The Drop in Yields Is Getting Scary, Writes Peter Boockvar

Wed, Aug 7, 2019 - 10:33am

Originally published at The Boock Report.

After a 1.5% month-over-month decline in the June German industrial production figure vs. the estimate of .5% with declines widespread in manufacturing, mining, intermediate goods, capital goods, consumer goods and energy, German bund yields are sinking again and taking yields across the region with it. The year-over-year decline in industrial production of 5.2% is the tenth month in the past 11 and is the biggest since November 2009. The German Economy Ministry said manufacturing "remains mired in a downturn."

The German 10 year bund yield is down 5.5 basis points and lower for the sixteenth day in the past 18 to -.59%. The two year is now at -.83%. Commerzbank reported earnings that missed estimates and its stock is falling to the lowest level since 1992. It's down 98 percent from its 2007 high. The Swiss 10 year is dropping to -1.0%, the Spanish 10 year is now just .15% and France is down to -.34%. U.S. Treasury yields are getting dragged lower in sympathy. The already epic global bond bubble continues to inflate further, and I think it's scary to watch. Is it any mystery why gold is now above $1500?

GERMAN 10 YEAR BUND YIELD.

Commerzbank stock.

Gold in orange, the dollar amount of negative yielding bonds.

The Reserve Bank of New Zealand cut its benchmark rate by 50 basis points surprisingly to one percent because the market was only expecting 25 basis points. Will they stop here? Of course not, as the New Zealand Governor said, "It's easily within the realms of possibility that we might have to use negative interest rates." I guess because it's worked so well for Europe and Japan? The New Zealand dollar is falling to the lowest level since January 2016 vs. the US dollar. Their 10-year yield is plunging by 14 basis points to 1.16%.

The Bank of Thailand and Reserve Bank of India also lowered interest rates as central banks are desperately trying to offset the weakness in global trade and manufacturing. Lever up they are saying, even more. It won't work unfortunately because we are already levered up.

Five days of selling last week in U.S. stocks and not even capturing Monday's selloff sent the number of bulls lower by a sharp 9.1 point to 48.1 according to Investors Intelligence. Amazingly, people are still afraid to be bearish (the Fed has brainwashed everyone into not being one) as bears rose just .8 points to 17.9 and still less than one point from the lowest level since March 2018. So, the correction side took most of the bulls as they jumped to 34 from 25.7. I'd normally say the drop in bulls is a good thing and a set up for a nice bounce in stocks but without a jump in bears, I can't say that yet.

The lowest average 30-year mortgage rate since November 2016 at 4.01% was not enough to help the purchase of a home as the MBA said applications fell two percent week-over-week, down for the fourth straight week and are now at the lowest level since March. While they are still up 6.5% year-over-year, I'd expect a much greater level of sales considering that mortgage rates are down 80 basis points year-over-year. Refi's continue to be the only notable response to the drop in rates as they jumped 12 percent week-over-week and 116 percent year over year.

Lastly, China said its July foreign exchange (FX) reserves totaled $3.104 trillion, slightly below the estimate of $3.105 trillion but down from $3.119 trillion in June. They continue to increase their pile of gold, buying about 10 tons in July after purchasing 84 tons in the prior seven months. The fear in China with the new leg lower in the yuan is the possibility of greater capital flight but that would be in the August data if it’s started again in earnest. We'll also see if the People’s Bank of China is expending reserves to stem the pace of yuan decline. The yuan fix was a touch lower and the yuan is trading down, both onshore and offshore.

CHINESE FX Reserves in USD.

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