Liquidity problems in junk bond markets; China fiscal revenues rise; China needs more mega cities; fear in oil markets; UST 10yr yield 2.18%; NZ$1 = 67.8 US¢, TWI-5 = 72.7

Liquidity problems in junk bond markets; China fiscal revenues rise; China needs more mega cities; fear in oil markets; UST 10yr yield 2.18%; NZ$1 = 67.8 US¢, TWI-5 = 72.7

Here's my summary of the key events overnight that affect New Zealand, with news of unsettling times in the bond and oil markets.

We are now just days away from the first Fed rate hike in almost a decade, and bond markets are nervous. It is an especially nervous time for sub-investment grade bonds - junk bonds - and yields are jumping in this sector. That is the same as saying, the price of junk bonds are falling. In some markets there are just no buyers, even at big discounts.

This is important because when liquidity vanishes in these markets, bad things can happen.

The situation is critical for many mutual or hedge funds, especially those who planned to profit at the more risky end. The tide is going against them aggressively; in fact one large US fund is essentially insolvent. And that is raising talk of a run on such funds.

The reason analysts are nervous is that a bond panic could spiral quickly. So far, though, the investment grade end of the market is calm and stable. Among those at risk will include NZ's most indebted man, Graeme Hart and his Reynolds Group which is loaded to the eyeballs with junk-grade debt. And it is not only Hart that who be at risk; bonds make up a significant part of KiwiSaver fund investments, although sub-investment grade components will be small.

In China, their government has reported an +11% rise in fiscal revenues in November. Consumption taxes led the way. The pace of Chinese fiscal spending grew even faster.

And here's one for the China irony file: A top Chinese planner has said his country needs 10 new megacities – each with top schools, hospitals and corporate headquarters – to ease the strain on Beijing. More mega cities needed because they can't handle growth and pollution in one super-mega city.

In New York, the UST 10yr yield benchmark is rising today and is now at 2.18%.

The US benchmark oil price is down today, although just now apparently holding at this level, now at US$36/barrel, while the Brent benchmark is now at US$38/barrel. These prices are at an 11-year low, and there is talk of 'the smell of fear in oil markets.

The gold price has slipped too, now at US$1,070/oz.

The New Zealand dollar is stronger against most others at 67.8 US¢, at 93.4 AU¢ and at 61.5 euro cents. The TWI-5 is now at 72.7.

The Chinese yuan has continued its slow and steady depreciation against the US dollar and is back to levels we last saw in 2011. This is a shift the Americans are not going to be very happy about, but the moves to float the yuan more freely is not something they can really complain about. And if the Fed raises rates, China will have difficulties stimulating its own economy.

If you want to catch up with all the local changes on yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

Daily exchange rates

Select chart tabs »

The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
End of day UTC
Source: CoinDesk

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

5 Comments

the bond market was always a train running out of rails, with ZIRP there was a huge supply of money looking for a return, and now its coming to an end that money wants to flow back to more safer options but there is no new money to fill the hole.
ZIRP has run too long and deep and we will see in future years the problems (inflated asset prices) it caused

Surely it was borrowed money, so it does not flow back to safer options but is used to repay the original loan.

A compounding problem.

With public companies under great strain in terms of cash flow to fund share repurchases, the turn in oil marking a potential turn now in sovereign wealth funds might explain at least the stock market’s failure to reaffirm new highs.. Read more

Why pay it back if you are still making a margin? We have seen huge inflows and then outflows from the BRIKS which pretty much stuffed them, ditto the junk market like shale oil. Also hanging on to it means an opportunity capability, ie you can rush out and buy something if you think its cheap.

"Mrs. Yellen and her cortege of necromancers may just lose their nerve and twiddle their thumbs come Wednesday. If they actually make the bold leap to raise the fed funds rate one measly quarter of a percent, they might finally succeed in blowing up a banking system that deserves all the carnage that comes its way. There is something in the air like a gigantic static charge, longing for release.

Kunstler"