After a record-breaking rally in bond markets, all of
Germany’s government debt now trades at sub-zero yields. That raises an
important question: what kind of investors are happy to hoover up bonds that
guarantee a loss if they are held to maturity?
One answer is that investors — in the sense of fund
managers seeking to generate a return on their clients’ money — do not actually
own very much of the German bond market.
An analysis by Union Investment, a Frankfurt-based
asset manager, shows that the overall value of Bunds outstanding has
been falling slightly since 2014 thanks to Germany’s aversion to
running budget deficits. But the volume of freely tradable Bunds on the market
has fallen much more sharply, and is expected to drop below €70bn by 2024 down
from more than €600bn a decade earlier.
The precipitous drop has been caused by the rise of a
class of bondholders typically indifferent to the level of yields. These
include foreign reserve managers at central banks, financial institutions that
since the crisis have had to hold ever larger piles of government bonds to meet
regulatory requirements, and the German central bank itself. The Bundesbank
holds more than €350bn of Bunds as a result of the European Central
Bank’s quantitative easing program.
Given the paucity of Bunds, it is not surprising that
Berlin is under growing pressure to borrow more, particularly with the German
economy seemingly headed for recession. But the modest scale of fiscal
loosening plans — finance minister Olaf Scholz has discussed a
€50bn stimulus package — seems unlikely to alter the dynamics of the
Bund market, for now.
“Surging shale production is poised to push U.S. oil output to more than 10 million barrels per day – toppling a record set in 1970 and crossing a threshold few could have imagined even a decade ago.”
“And this new record, expected within days, likely won’t last long. The U.S. government forecasts that the nation’s production will climb to 11 million barrels a day by late 2019, a level that would rival Russia, the world’s top producer.”
“The economic and political impacts of soaring U.S. output are breathtaking, cutting the nation’s oil imports by a fifth over a decade, providing high-paying jobs in rural communities and lowering consumer prices for domestic gasoline by 37% from a 2008 peak.”
“U.S. energy exports now compete with Middle East oil for buyers in Asia. Daily trading volumes of U.S. oil futures contracts have more doubled in the past decade, averaging more than 1.2 billion barrels per day in 2017, according to exchange operator CME Group.”
“The United States now exports up to 1.7 million barrels per day of crude, and this year will have the capacity to export 3.8 billion cubic feet per day of natural gas. Terminals conceived for importing liquefied natural gas have now been overhauled to allow exports.”
“Bitcoin fell as low as $9,966, down around 6% on the day and nearly half from its Dec. 17 record of $19,783.21, according to data from CoinDesk. A day earlier, the cryptocurrency plunged as much as 25%. Later in the U.S. morning, the price bounced back above the $10,000 mark.”
“Wednesday’s drop spread quickly to other major digital currencies. Ether was down as much as 33%. XRP was down 47%. Litecoin was down 35%. Newer tokens like Cardano, EOS and Monero were down 35% or more.”
“’We have very fast-moving weather systems in the crypto world,’ said Charles Hayter, the chief executive of research firm CryptoCompare. ‘One moment it’s absolute exuberance, and then it’s pure fear and panic, running for the exits. It’s quite interesting’.”
“’This is what you’d expect in a nascent market with a lot of misinformation,’ said Mr. Hayter.”
“For all the volatility, bitcoin prices remain in a general uptrend, measured by technical analysis. ‘Suggestions that this is the start of the demise of cryptos is very premature,’ said Fawad Razaqzada, a market analyst at Forex.com.”
“The first of Cboe’s (Chicago Board Options Exchange) futures contracts expired on Wednesday, prompting a flurry of trading as market makers rushed to settle transactions and roll over some contracts into next month. Futures traders make a profit if the value of prices and futures diverge when they expire.”
“But the assumption that opening a path for bitcoin to institutional buyers would accelerate that momentum hasn’t happened. In fact, the ability to short bitcoin appears so far to be a winning bet. Bitcoin touched its record high the day before futures began trading on Dec. 11 and has been falling since then.”
“Many people believe that college costs more than it actually does.”
“Average net tuition at community colleges is less than zero — seriously — once financial aid is taken into account. Average in-state tuition at public colleges will be just $4,140 this year. And many elite private colleges cover much of their sky-high list-price tuition through scholarships.”
“Yet many middle-class and low-income families believe tuition will cost them tens of thousands of dollars a year. This misperception has a serious downside. It keeps some people from attending college, even though the financial (and nonfinancial) benefits of a degree are enormous.”
“Fortunately, a growing number of colleges are starting to take tuition misperceptions seriously. Sixteen top colleges are announcing this morning that they’re joining an effort called MyIntuition — an online calculator that lets people answer just a few questions, anonymously, and receive an estimate of how much attending each college would cost.”
“The 16 include Boston College, Brown, Davidson, Duke, Johns Hopkins, Northwestern, St. Olaf and Yale. They’ve joined 15 others that already participate. The calculator was created by Phillip Levine, an economist at Wellesley College.”
“Riskier ‘covenant-lite’ loans now account for about 70% of new leveraged loans, up from 30% before the Lehman Brothers crisis. Protections that were standard back then have now vanished altogether.”
“’As long as investors keep buying these loans, there’s nothing really to put the brakes on,’ says Derek Gluckman, a vice-president at Moody’s. ‘Things just keep getting worse.’”
“’Loan terms never got this bad in ‘07,’ says Mr. Cohen (founder and CEO of Covenant Review). ‘The contracts … are the worst they’ve ever been. Period, full stop.’”
“A string of natural disasters from Hurricane Harvey in the US to earthquakes in Mexico have left the insurance industry facing one of its most expensive years on record.”
“The catastrophes have wiped more than $35bn from insurers’ profits, according to a Financial Times analysis of third-quarter results that have laid bare the scale of the damage. Berkshire Hathaway, run by billionaire Warren Buffett, and AIG were among the hardest hit in the US, while in Europe Swiss Re and Munich Re face large claims. Lloyd’s, the London-based insurance market, expects to pay out a total of $4.5bn.”
“Insurers say the final cost is likely to be larger and push up premiums. Commercial insurance and reinsurance have suffered from years of falling rates, as excess capacity and a lack of big claims combined to drive prices down.”
“’The losses have been extensive across reinsurance, commercial insurance and personal lines,’ said Kurt Karl, chief economist at Swiss Re. ‘There were $20bn of natural catastrophe losses across the industry in the first half. Hurricanes Harvey, Irma and Maria, combined with the earthquakes in Mexico, will create about $95bn of insured losses.’”
“Added together, the industry is facing more than $110bn of insured losses from natural catastrophes. Only 2005 — when Hurricane Katrina hit the US — and 2011 — when there were earthquakes in Japan and New Zealand — were more costly.”
“The $35bn figure, taken from company reports, does not include losses from unlisted companies, or from insurance-linked securities in which investors’ capital is used to directly back insurance risk.”
“This year, the ozone hole is the smallest it has been since 1985. NASA and NOAA scientists have been studying the ozone layer and monitoring its hole over Antarctica for years. This year, the ozone hole is the smallest it has been since 1985.”
“Here’s a rare piece of good news about the environment: The giant hole in the Earth’s protective ozone layer is shrinking and has shriveled to its smallest peak since 1988, NASA scientists said.”
“The largest the hole became this year was about 7.6 million square miles wide, about two and a half times the size of the United States, in September. But it was still 1.3 million square miles smaller than last year, scientists said, and has shrunk more since September.”
“Warmer-than-usual weather conditions in the stratosphere are to thank for the shrinkage since 2016, as the warmer air helped fend off chemicals like chlorine and bromine that eat away at the ozone layer, scientists said. But the hole’s overall reduction can be traced to global efforts since the mid-1980s to ban the emission of ozone-depleting chemicals.”
“The ozone hole was largest in 2000, when it was 11.5 million square miles wide, according to NASA.”
“As Indian politicians squabble over who is to blame for the thick smog that has descended over the north of the country this week, citizens have been looking enviously over the border at China, where particulate levels have been falling for years.”
“Many in India believe Beijing has been better able to combat its air pollution problem because it does not get bogged down in political infighting. They blame India’s problems on the country’s raucous but inefficient democracy.”
“This week, pollution in Delhi literally went off the charts, hitting the top reading of 999 on the US embassy’s air quality index. Anything over a reading of 100 is considered unhealthy.”
“By Wednesday afternoon, Delhi saw airborne levels of tiny damaging particles known as PM2.5 hit 833 parts per million, while in Beijing the level was 76. Anything over 50 is considered unhealthy, and anything over 300 hazardous.“
“The difference between the two cities reflects a broader divergence over recent years, during which Delhi has taken over from Beijing as the world’s most polluted megacity.”
“’Indian politicians have this very weird idea that we will do something about pollution when we are developed, but we won’t develop unless they invest in public health,’ says TK Joshi, director of the Centre for Occupational and Environmental Health in Delhi.”
“He adds: ‘Beijing has tackled this problem much better, but then it is much easier to control things in an authoritarian regime than in a democracy, especially one like India, where 50% of the people are so badly educated about the problem.’”
“The Saudi government is aiming to confiscate cash and other assets worth as much as $800 billion in its broadening crackdown on alleged corruption among the kingdom’s elite, according to people familiar with the matter.”
“The country’s central bank, the Saudi Arabian Monetary Authority, said late Tuesday that it has frozen the bank accounts of ‘persons of interest’ and said the move is ‘in response to the Attorney General’s request pending the legal cases against them.’”
“Much of that money is abroad, which will complicate efforts to reclaim it, people familiar with the matter said. But even a portion of that amount could help Saudi Arabia’s finances. A prolonged period of low oil prices forced the government to borrow money on the international bond market and to draw extensively from the country’s foreign reserves, which dropped from $730 billion at their peak in 2014 to $487.6 billion in August, the latest available government data.”
“The recovery in US house prices since the recession has created a so-called seller’s market.”
“In this part of the cycle, housing inventory is tight, especially in big cities where there’s plenty of demand. But buyers in these markets are getting stretched as prices climb above their prerecession highs and choices remain limited.”
“Germans will in future be able to register officially as neither male or female, after the country’s constitutional court issued a ruling establishing a third gender option that was hailed by intersex campaigners as a ‘revolution’.”
“Venezuela is closer to a formal default on its debts, with a global derivatives body set to rule on whether credit insurance should be paid out after a crucial payment deadline missed by state-backed oil company PDVSA.”
“Venezuela and PDVSA are legally separate entities, so PDVSA’s default would not trigger Venezuelan CDS or a Venezuelan sovereign default. But there are myriad other overdue interest payments by both borrowers, and unless the money appears soon then Venezuela will be in formal default on all its international bonds.”
“Venezuela has summoned bondholders for negotiations in Caracas on November 13, but the talks are expected to yield little. Indeed, US investors will be wary of even attending, given that the person leading the Venezuelan side of the talks, vice-president Tareck El Aissami, has been sanctioned by the US Treasury as an alleged drug smuggler.”
“None of the big rating agencies have formally declared a default yet, but S&P Global Ratings on Monday lowered the country’s rating to CC, the second-lowest rung possible, and said there was a 50% chance of a default within three months.”
“It is not clear how far the toxic waters have spread. But Fire Chief Samuel Peña of Houston said over the weekend that there had been breaches at numerous waste treatment plants. The Environmental Protection Agency said on Monday that 40 of 1,219 such plants in the area were not working.”
“The results of The Times’s testing were troubling. Water flowing down Briarhills Parkway in the Houston Energy Corridor contained Escherichia coli, a measure of fecal contamination, at a level more than four times that considered safe.”
“Thirty US companies together have more than $800bn of fixed-income investments, according to a Financial Times analysis of their most recent filings with the US Securities and Exchange Commission.”
“Their holdings of Treasuries, corporate, agency and municipal debt, as well as asset- and mortgage-backed securities, means they collectively have more firepower in debt and credit markets than high-profile asset managers including AllianceBernstein, Invesco and Franklin Templeton.”
“’They are asset managers in their own right,’ Ramaswamy Variankaval, head of JPMorgan’s corporate finance advisory group, said of the companies.”
“A reluctance by American multi-nationals to repatriate profits generated overseas has pushed the size of the US corporate cash piles to more than $2tn, a rise of 50% over the past decade and more than double the levels at the turn of the century, according to the Federal Reserve.”
“In total, the 30 companies, which include venerable household names like Ford, Coca-Cola and Boeing, have more than $1.2tn in cash, cash equivalents, marketable securities and investments, according to the FT analysis.”
“The 30 companies have amassed a portfolio of more than $400bn of US corporate bonds, representing nearly 5% of the outstanding market.”
“They compete for such debt alongside pension funds, sovereign wealth funds and other investors, helping to drive down borrowing costs for corporate America.”
“The policy shift in the world’s No. 2 economy shows how nations are wrestling with bitcoin and its place in the financial system. In China, specifically, the government’s attack on bitcoin comes amid a focus on preventing capital from fleeing to digital currencies.”
“After a Chinese news organization Friday reported on China’s commercial-trading ban, Bitcoin slid around 10% to $4,186, from levels above $4,600 on Thursday, according to research site CoinDesk. It has hovered around that level since, closing Monday at $4,211.”
“China has long been a major hub for bitcoin, which was created by an anonymous programmer during the depths of the 2008 financial crisis as an alternative to official currencies. Much of the world’s bitcoin is mined—created through powerful algorithms—in China. As recently as this past January, before new rules damped trading in the country, more than 80% of global bitcoin activity took place in yuan.”
“The stakes for Beijing grew as prices of virtual currencies like bitcoin soared, adding to the risk that Chinese investors would continue to speculate and expose themselves to big losses. Analysts and investors attribute the sharp rise in bitcoin last year to Chinese investors, who began buying it up while at the same time selling the yuan amid worries that the Chinese currency would weaken.”
“While China in the past accounted for the bulk of global bitcoin trading activity, the country’s share has dropped dramatically since the government started making moves to cool the market.”
“In April, Japan’s Financial Services Agency implemented rules that recognized bitcoin as a payment method. Since then, Japan has become the top market for bitcoin trading, accounting for almost half of global volumes. The U.S. share of trading has jumped to above 25% from 5% over the past year.”
“The first gene therapy treatment in the United States was approved recently by the Food and Drug Administration, heralding a new era in medicine that is coming faster than most realize — and that perhaps few can afford.”
“The treatment, Kymriah, made by Novartis, is spectacularly effective against a rare form of leukemia, bringing remissions when all conventional options have failed. It will cost $475,000.”
“With gene therapy, scientists seek to treat or prevent disease by modifying cellular DNA. Many such treatments are in the wings: There are 34 in the final stages of testing necessary for F.D.A. approval, and another 470 in initial clinical trials, according to the Alliance for Regenerative Medicine, an advocacy group.”
“The therapies are aimed at extremely rare diseases with few patients; most are meant to cure with a single injection or procedure. But the costs, like that of Kymriah, are expected to be astronomical, alarming medical researchers and economists.”
“One drug, to prevent blindness in those with a rare genetic disease, for example, is expected to cost between $700,000 and $900,000 per patient on average, noted Dr. Aaron Kesselheim, director of the program on regulation, therapeutics and law at Brigham and Women’s Hospital.”
“Drug makers argue that the prices ought to reflect the value of a curative treatment to the patient. Dr. Kesselheim and other experts are far from convinced.”
“Elizabeth Pingpank, a spokeswoman for Bluebird Bio, which is developing several gene therapies, said the company realizes its prices will be a challenge.”
“Bluebird and several other companies have set up a consortium with academics to try to figure out novel ways to enable insurers to pay the expected high prices.”
“’We recognize that most payers in the U.S. are not currently set up to support one-time therapies that generate long-term transformative benefits,’ Ms. Pingpank said.”
“Indeed, health care executives already are rushing to develop new payment models.”
“’It’s amazing how many think this is in the future,’ said Dr. Steve Miller, chief medical officer at Express Scripts, said of the looming payment problem. ‘This is right now.’”
“The idea favored by Dr. Miller and others is to pay for these novel drugs as you might a mortgage on a house.”
“An insurer would pay a large fraction up front, when the patient is treated, and then make regular payments until the entire bill is paid — or the disease returns.”
“That would require an unprecedented type of cooperation among insurers. Patients often change insurers, and there is no benefit to a new insurer in continuing payments for an injection that a patient had long ago — even if it was curative.”
China
WSJ – Daily Shot: Natixis – Cross Border M&A Deals by Chinese Corporates 9-12
“China’s biggest banks have banned North Koreans from opening new accounts in an unprecedented move to clamp down on financial flows with the country’s unruly neighbor.”
“Multiple bank branches, including those of the country’s top four lenders, told the Financial Times they had imposed a freeze on new accounts for North Korean people and companies. Some are going even further, saying they are ‘cleaning out’ existing accounts held by North Koreans by forbidding new deposits.”
“The moves give weight to the theory that since Pyongyang’s sixth and most powerful nuclear test this month, policy hawks in Beijing have gained the upper hand in an internal debate over whether to toughen sanctions against the Kim Jong Un regime.”
“The measures go further even than what has been agreed internationally.”
Europe
WSJ – Daily Shot: Europace German House Price Index 9-11
“Perhaps the recent IPOs will rebound, as Facebook did after its initial dip. Or maybe a stronger company, such as Airbnb, will manage to make a success of going public. The evidence so far is that private valuations are still inflated and should fall.”
“For banks and regulators, as flexible working grows, they will need to find other indicators of looming payment problems. Difficulties may already be happening. Delinquency rates on some forms of subprime credit and auto loans are rising according to New York Fed data, at a time when unemployment rates are still trending down.”
“That is very unusual, but it may be a sign of things to come.”
Finance
WSJ – Daily Shot: German 10yr Government Bond Yield 7/13
“While Treasury prices have stabilized, the selloff in Bunds persists. Here is the 10yr German bond yield approaching 60 bps.”
“Banks have in recent years been forced to retrench their operations, tamed by financial crisis losses, bridled by shareholders and tethered by more onerous regulation. Lending to smaller and mid-sized companies has been one of the biggest victims, as banks have focused on servicing their blue-chip clients. But a swelling array of investors have stepped into the resulting breach.”
“But some industry insiders are beginning to worry that private debt is getting frothy, as billions of dollars roll into a once-niche market.”
“Private debt is a large and diverse ecosystem, made up of asset managers, private equity firms, pension funds, insurers, ‘business development companies‘ and hedge funds. The assets under management of private debt fund managers tracked by Preqin have increased fourfold over the past decade to $595bn at the end of last year, after another 131 funds raised $93bn in 2016. At the current growth rate, the data provider reckons the industry could reach $2.5tn in another decade — rivalling the private equity world.”
“The investor enthusiasm is palpable. More than 90% of investors polled by Preqin said their private debt returns met or exceeded their expectations, and 62% plan to increase their allocation over the long run. That made it a more popular asset class than more traditional alternative allocation stalwarts like real estate, infrastructure, natural resources and private equity.”
“But returns have been souring lately. Preqin’s latest median net internal rate of return — a popular industry measure of performance — for direct lending funds set up in 2010-14 has gradually dipped from 10.6% for the 2010 vintage, to 7.6% for 2014 vintage funds. One analyst says that while a private debt fund might reasonably expect to collect an interest rate of 10-12% five years ago, a similar loan would only pay 5% to 6% today, as a result of all the money gushing in.”
“The industry itself is becoming a little warier. Almost half of fund managers polled by Preqin said valuations were a big problem, with 31% citing deal flow and 27% highlighting fee pressure. On the other hand, only 3% due diligence on their lending was a ‘key challenge.'”
“It is too early to call time on the private debt binge. The economy is ticking along nicely, quelling any corporate distress, and the amount of money chasing potential borrowers will paper over many cracks. But when the business cycle inevitably at some point rolls over, many investors will discover that the interest rates they are now charging are inadequate compensation for the risks.”
“This is a story as old as capitalism itself. A promising new market proves phenomenally profitable, attracting more players and eventually some tourists. Returns are eroded, standards fall and eventually it ends in tears. Private debt has a vibrant future, but there will be some bumps along the way.”
“The greatest risk in 2017, is that China is forced to choose in favor of financial-system stability at the expense of exchange-rate stability.” – Gene Frieda, global strategist at Pacific Investment Management Co.
“Despite an influx of 1.2m refugees over the past two years, Germany’s population faces near-irreversible decline. According to predictions from the UN in 2015, two in five Germans will be over 60 by 2050 and Europe’s oldest country will have shrunk to 75m from 82m. Since the 1970s, more Germans have been dying than are born. Fewer births and longer lives are a problem for most rich countries. But the consequences are more acute for Germany, where birth rates are lower than in Britain and France.”
“China warned that a war on the Korean Peninsula would have devastating consequences as the U.S. threatened military retaliation against North Korea if it proceeds with a nuclear test this weekend.”
“Almost half of the shadow banking products that have fueled China’s credit boom carry an ‘elevated’ risk of default, the International Monetary Fund has warned in its annual review of the world’s second-largest economy.”
“‘Wealth management products’ that allow banks to channel credit to local governments, property developers and industries struggling to access normal bank loans grew almost 50% to Rmb40tn ($6tn) last year, according to the IMF’s annual ‘Article IV’ review.”
“While the IMF noted that China’s big four state banks have relatively small exposure to wealth management products, it added that ‘several other listed banks and [unlisted banks] in aggregate have exposures that are several times their capital.’ Just over Rmb15tn of China’s outstanding wealth management products are held by banks, accounting for 8% of their assets and more than 90% of the capital buffers that protect them from losses.”
It’s not all bad, just part of the process of the downshift.
“All told, there have been 188 settlements since 2009, costing $219 billion, according to KBW, an investment bank. “
“Eleven firms have paid fines in excess of 10% of their market capitalization, with Bank of America having spent the most in absolute terms ($77 billion) and in relation to its net worth (50%).”
Basically, if you believe interest rates will continue to go down, then long-dated (20-years plus) sovereign debt is the way to go, especially 30-year U.S. Treasuries (since 1981, this has been a very good call).
The longer negative rates stick around and the deeper they go, expect more of this to follow…
“A Bavarian bank has become the second German lender to say it will levy a negative interest rate on private customers’ deposits, in the latest sign of the strain that the European Central Bank’s monetary policy is putting on the country’s financial system.”
“In an effort to boost the eurozone’s flagging economy, the ECB has slashed interest rates to record lows, and, since March, has charged a 0.4% fee on excess deposits left with it by eurozone banks.”
“The co-operative bank in Gmund am Tegernsee, a small municipality about 50km south of Munich, said that from September 1, it would levy a ‘custodian charge’ of 0.4% on deposits above €100,000.”
“The decision follows a similar move by Skatbank, a small German co-operative bank in the east of the country, which introduced negative interest rates for private clients on balances above €500,000 in 2014.”
“German banks are considering a variety of strategies in response to the low interest rate environment. These range from introducing fees for services previously offered for free, such as paper account statements, to keeping cash in vaults rather than parking it with the ECB.”
Japanese banks wary of property risks. Negative-yielding sovereign debt jumps to $11.7tn.
This week all the media outlets were blanketed with coverage on the Brexit and of course the synopsis varied from catastrophe (a lot of money was lost in the equity markets around the world immediately – which have already made up a lot of lost ground), to concern over the survival of the European Union, to a general ‘meh.’ Remember, the world moves on. Importantly, Britain is still part of the EU. No one has triggered Article 50 of the Lisbon Treaty yet and even when Britain does trigger the article, there is a two-year exit process with the EU. As such, some even think that Britain may not eventually leave. So for now as the Brits like to say, keep calm and carry on.
“Moody’s Investors Service is predicting that China’s property markets are facing a double-whammy of growing margin pressures for developers and tapering growth in home sales nationwide.”
“The rapid growth in land costs will raise the developers’ capital requirements and will also likely add margin pressure in the next 12-24 months. Furthermore, developers that acquired land with high unit costs in major cities will face increased business risks, given our expectation that price growth in these cities will moderate.” – Dylan Yeo, Moody’s analyst
“The report from Moody’s follows a note from S&P Global Ratings last week reiterating expectations for growing bond defaults onshore in China, with those for property developers forecast to have the biggest potential impact.”
“Between 2005 and 2015 the world’s cities swelled by about 750m people, according to the UN. More than four-fifths of that growth was in Africa and Asia; specifically, on the fringes of African and Asian cities. With few exceptions, cities are growing faster in size than in population. Lagos, the capital of Nigeria, is typical: it doubled in population between 1990 and 2010 but tripled in area. In short, almost all urban growth is sprawl.”
“London took two millennia to grow from fewer than 30,000 people to almost 10m; Shenzhen in China managed that within three decades. And most African and Asian cities are growing more chaotically.”
“Like it or not, this is how the great cities of the 21st century are taking shape.”
“Shlomo Angel of New York University has studied seven African cities in detail: Accra, Addis Ababa, Arusha, Ibadan, Johannesburg, Lagos, and Luanda. He calculates that only 16% of the land in new residential areas developed since 1990 has been set aside for roads – about half as much as planners think necessary. And 44% of those roads are less than four meters wide.”
“Inflation-adjusted rents have risen by 64% since 1960, but real household incomes only increased by 18% during that same time period, according to an analysis of U.S. Census data released by Apartment List, a rental listing website.”
“Renters fared the worst during the decade between 2000 and 2010, when inflation-adjusted household incomes fell by 9%, while rents rose by 18%, according to Apartment List.”
In regard to inflation “…housing still largely relies on U.S. labor and materials (and zoning restrictions), making it one of the few essentials that haven’t become cheaper with globalization.”
“The International Monetary Fund has warned that ultra-low interest rates pose a threat to the profitability of Germany’s €13tn financial sector, as it steps up its call for the country’s banks and insurance groups to restructure.”
“The IMF has supported the ECB’s aggressive monetary easing and indicated that the onus was on German banks and their regulators and supervisors to reform.”
“Given its high share of savings and co-operative banks – whose business revolves around taking deposits from and making loans to local communities – the German banking system is highly dependent on interest rates.”
“A study by BaFin, the German financial watchdog, and the Bundesbank last year found that Germany’s 1,500 small and midsized banks expected profits to fall by an aggregate of 25% by 2019, mainly owing to the collapse in net interest income. The study projected that if rates fell a further 100 basis points, lenders’ profits would plunge at least 60% by the same date.”
“Japanese banks are reining in their exposure to the property market on concern the central bank’s negative-rate policy is fueling overheating.”
“We’re watching the market carefully because we get a strong sense that the market is being pushed up mainly by a lot of lending.” – Michiya Fujii, head of the real estate finance department, Tokyo Star Bank, Ltd.
“Lending to the real estate sector rose to a record high in March, exceeding levels during Japan’s asset bubble in the late-1980s, according to Bank of Japan data.”
When you look at the options for income investors you can understand why. “While the average expected yield for central Tokyo office property fell to 3.7% in the first quarter, its lowest since at least mid-2007, that is still 82 times the 0.045% yield an investor can earn from buying 20-year government debt. Ten-year yields have dropped 10 basis points this month to minus 0.22%.”
“Considering the downside risks, this is not a time when we can aggressively lend. What’s important is, when the time comes and the market turns, how much durability we’ve built into the portfolio.” – Katsumi Taniguchi, head of the planning team of the real estate finance department at Sumitomo Mitsui Trust
Additionally, while rates are low real estate investment trusts and large developers are taking advantage of the opportunity to lower their borrowing costs. “Nippon Building Fund Inc., Japan’s largest REIT, sold 30-year debt this month at a coupon of 1%, while the largest developer Mitsubishi Estate Co. issued 40-year bonds at 0.789%.”
“The universe of negative-yielding government debt has increased by more than $1tn in the last month to reach a high of almost $12tn in one of the most tangible results of Britain’s decision to leave the EU.”
“Low sovereign bond yields reflect gloomy economic outlooks and expectations of central bank stimulus. In turn a record $11.7tn of global sovereign debt has now entered sub-zero territory – an increase of $1.3tn since the end of May, according to data released by Fitch Ratings.”
“You have to look at the response by central banks after the Brexit shock. You’re seeing a ubiquitous tilt toward easing among G4 central banks (Federal Reserve, European Central Bank, Bank of Japan, and the Bank of England).” – Ben Mandel, a global strategist at JPMorgan Chase
Because of this, “futures markets suggest investors saw a roughly 75% chance that the Federal Reserve will not raise interest rates over the next 12 months.”
