I haven’t posted too often this year and the above chart pretty much shows why. This year, there hasn’t been too much change a not a great deal of interesting things to write about. Despite natural disasters, minority government, middle east issues, record food prices and climbing oil prices, our bond yields have been relatively stable and ‘normal’ looking.
Even the short part of the curve has been relatively stable this year as the market has pretty much agreed that the Reserve Bank is more likley to keep rates steady until at least the latter half of this year. This ‘normal’ looking chart suggests the continued strength in the Australian economy and despite very high food and energy prices, inflation is not of major concern at this point in time.
Risks to our economy continue to revolve around our reliance on strength of China’s economic growth and our property prices holding up. The Euro-sovereign crisis appears to have been forgotten by the newspapers but Portugal is looking like following in Greece and Ireland’s footsteps and will probably require a bailout some time this year as their yields continue at record highs with 10 year bond yields around 7.5% (many economists believe 7% yields are unsustainable borrowig costs for the Portuguese). Markets continue to be complacent about the Euro-Sovereign issue as its banking system is far from strong and is incredibly weak.
Anyway, aside from going long the Renmimbi, I believe the best trade for the year will be going long the VIX when it gets towards mid-teens as there is little doubt that, just like the last couple of weeks, as soon as it gets there some market shock will result in the VIX moving up 30% or more for a nice little gain. Volatility strategies are a must for any multi-strategy fund or portfolio.
First post in a while and the first for the new year, so I thought I’d start with a popular favourite…the Australian Government Bond Yield Curve. The above chart shows the changes in the yield curve over the pas 12 months and it certainly has been an interesting ride. Equities have been largely out of favour thanks to 12 months of European Sovereign concerns putting pressure on the global financial system, but the local economic outlook has shown signs of improvement that has resulted in the shorter term interest rates increasing. Whilst the yield curve is not as steep as it was at the end of 2009 it has certainly steepened over the last 6 months as concerns around a double dip recession in the US subsided and the ECB stepped in to save Ireland.
Moving forward the Euro Sovereign Crisis will continue to place pressure on global financial markets and with Portugal going to the market this week to raise a few dollars I believe this may be a key week in determining global investor psychology in the short term. Portugal’s bond yields are at record highs (~7.1% for a 10 yr bond) and if the auction results in higher yields then I think we’ll be in for a bumpy ride in both equity and bond markets. The newspaper talk has been incredibly bullish with what appears to be every analyst in the land predicting double digit sharemarket returns this year…hopefully they’re right but let’s not forget these Euro issues and the fact that there are many near insolvent US state and municipal governments that will be holding the global recovery in the lower gears. Our economy looks like it will continue to rely on China and whilst the Queensland flood recovery will help some industries (construction) the damage is bigger for others (agriculture and mining).
Source: Bloomberg
If you can’t pay your debts then you can’t pay your debts…additional credit doesn’t quite cut it. Clearly the market is unconvinced by the bailout package for the Irish and bond yields continue their upward climb. One of the desired outcomes of a bailout package is the hope it will calm markets…it clearly failed there.
Meanwhile in a different part of Europe, Italy, which appears to have the ability to pay its debts thanks to a low-ish budget deficit, has a very scary looking increase in their 10 year bond yields. I could also show similar looking charts for numerous other European countries (Hungary, Belgium,..) but I’m sure you get the picture…so to speak.
These Euro Sovereign debt problems are getting contagious.
Source: Bloomberg
The above chart shows 10 year Spanish bond yields hitting record highs overnight…this intense acceleration of yields (or sell-off) is a pretty strong sign this Euro-Sovereign crisis is a long long way from over. Expect more volatility in sharemarkets yet as Spain carries more risk to Europe and the Global Economy than Ireland does given it comprises around 13% of European GDP…its unemployment is still around 20% and Spanish bank’s balance sheets must be under a fair bit of pressure so hang on for the upcoming ride of economic fear in markets and newspapers.
Source: Bloomberg…from left to right…Ireland, Portugal, Greece, and Spain on the second row
I found the above charts from Calculated Risk and these sharply increasing yields for each of their bonds is suggesting that the Euro-Sovereign crisis is far from over. I can only imagine there will be significant pressure on the solvency of each of these countries banking systems and may result in bank runs such that the money ends up under the mattress here and there.
Source: Bloomberg
The really bad news globally is the Irish story…their housing price crash has led to a banking crisis and an economy that is pretty much stuffed. Whilst Irish sovereign debt spike in May along with all risky European debt the above chart shows how much worse the market is viewing Irish debt today.
With a few commentators of notable reputation have concluded that Greece is pretty much guaranteed to default within the next 5 years, it is increasingly looking the same for Ireland. Ireland was one of the first Euro countries to start exercising “fiscal austerity”…I don’t think its working and was probably not a good idea…refer Krugman.
