Markets

Bond Traders Get a Glimpse of the Apocalypse

An accelerating sell-off leads market commentary.

This year may be all about the global synchronized bond slump.

Photographer: Education Images/Universal Images Group Editorial via Getty Images

Remember how last year was all about the global synchronized economic recovery? This year may be all about the global synchronized bond slump.

From Japan to Frankfurt, London and New York, the market for government debt securities was a sea of red Monday as European and U.S. central bankers up their plans to "normalize" monetary policy, which is code for raising interest rates and cutting back on their debt purchases.

Although the U.S. Federal Reserve has been doing just that since late 2016, the bond market has largely been able to get by because the European Central Bank and Bank of Japan pressed on with their extraordinary easy money policies. But Monday's action shows what may be in store for bond traders after ECB policy maker Francois Villeroy de Galhau told Bloomberg News that he expects bond purchases to end this year and an interest-rate increase could follow in a matter of “some quarters, but not years.”

“We will probably give additional guidance for the end of the year for the timing of the rate hike and the contingencies,” he said in a Bloomberg TV interview with Francine Lacqua. German 10-year bond yields rose 5.2 basis points to 0.61 percent, the biggest increase since April. Yields on similar-maturity bonds of Italy, Spain and France rose by similar amounts. Even yields in the U.S. jumped. 

Monday's sell-off will worsen the pain suffered by bond investors this year. The Bloomberg Barclays Global Aggregate Bond Index is down 0.75 percent this year as of Friday, with all but three of 19 major categories showing losses for May. "I don't believe Villeroy's comments should be a surprise to anyone, but it seems to be a gentle reminder of what is to come," Peter Boockvar, the chief investment officer at Bleakley Financial Group, noted in a research report. "My worry about what is to come for European bonds has been made clear many times" but even so yields on the continent remain "mind boggling" at such low levels, Boockvar wrote.

STOCKS GET A NEW TAILWIND

The S&P 500 Index rose to its highest level in two months, and at least part of that may be due to investors becoming more confident in the quality of corporate profits. Recall that at the start of the current earnings season in early April, most investors knew that U.S. companies would post blockbuster results, thanks to a reduction in corporate tax rates. And they have, with earnings per share for members of the S&P 500 rising the most since 2010. The skeptics were more focused on what they said would be lackluster top-line,  or revenue, growth. But according to the equity strategists at Bloomberg Intelligence, "sales are now beating expectations broadly and strongly." They note that earnings estimates for the rest of the year are moving up at an accelerated pace, "no longer due just to the tax overhaul or margins, but largely because of improving top-line prospects." Sales growth is on track to top 6 percent, more than 1 percentage point better than expected, and 10 of the 11 sectors are posting better-than-forecast revenue figures. "Until the last two weeks, strong earnings results were overshadowed by a skepticism that strength was purely driven by tax savings and will fade heavily into 2019," Bloomberg Intelligence strategists Gina Martin Adams and Peter Chung wrote in a research note Monday. "Comparisons will still be tough to match, but growing top-line confidence can go a long way to improving stock sentiment."

GAS PRICES ARE NO DETERRENT 

The American Automobile Association doesn't think the highest gasoline prices since 2014 will stop Americans from hitting the road for the unofficial start to summer on Memorial Day weekend. The group, better known as AAA, projects road travel will rise 4.7 percent over the long holiday weekend in late May, reports Bloomberg News' Laura Blewitt. Even though gasoline prices are up about 50 cents a gallon to $2.87 from May of last year, fuel costs aren’t high enough to deter travel, according to Bill Sutherland, senior vice president of AAA Travel and Publishing. “A strong economy and growing consumer confidence are giving Americans all the motivation they need,” he said. Some of the research backs up AAA. DataTrek Research found that Google searches for “vacation” were running 10 percent above last year’s levels in April, the last full month for such data, while searches for “rental car” are up slightly, a promising economic signal going into summer.  Also, searches for “cheap vacation” are lower than last year by 12 percent and 48 percent below the peak in 2010. "As that speaks to consumers’ desire to spend, we chalk it up as another positive economic sign," Nicholas Colas, co-founder of DataTrek, wrote in a rsearch note Monday. 

POLITICS MATTER

Latin America is in trouble. That's the assessment of foreign-exchange traders, who have pummeled the region's currencies over the past four weeks. The Bloomberg-JPMorgan index tracking Latin America's currencies has dropped 7.65 percent since April 18, compared with a decline of just 1.82 percent for the MSCI Emerging Markets Currency Index. The collapse in Argentina's peso the last couple of weeks due to the inability of the nation to control inflation is well known, but take a look at Brazil's real. The currency on Monday dropped to 3.6396 per dollar, its weakest level since May 2016. It has lost more than 13 percent of its value since late January. The main reason for the weakness is politics. The leading market-friendly candidate in Brazil’s presidential race is losing ground among voters, while a leftist contender is advancing, according to Bloomberg News' Mario Sergio Lima. Former Sao Paulo Governor Geraldo Alckmin, who is one of the investor favorites, dropped to 5.3 percent support from 8.6 percent in March, according to a survey carried out by polling firm MDA and released Monday. Former Ceara Governor Ciro Gomes, who has pledged to expropriate oil fields, rose to 9 percent from 8.1 percent. A weekly central bank survey published Monday showed that analysts slashed their 2018 economic growth estimates to 2.51 percent from 2.70 percent, the biggest cut to the 2018 forecast in more than 2 years.

CRYPTO LAMBOS FAIL TO IMPRESS

The movers and shakers in the world of cryptocurrencies descended on midtown Manhattan Monday for the Consensus 2018 conference. Lamborghinis, the flashy cars that symbolize conspicuous consumption among Bitcoin true-believers, roared through the streets near the Hilton Midtown, the conference headquarters, according to Bloomberg News' Lily Katz. While an impressive showing, they did little to juice demand for cryptocurrencies. While Bitcoin did manage to rise from a three-week low, the MVIS CryptoCompare Digital Assets 10 Index that tracks the performance of the 10 largest and most liquid digital assets fell. Perhaps that’s due to come comments made by Federal Reserve Bank of St. Louis President James Bullard, who said in a speech at the conference that “cryptocurrencies are creating drift toward a non-uniform currency in the U.S., a state of affairs that has existed historically but was disliked and eventually replaced.” Bullard added that “currencies have to be reliable and hold their value” which “is probably why government backing has been important historically, combined with a stable monetary policy that promotes stability of the currency." None of that seems to apply to cryptocurrencies.

TEA LEAVES

The consensus is that the first-quarter slowdown in the U.S. economic expansion was just a blip and that growth this quarter should trend back toward the high 2 percent range. Data this week, starting with the monthly retail sales report for April on Tuesday, may determine whether the optimism for a rebound is warranted. The median estimate of economists surveyed by Bloomberg is for the government to say that retail sales growth slowed to 0.3 percent last month from 0.6 percent in March. So-called retail control-group sales – which are used to calculate gross domestic product and exclude food services, auto dealers, building-materials stores and gasoline stations – are forecast to be unchanged at 0.4 percent. A broad advance would indicate that bigger take-home pay from the recently enacted tax cuts is more than compensating for the recent pickup in fuel costs, according to Bloomberg News' Shobhana Chandra. However, higher receipts that are concentrated at service stations would indicate gasoline purchases are eating into discretionary sales at other merchants.

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Matt Levine's Money Stuff: Everyone Wants to See Green in Bonds 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Robert Burgess at bburgess@bloomberg.net

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