified by recession risk

SYDNEY -- Asian shares braced for more volatility on Thursday as eye-catching easings by central banks stoked fears of global recession, driving US yields to near-record lows and lifting gold past $1,500 for the first time since 2013.

Spot gold was last at $1,503.56 per ounce, having been as far as $1,510. The precious metal has surged 16 percent since May as the worsening Sino-US trade dispute sparked a rush to safe havens.

"Financial markets are raising risks of recession," said JPMorgan economist Joseph Lupton.

"Equities continue to slide and volatility has spiked, but the alarm bell is loudest in rates markets, where the yield curve inverted the most since just before the start of the financial crisis."

Early Thursday, Asian share markets were wobbly, as investors tried to find their footing after enduring a string of heavy losses. MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.03 percent, having shed 8 percent in less than two weeks.

Japan's Nikkei inched up 0.1 percent, and away from seven-month lows. E-Mini futures for the S&P 500 lost 0.13 percent.

There was much relief that Wall Street had managed a late come back overnight, so that the Dow ended with a loss of just 0.09 percent having been down 500 points at one stage. The S&P 500 tacked on 0.08 percent and the Nasdaq 0.38 percent.

Stocks had initially been pressured by the flight to bonds. Yields on US 30-year bonds dived as deep as 2.123 percent, not far from an all-time low of 2.089 percent set in 2016.

Ten-year yields dropped further below three-month rates, an inversion that has reliably predicted recessions in the past.

The latest spasm began when central banks in New Zealand, India and Thailand surprised markets with aggressive easings, while the Philippines is expected to cut later Thursday.

FED TO THE RESCUE?

"The decision by these APAC central banks to "go hard and early" has provided further fuel to concerns of a global recession," said Rodrigo Catril, a senior FX strategist at National Australia Bank. "This also means that the Fed will need to come to the rescue."

Chicago Fed President Charles Evans signaled on Wednesday he was open to lowering rates to bolster inflation and to counter risks to economic growth from trade tensions.

Futures moved to price in a 100 percent probability of an Fed easing in September and a near 30 percent chance of a half-point cut. Some 75 basis points of easing is implied by January, with rates ultimately reaching 1 percent.

Dire data on German industrial output stoked concerns Europe might already be in recession and pushed bund yields deeper into negative territory.

All of which fueled speculation that the major central banks would also have to take drastic action, if only to prevent an export-crimping rise in their currencies.

The Bank of Japan would be under particular pressure as its yen has gained sharply from the flood to safe havens, leaving it at 106.10 per dollar from 109.30 just a week ago.

The euro has also bounced to $1.1217, from a two-year trough of $1.1025, while the US dollar index has backtracked to 97.595, from a recent peak of 98.932.

New Zealand's dollar was still picking up the pieces after sliding as much as 2.6 percent on Wednesday when the country's central bank slashed rates by a steep 50 basis points and flagged the risk of negative rates.

The kiwi was huddled at $0.6447 having shed 1.3 percent for the week so far.

Oil prices were attempting a recovery as talk that Saudi Arabia was mulling options to halt crude's descent helped offset a build in stockpiles and fears of slowing demand.

Brent crude futures climbed $1.20 to $57.43, though that followed steep losses on Wednesday, while US crude rose $1.23 to $52.32 a barrel.

source: news.abs-cbn.com

Asia stocks hit 6-month lows, bonds boom in market shakeout

SYDNEY -- Asian shares slid to 6-1/2-month lows on Monday and the yuan slumped to a more than decade trough as a rapid escalation in the Sino-US trade war sent investors stampeding to traditional safe harbors including the yen, bonds and gold.

Markets have been badly spooked since US President Donald Trump abruptly declared he would slap 10 percent tariffs on $300 billion in Chinese imports, ending a month-long trade truce. China vowed on Friday to fight back.

In response, China's yuan burst beyond the psychological 7-per-dollar threshold in a move that threatened to unleash a new front in the trade hostilities - a currency war.

"Everything is selling off right now," said Ray Attrill, head of forex strategy at National Australia Bank in Sydney. "We have no reason to expect any cessation in selling unless we see any strong action to defend any CNY or CNH weakness."

"Our working assumption is that we are unlikely to see any meaningful resolution to the trade dispute anytime soon."

Asian share markets were a sea of red with Japan's Nikkei shedding 2.4 percent to the lowest since early June. It was the sharpest daily drop since March.

Australian shares slipped about 1.4 percent to spend their fourth straight session in the red, and South Korea's Kospi tumbled 2.2 percent to hit its lowest since December 2016.

MSCI's broadest index of Asia-Pacific shares outside Japan sank 2.1 percent to depths not seen since late January.

In China, the blue-chip index fell 0.8 percent while the troubled Hong Kong market hit a seven-month trough. The pain quickly spread globally, with E-Mini futures for the S&P500 and FTSE futures both down over 1 percent.

Oil prices were also pulled down again on demand worries, while gold climbed 0.65 percent to $1,450.41 an ounce.

The grim mood followed declines on Wall Street on Friday with MSCI's gauge of world stocks posting its largest weekly loss of the year.

The trade dispute between the world's two largest economies has already disrupted global supply chains and slowed economic growth.

The abrupt escalation capped a critical week for global markets after the US Federal Reserve delivered a widely anticipated interest rate cut and played down expectations of further easing.

EVER DEEPER CUTS

So far, investors are not buying Fed Chair Jerome Powell's claim that the 25-basis-point rate reduction was a mere "mid-cycle adjustment to policy".

Futures are now pricing in deeper cuts than before last week's Fed meeting. The terminal US rate is seen at 1.22 percent, 93 basis points below the current effective rate.

Analysts at TD Securities are forecasting no less than five more cuts from the Fed, amounting to 125 basis points of easing, over the coming year or so.

Bond markets were well ahead of the game as U.S. 10-year yields dived 7 basis points to 1.77 percent, a violent shift for usually cautious Asian hours. Yields in Australia and New Zealand touched all-time lows.

German 10-year government bond yields on Friday dropped to an all-time low of -0.502 percent and the country's entire government bond yield curve turning negative for the first time ever.

The flight to safety lifted the yen, which often gains at time of stress thanks to Japan's position as the world's largest creditor. The dollar slipped to a 7-month trough of 105.78 yen, while the euro sank to its lowest since April 2017 at 117.64 yen.

That dragged the dollar index off 0.1 percent, though it was up against most other Asian currencies and those exposed to China or commodities including the Australian dollar.

The Aussie, a liquid proxy for emerging market and China risk, slipped to a fresh 7-month trough at $0.6748 after losing 1.6 percent last week.

The Swiss franc was also boosted by safe-haven demand from the escalating trade tensions. Trump is also eyeing tariffs on the European Union, but is yet to make any formal announcements. The euro was relatively steady on the dollar at $1.1119.

Sterling hovered near 2017 lows at $1.2159, pressured by concerns about Britain exiting the European Union without a deal in place.

The pound has been whiplashed since late last month when Boris Johnson, a figurehead for the "leave" campaign in the 2016 Brexit referendum, became the country's prime minister.

Oil extended losses with US crude off 26 cents at 55.40 and Brent down 35 cents at $61.54.

source: news.abs-cbn.com

Treasury yields jump, Wall Street falls after Fed decision

NEW YORK -- US Treasury yields jumped and Wall Street reversed earlier gains to close lower on Wednesday, after the Federal Reserve raised interest rates and signaled that 2 more hikes could be coming this year.

Ten-year US Treasury note yields hit a one-week high, while two-year note yields rose to a three-week peak after the Fed's decision to raise its benchmark overnight lending rate a quarter of a percentage point, to a range between 1.75 percent and 2 percent.

Policymakers also projected a slightly faster pace of rate increases in the coming months, with 2 additional hikes expected by the end of this year, compared to one previously.

Benchmark 10-year US Treasury notes last fell 6/32 in price to yield 2.9774 percent, from 2.957 percent late on Tuesday.

The 30-year bond last fell 3/32 in price to yield 3.0967 percent, from 3.092 percent Tuesday.

The dollar index, which measures the greenback against a basket of currencies, fell 0.24 percent, with the euro up 0.41 percent to $1.1791.

"There was some question about the December rate hike and it looks like the Fed is sticking to that plan and I would say this is a very mild negative for risk markets," said Matthew Forester, chief investment officer at Lockwood Advisors Inc in King of Prussia, Pennsylvania.

"Each rate hike becomes more difficult for the risk markets and the real economy to digest."

The Dow Jones Industrial Average fell 119.53 points, or 0.47 percent, to 25,201.2, the S&P 500 lost 11.22 points, or 0.40 percent, to 2,775.63 and the Nasdaq Composite dropped 8.10 points, or 0.11 percent, to 7,695.70.

The losses came on a day Wall Street had opened slightly in the black, after a court approved AT&T's $85-billion takeover of Time Warner after the closing bell on Tuesday.

Time Warner shares jumped 1.73 percent after approval of the AT&T deal, which is expected to trigger other corporate takeovers, and AT&T dropped 2.13 percent.

Focus now turns to policy meetings later this week at the European Central Bank and the Bank of Japan.

"The Fed isn't the biggest player here," said Stephen Massocca, senior vice president at Wedbush Securities in San Francisco. "If the ECB or the Bank of Japan begin tightening it'll have a bigger impact than the Fed."

Trade tensions are also weighing on markets, as the US prepares to unveil more tariffs on $50 billion worth of Chinese goods.

The pan-European FTSEurofirst 300 index rose 0.09 percent and MSCI's gauge of stocks across the globe shed 0.26 percent.

Emerging market stocks lost 0.61 percent.

Trade tensions were pressuring the Mexican peso and Canadian dollar, which bounced back and forth against the US dollar, last gaining 0.18 percent and 0.22 percent, respectively, versus the greenback.

CRUDE INVENTORY LOWER

Oil prices, which had started the day in the red, settled higher after a report by the Energy Information Administration indicated US crude inventories fell more than anticipated last week and gasoline and distillate stocks surprised with declines.

US crude settled up 0.42 percent, at $66.64 per barrel, while Brent gained 1.13 percent on the day, settling at $76.74.

"The demand metrics here are amazing for crude oil and gasoline," said John Kilduff, a partner at Again Capital in New York. "Put the exports of crude on top of that, and it's just a really bullish report."

Italian government bonds were in demand, as well, after Paolo Savona, the country's new EU Affairs Minister, said the euro was "indispensable."

The comments by Savona, who has previously expressed hostile views on the euro, followed statements earlier in the week by Italy's new coalition government that it had no plans to leave the euro zone.

In another reminder of the danger of trade disputes, shares in Chinese telecommunications giant ZTE Corp fell as much as 41.5 percent, wiping $3 billion off its market value, as it resumed trade after agreeing to pay up to $1.4 billion in penalties to the US government.

source: news.abs-cbn.com

China opens bond market to foreign investors

China will allow foreign investors direct access to its massive bond market from Monday, the Chinese central bank said.

A platform allowing one-way "northbound" investments from Hong Kong into the Chinese bond market will go into "experimental operation" on July 3, the People's Bank of China and the Hong Kong Monetary Authority said in a joint statement Sunday, which came as Hong Kong marked the 20th anniversary of its handover to China by Britain.

Access to the market will be restricted to "qualified investors" including central banks and sovereign wealth funds, but also commercial banks, insurers, brokerage firms and investment funds, according to the PBOC.

China's debt market is the third largest in the world, with a cumulative value of about $10 trillion according to Bloomberg news agency.

However, this booming market has been virtually out of reach for foreign investors, who currently hold only a small portion of the bonds issued in China -- less than 1.5 percent according to Bloomberg estimates.

China has moved gradually toward opening its capital markets.

In 2014, a trading link between the Hong Kong and Shanghai stock exchanges was introduced, and another was started in December 2016 between Hong Kong and Shenzhen, China's other exchange.

The links give foreigners some access to China-listed shares, while also allowing Chinese firms to buy Hong Kong-traded stocks.

The bond move is the latest in a series of liberalization pledges from China, which has regularly been hit by complaints from foreign companies and trading partners about access to its markets.

source: news.abs-cbn.com

U.S. Fed raises rates, unveils cuts to bond holdings

WASHINGTON - The U.S. Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued U.S. economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year.

The decision lifted the U.S. central bank's benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent as it proceeds with its first tightening cycle in more than a decade.


In its statement following a two-day meeting, the Fed's policy-setting committee indicated the economy had been expanding moderately, the labor market continued to strengthen and a recent softening in inflation was seen as transitory.

The Fed also gave a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

"The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated," the Fed said in its statement.

The central bank said it would gradually ramp up the pace of its balance sheet reduction and anticipates the plan would feature halting reinvestments of ever-larger amounts of maturing securities.

The Fed said the initial cap for Treasuries would be set at $6 billion per month initially and increase by $6 billion increments every three months over a 12-month period until it reached $30 billion per month in reductions to its holdings.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reached $20 billion per month.

U.S. stocks rose after the Fed announcement, while the dollar reversed some of its earlier losses.

"The Fed announcing an update to their reinvestment principles leaves September open. The start of balance sheet runoff and the fact that they haven't slowed their projected path of rate hikes suggest they can do both balance sheet and rate hikes at the same time," said Gennady Goldberg, interest rate strategist at TD Securities.

Fed Chair Janet Yellen was holding a press conference at 2:30 p.m. EDT (1830 GMT).

EYES ON INFLATION

The Fed has now raised rates four times as part of a normalization of monetary policy that began in December 2015. The central bank had pushed rates to near zero in response to the financial crisis.

Policymakers also released their latest set of quarterly economic forecasts which showed temporary concern about inflation and continued confidence about economic growth in the coming years.

They forecast U.S. economic growth of 2.2 percent in 2017, an increase from the previous projection in March. Inflation was expected to be at 1.7 percent by the end of this year, down from the 1.9 percent previously forecast.

A retreat in inflation over the past two months has caused jitters among some Fed officials who fear that the shortfall, if sustained, could alter the pace of future rate hikes. Earlier on Wednesday, the Labor Department reported consumer prices unexpectedly fell in May, the second drop in three months.

The Fed's preferred measure of underlying inflation has retreated to 1.5 percent, from 1.8 percent earlier this year, and has run below the central bank's 2 percent target for more than five years.

Expectations of any fiscal stimulus in the near term from the Trump administration have also waned with campaign promises on tax cuts, regulation rollbacks and infrastructure spending either still on the drawing board or facing hurdles in Congress.

Interest rates are seen rising one more time by the end of this year, according to the median projection of the forecasts released with the Fed's policy statement, in keeping with the previous forecast.

Estimates for the unemployment rate by the end of this year moved down to 4.3 percent, the current level, and to 4.2 percent in 2018, indicating the Fed believes the labor market will continue to tighten.

The median estimate of the long-run neutral rate, which is seen as the level of monetary policy that neither boosts nor slows the economy, was unchanged at 3.0 percent.

Minneapolis Fed President Neel Kashkari dissented in Wednesday's decision.

source: news.abs-cbn.com

Bond markets set for taste of the 60s as inflation picks up

LONDON - Inflation has a habit of creeping up on you. Just ask historians.

From rates below zero less than a year ago, inflation across the developed world has risen in recent months towards central bank targets, largely driven by a rising oil price.

And if history is any guide, bond markets had better beware.

Paul Schmelzing, a visiting scholar at the Bank of England from Harvard University, has studied 800 years of bond markets history and says the most relevant parallel with today's environment is with the late 1960s under USPresident Richard Nixon.

The United States was emerging from a prolonged period of low inflation, the jobs market was tightening and a new pro-business president had raised expectations of fiscal expansion. It was a bruising time for bond investors.

US bonds lost 36 percent in real price terms between 1965 and 1970, while annual consumer price inflation more than tripled in the period, to 5.9 percent from 1.6 percent.

As the world's biggest bond market, what happens to US Treasuries usually sets the tone for bonds across the world.

The specter of what Schmelzing describes as an "inflation reversal" could be the final nail in the coffin of a 36-year bull run in government bonds that has been underpinned by years of low growth and subdued inflationary pressures.

"If you look at inflation expectations in the 1960s, no one expected them to rise so quickly but inflation can accelerate quickly and take people by surprise," said Schmelzing.

Based on historical standards, bonds could be set for double-digit losses, he said.

Other elements of previous sell-offs are also coming into play, creating the potential for a "perfect storm" for fixed income assets, he added.

This includes a sudden steepening in yield curves, as witnessed in a sharp sell-off in Japan in 2003.

END OF AN ERA?

Bond yields globally have risen recently on Trump "reflation" bets and growing signs of strength in the global economy.

US 10-year yields have risen about 65 basis points since the November election to around 2.50 percent, and German Bund yields -- the euro zone benchmark -- are near one-year highs just under 0.50 percent.

Based on his analysis of bond bear markets, Schmelzing said that what is currently priced into market inflation expectations may be conservative.
A sharp jump in yields on signs that inflation is taking off could be painful for bond investors and hurt savers.

The interest rate on benchmark Bunds, for instance, is just 0.25 percent, so even a slight rise in yield can outweigh an investor's return and spark a snowballing sell-off.

The 2015 "Bund tantrum" provided a taste of what happens when investors sense inflation building -- German yields rose sharply from record lows as data pointed to an inflation uptick.

What that episode showed, said Schmelzing, is that inflation remains the key driver for bond markets. But what is different to 2015 is that the uptick in inflation appears more enduring.

US average hourly earnings rose 2.9 percent in December, the largest year-on-year increase since 2009, and Germany's unemployment rate is at its lowest level since reunification in 1990 -- suggesting the jobs market in Europe's biggest economy is tightening.

China's producer prices surged the most in more than five years in December, while in the UK, many economists expect inflation will hit 3 percent later this year -- well above the Bank of England's 2 percent target.

"What is changing is that we are no longer looking at economies with a lot of slack in them," said Lombard chief economist Charles Dumas.

Pictet estimates annual returns in the next 10 years from US Treasuries could be less than half the 4.8 percent of the past 10 years, while German Bunds, will on average deliver negative returns.

For some investors, there is now a clear risk from the trajectory for higher interest rates.

"The risk is greater for bond holders about rising interest rates now than at any point since the financial crisis," said Payson Swaffield, Chief Income Investment Officer at Eaton Vance, an asset management firm with $354 billion in assets. "There will be periods where we will question that, but I believe the landscape has changed."

source: news.abs-cbn.com