90 seconds at 9 am: Bond yields low despite rising interest rates

US Q4-16 growth revised up on strong consumer spending; new stability regulation boosts sovereign bond demand; CDS spreads narrow; China BOP surplus falls; UST 10yr yield at 2.42%; oil and gold up; NZ$1 = 70.1 US¢, TWI-5 = 75.1

31st Mar 17, 7:43am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news bond yields are likely to stay low for a very long time despite rising interest rates.

But first in the US their final reading of Q4-2016 GDP brought a revision higher to +2.1% on stronger growth in consumer spending (+3.5%). Offsetting that somewhat was a rise in imports. It turns out that the December 2016 quarter was the second best result in six quarters and third best since the third quarter of 2014. This was a result that was better than markets expected. But somewhat dampening the party were higher than expected jobless claims even though they were lower than the week before.

Bond investors who need investment grade paper are facing a long low-yield future. Regulations in a range of first world economies aimed at making the financial system safer mean that banks, insurers and pension funds need sovereign bonds to meet liquidity requirements and match liabilities. This month, more rules came into effect in the US and Europe that could make that demand even stronger. Even as benchmark interest rates rise pushing up loan rates, bond buyers’ needs for long-term debt are growing, meaning investment yields on them are likely to stay low.

That drive for financial stability is also driving down CDS spreads, especially for Australasian investment grade debt. Not only are American CDS spreads at their lowest in almost two years, ours are now their lowest in over nine years and as far as we can tell the premium over similar US bonds is its narrowest in eight years

In China, they announced their 2016 current account result as a surplus of +1.8% of GDP. The goods-trade surplus declined -14% from the 2015 level to almost US$0.5 tln, while their service trade posted a deficit of -US$244 bln, +12% higher year on year.

In the UK, insurer Lloyds of London has confirmed the opening of a Brussels office in 2019 and is shifting some jobs there

In New York, the UST 10yr yield is up a little today and now at 2.42%.

Oil prices are up again today to just over US$50 for the US benchmark, while the Brent benchmark is just over US$52.50 a barrel. New fracking techniques are allowing independent producers stay in the game at prices that undermine the traditional crude oil and gas drillers.

The gold price however is down another -US$8 to US$1,244/oz.

And the New Zealand dollar starts today just a little lower at 70.1 USc. On the cross rates the Kiwi dollar is at 91.5 AU¢, and against the euro is at 65.5 euro cents. The NZ TWI-5 index is at 75.1.

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

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

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20 Comments

by sharetrader | 31st Mar 17, 8:11am 1490901072

EU is now worried other stronger nations will follow the UK
I will follow what influence Germany uses and which direction they push the smaller nations
http://www.cnbc.com/2017/03/30/eu-parliament-will-block-brexit-deal-if-…
http://www.telegraph.co.uk/news/2016/05/15/the-fourth-reich-is-here---w…

by Wildcard | 31st Mar 17, 9:05am 1490904302

It'll be interesting to see how the next French/German elections go, and how many votes centre-right, right and far right parties gain. If either country end up having a referendum on leaving the EU and vote to leave then things will get ugly.

by Tom Joad | 31st Mar 17, 8:25am 1490901904

Interesting article here which goes a long way to explaining the global housing/debt bubble, Trump, Brexit and the rise of so-called "populism".

"Populism" being just democracy producing difficult outcomes where large numbers of discontented voters misdiagnose the cause of their symptoms, assisted by soothsayers such as Trump, Farage and Le Pen.

by ham n eggs | 31st Mar 17, 8:43am 1490903022

But it falls into the fallacy that "All we need to do is to give real hard-working people what they deserve."

This is a better summary of what underlines our apparent political & economic issues ... scarcity. Harder to get your head round but worth working through.

http://www.populationinstitutecanada.ca/keypapers/SCARCITY-by-C-Clugsto…

by murray86 | 31st Mar 17, 9:21am 1490905300

".... fallacy that "All we need to do is to give real hard-working people what they deserve."" FALLACY ...Really? While i do get the issue of a finite universe and the natural limitations on growth, to argue that hard working people being rewarded for their efforts is a fallacy is beyond the pale.

The problem with this world is that people with power and privilege seek to preserve and protect that power and privilege. So this is usually about the top one or so percent of the population (including politicians) who do it at the expense of everyone else. When people are wealthy and have power and privilege, and they most often go hand in hand, when their business becomes constrained by environmental effects, they usually seek to preserve their profits and wealth by depriving their workers, the very people on whose backs they gained that wealth. this has been occurring for decades if not centuries, and history points us to sociological consequences of such unrestrained acts on several occasions. We call them revolutions, and they are usually very bloody.

Your point is essentially a part of the continuing denial of the reasons behind Trump and Brexit, that politicians have persistently failed their constituents the world over by enacting legislation that favours themselves, the wealthy and powerful at the expense of the common people. This has extended to the point now that the very health of our planet has become threatened, yet the politicians continue to essentially deny that impact and continue to seek their profits, grow their wealth and ignore the impacts of their actions, somehow believing in their hubris that they are immune. The problem is the bulk of the consequences and costs will fall on the shoulders of those who had little or no influence, were unable to change or effect the progress of the damage, and most of all are least positioned to protect themselves from the consequences.

Do not kid yourself that the recent gathering at Davos in Switzerland was to celebrate the largess and generosity of the mega rich and influential, but more to entrench their power and privilege, maintain their control over the world affairs and to ensure the masses are kept in their place.

"Do you hear the people sing, singing the song of angry men......"

by ham n eggs | 31st Mar 17, 9:48am 1490906904

Yes. Its a fallacy. Its a fallacy that this is somehow a solution. A solution to what exactly?
The well is drying up and youre arguing about who should work the pump.
If the power goes down how much richer is Bill Gates than me?

by murray86 | 31st Mar 17, 11:05am 1490911556

I agree it is not a solution, and I am not arguing about who should man the pump. I am arguing that the consequences of the last several hundred years of industrialisation fall primarily on the shoulders of the workers, while the wealth generated from them does not.

The solutions are far more complex than that. Bill Gates is perhaps a poor example to use as well as I am not entirely sure that the threats to this world stem from his business activities. He was simply lucky that his vision of computer technology being available to the masses could be and was translated into an effective working business model. Combine that with the internet and you could actually argue that his wealth has actually produced some real good as he has provided the means to expose much of the graft and corruption that is occurring. On the other hand the way we choose to use our tools also opens the opportunities for more graft and corruption and other crimes too.

by ham n eggs | 31st Mar 17, 11:54am 1490914455

Fair point - I just chose someone considered to be wealthy. BUt I would say the consequences of scarcity are going to fall on everyone in time, its just that as the squeeze on resources takes hold it is inevitably those at the bottom who get squeezed first. But "remove" enough workers and there's no rentier class. In terms of wealth sharing the historic norm has always been for the rentiers to enjoy the fruits of the workers. A temporary fossil fuel burn of apparent abundance and now we are really reverting back to the norm, with a much nigher world population.

by ham n eggs | 31st Mar 17, 10:43am 1490910235

you are also missing the link that if we give "more wealth" or consuming power to more people ... we crash natural physical systems faster ...
the wealth everyone thinks is there to share is only pixels ... a computer's imagination. Yes they are handy in the meantime, but ultimately worthless.

by meh | 31st Mar 17, 10:52am 1490910760

https://www.theguardian.com/business/2017/mar/26/populism-is-the-result…

The answer seems pretty simple. Populism is the result of economic failure. The 10 years since the financial crisis have shown that the system of economic governance which has held sway for the past four decades is broken. Some call this approach neoliberalism. Perhaps a better description would be unpopulism.

Unpopulism meant tilting the balance of power in the workplace in favour of management and treating people like wage slaves. Unpopulism was rigged to ensure that the fruits of growth went to the few not to the many. Unpopulism decreed that those responsible for the global financial crisis got away with it while those who were innocent bore the brunt of austerity.

https://www.theguardian.com/books/2016/dec/09/wolfgang-streeck-the-germ…

Public discontent is fitful and fragmented, ready to fall into Trump’s tiny hands. Meanwhile, capitalism – unrestrained and unreformed – will die.

This isn’t the violent overthrow envisaged by Marx and Engels. In The Communist Manifesto, they argued that capitalism’s “gravediggers” would be the proletariat. Nearly 170 years later, Streeck is predicting that the capitalists will be their own gravediggers, through having destroyed the workers and the dissidents they needed to maintain the system. What comes next is not some better replacement but is more akin to the centuries-long rotting away of the Roman empire.

“I spent a long time in my life exploring the possibilities for an intelligent social democratic solution of the class conflict,” he explains over lunch. “The idea that we could modify capitalism towards equality and social justice. That we could tame the beast. Now I think those are more or less utopian ideals.”

Economic growth is over. Productivity is maxed out.

I agree with your points murray86 and with ham n eggs. We do need to share what we currently have better and we will need to share more of less going forward.

How do we move forward when we can't use the same model/thinking that created the problems. What if the current situation has to go through its death throes before it can be changed?

by NorthernLights | 2nd Apr 17, 7:49am 1491076182

Murray86 you are correct & your heart is in the right place also
In Spain they have companies run by the workers who are also its owner/ shareholders
These companies are extremely productive & profitable
Society has not progressed very far if you look at the % of wealth held in a minuscule number of hands.
The paradigm must change but I fear the rich will end up using armies of robots against the rest of us to keep their status quo ! Maybe judgement day will come ?

by ham n eggs | 31st Mar 17, 8:59am 1490903981

this is a great quote to sum things up

"The “Conservative Right” believes excessive government intervention in the economy causes resource misallocation thereby causing suboptimal societal wellbeing. The solution is unfettered free markets.
The “Liberal Left” believes unfettered free market capitalism causes resource misallocation toward the wealthy minority, thereby causing suboptimal societal wellbeing. The solution is government sponsored policies and programs. Each side believes that our economic malaise will be resolved only when
people “come to their senses” and implement its proposed solution ....

We have allowed ourselves to become distracted by an irrelevant argument between two diametrically opposed, physically impossible, economic/political viewpoints, rather than attempting to address the most daunting ecological challenge ever to confront humanity—ever-increasing NNR scarcity."
NNR = Non renewable natural resource

by NorthernLights | 2nd Apr 17, 7:55am 1491076553

Ham & eggas I try as much as I can to sway the conservatives of which I once was a member but their thinking is such that they believe a fraudster like Don Trumo will make a Great POTUS ! How stupid are they ? Very !

by Tom Joad | 31st Mar 17, 9:46am 1490906808

In reply to ham 'n eggs

But it falls into the fallacy that "All we need to do is to give real hard-working people what they deserve."

Sorry, but I disagree - I don't believe this is what the article is saying.

What it does explain clearly is how the powerful rentier class suck more and more out at the expense of everyone else and why this is not good for economies.

It also highlights the parasitic nature of mega companies such as Google, Apple, Facebook etc. and how they benefit from corporate welfare policies.

by ham n eggs | 31st Mar 17, 10:40am 1490910002

That is actually a direct quote from the article.

i don't disagree that this is clearly a symptom ... but it says nothing about the underlying cause.

The reason we are at this point is that DEBT is crucial to the economy - it keeps wages and commodity prices up. But now that we are hitting natural limits, debt growth is ALL we have to keep things afloat... and this means more and more of what gets produced has to be siphoned off in the form of "rentier" payments such as interest ... a drag on the economy ability to grow as you state. But its a symptom of an underlying problem in natural limits ... real growth is actually dead.

by murray86 | 31st Mar 17, 11:21am 1490912499

I agree more with Ham n eggs, but Toms point Ham that I am interested in is that the companies he lists are actually companies that are all about information sharing. He describes this as parasitic, I assume based on their apparent wealth/value. But i would ask if it is they who are really the problem as opposed to companies such as the oil producers and other manufacturers who systematically rape the environment with no apparent penalty, and if you believe the conspiracy theorists, actively oppose the development of alternative technologies rather than using their wealth for the development of them as a means of succession planning and recognising the finite limitations of their natural resource. I don't see information sharing companies as the problem, and can indeed be a part of the solution. Their wealth is simply a construct based on market perceptions of what they can deliver, rather than being based on something they make.

The debt you refer to is the financial industries simply ensuring that they control all of the activities we are talking about, and making sure all of it, the good and the bad, continues as they play both sides of the road. Thus the banks are as much the enemy as they are our potential friend. How to get them to have integrity is another question altogether...

by ham n eggs | 31st Mar 17, 12:39pm 1490917141

The companies you refer to as "information" companies rely on resource extraction in some form once you go back down the chain ... advertising clicks are paid by consumption somewhere ...
The reality is we all collectively rape the envt with no apparent penalty - we dont really pay for depletion of finite resources, degradation of recurring resources or pollution in general. If it was priced in, you can guarantee living standards would be far lower.

I agree re the banks - they are simultaneously our enemy & friend. Debt is crucial for supply chains but the growing debt burden is what will collapse things ... & the financial system doesn't do less debt.

by Jethro | 31st Mar 17, 11:46am 1490913990

How refreshing to have a thought provoking comment stream and one which doesn't mention Auckland and housing.

by ham n eggs | 31st Mar 17, 12:08pm 1490915299

...like a troubling of goldfish endlessly debating how deep the water is...

by dictator | 31st Mar 17, 12:12pm 1490915541

There you go bringing it up. Auckland has been interesting to see at what point the house prices went into decline. However bank stability and external economic events are a lot more interesting.