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"It Feels Like 2008" Government Bond Yields Signal "Something Very Nasty Is Coming"
Zero
Hedge,
6
July, 2016
With
global developed market bond yields crashing to record lows and
almost $10
trillion of negative-yielding debtworldwide,
it is no surprise that money managers are concerned that "it's
starting to feel like 2008."
Global
developed market bond yields crashed once again to new record lows
overnight at
just 40.0bps (having plunged from 63bps pre-Brexit)...
As
negative yields become the new normal around the world. Japan
and France are leading the way as
demand for the safest assets boosts the amount
of global bonds with negative yields to $9.8 trillion,
according to Bloomberg World Sovereign Bond Indexes.
That’s
up from $8.35 trillion before Britain voted to leave the European
Union last month.
The
latest new entrants include Japan’s 20-year bonds, and French
nine-year securities, which both saw yields drop below zero for the
first time in the past 24 hours.
As
John Anderson, a money manager at Smith & Williamson Investment
Management in London concluded:
"Government
bond yields are telling you something very nasty is about to
happen. These
property fund suspensions are a worry. I am risk-off at the moment,
erring on the side of believing the govvies,"
Certainly
seems like ever since Bernanke went back to the money-printing game
after QE2 that he broke the stock market's ability to signal
anything...
Because
the days of 'fundamentals' are long gone...
"Government bond yields are telling you something very nasty is about to happen. These property fund suspensions are a worry. I am risk-off at the moment, erring on the side of believing the govvies,"
"The Dominoes Are Fallling": Three Largest UK Property Funds Freeze$12 Billion In Assets, More To Come
As
first reported last night, and following up this morning, in an
episode painfully reminiscent of the Bear hedge fund "freezes"
that preceded the bank's 2008 collapse and the great financial
crisis, first
the
UK's Standard Life halted tradingin
its property fund, followed hours later by both Aviva and M&G
which likewise announced they are suspending trading in their own
portfolio funds. And, as Bloomberg
summarizes,
three of the U.K.’s largest real estate funds have frozen
almost 9.1 billion pounds ($12 billion) of assets after
Britain’s shock vote to leave the European Union sparked a flurry
of redemptions.
These
were the first major dominoes to fall as a result of the confusion
resulting from the Brexit vote. M&G Investments, Aviva Investors
and Standard Life Investments halted withdrawals
because
they don’t have enough cash to immediately repay investors. About
24.5 billion pounds is allocated to U.K. real estate funds, according
to the Investment Association.
The
rush by private investors to withdraw money prompted M&G, which
held 7.7% in cash before the vote, to suspend its 4.4 billion-pound
Property Portfolio fund and Aviva Investors to freeze its 1.8
billion-pound Property Trust on Tuesday. Standard Life halted trading
on its 2.9 billion-pound U.K. real estate fund on Monday. The cash
position for Aviva and Standard Life’s funds at the end of May was
9.3% and 13.1% respectively.
The
market reaction has been swift and brutal, sending stocks of the
property-linked asset managers crashing.
Standard
Life is among firms, including Aberdeen Asset Management Plc,
Henderson Group Plc, Legal & General Group Plc and M&G to
adjust the value of assets in their property funds last week.
Holdings in the funds range from an office building in Birmingham, to
a mall in Newcastle and retail warehouses in Northampton.
“Investor
redemptions in the fund have risen markedly because of the high
levels of uncertainty in the U.K. commercial property market since
the outcome of the European Union referendum,” M&G said on its
website. Outflows “have now reached a point where M&G believes
it can best protect the interests of the funds’ shareholders by
seeking a temporary suspension.”
“The
dominoes are starting to fall in the U.K. commercial property
market,”
said
Laith Khalaf, a senior analyst at Hargreaves Lansdown. “The problem
these funds face is that it takes time to sell commercial property to
meet withdrawals, and the cash buffers built up by the managers have
been eroded by investors heading for the door.”
Cited
by Bloomberg, "
the
drop-off in inflows and then redemptions forces these funds to eat
into their liquidity buffer,”
much
of which is held in real estate investment trust shares, Mike Prew,
an analyst at Jefferies LLC, said in a note to clients on Tuesday.
While
traders around the globe had been mostly focused on the downstream
effects slamming Italian banks in recent weeks, the news of
"freezing" UK property funds spooked global markets, and as
a result the pound fell to its weakest level in three decades against
the dollar Tuesday, surpassing lows reached in the aftermath of the
Brexit vote. Bank of England Governor Mark Carney pledged to shore up
financial stability on a day when a survey showed a plunge in U.K.
business confidence, but has so far failed to achieve that.
The
biggest concern prompting the redemptions is that according to
industry commentators London office values could fall by as much as
20 percent within three years of the country leaving the EU. During
the financial crisis of 2007 and 2008, real estate funds were forced
to freeze operations after withdrawals surged, contributing to a
property-market slump that saw values drop more than 40% from their
peak in the U.K.
As
Bloomberg adds, regulators had already planned to meet with the
U.K.’s largest asset managers on Tuesday to discuss the effect of
Brexit on the industry. The meeting - which could not come fast
enough - takes place as the Financial Conduct Authority’s new chief
executive officer Andrew Bailey told reporters that while the fund
suspensions were not a “panic measure,”
the regulator “may
need to look at the design” of
property funds. Just like the SEC looked at the design of open-ended
junk bond funds during the late 2015 blow up in that asset space.
Almost
3 billion pounds has been wiped from the market value of the FTSE 350
Real Estate Investment Trust Index since trading started Monday. Land
Securities Group Plc, the U.K.’s largest REIT, tumbled 9.1 percent
over the period.
Other
funds remain hopeful that redemptions will slow enough to prevent
further gating:
A spokesman for Aberdeen said the company has no plans to suspend trading in its funds, saying that redemptions have started to slow and its U.K. property fund holds about 20 percent in cash. Henderson declined to comment, while L&G said its U.K. property fund is “well positioned” in terms of liquidity and asset management.
Good
luck, because as Emma Bewley, head of funds at Connection Capital in
London told Bloomberg, “
the
potential impact of a high-profile liquid fund suspending redemptions
shouldn’t be underestimated, particularly given the uncertain
environment.
While
asset managers will seek to avoid suspending redemptions, they may
have to use additional liquidity facilities” such as lines of bank
credit."
In
other words, half a year after the junk bond mutual fund scare, and
just months after most central banks unleashed the strongest salvo in
the global race to debase yet, the global financial system finds
itself in dire straits yet again.
Naturally,
all of this assumes that Italian banks will remain perfectly solvent
for the duration of the current crisis, something which as Matteo
Renzi's urges to get permission from Europe for a bank bailout
suggests will not
be the case considering he
"
hoped
to use a liquidity backstop to contain investor panic, which could
result in a run on deposits.
"
Because once the bank runs do start - precipitated of all things by
fears that Europe's brand new bail-in regime will be instituted in
one of Europe's largest economies, then it will really be time to
panic.
Britain's FTSE 100 one of world's best performing stock markets since Brexit vote
Despite
the fear campaign surrounding the UK leaving the European Union,
London's premier exchange has been the best performer among the
world's major stock markets.
Since
the referendum on June 23, Britain's FTSE 100 index has gained two
percent as of Wednesday afternoon’s trading. Meanwhile, major
European, US and most Asian stock markets are in the red over the
same time period.
Germany's
DAX and the CAC 40 index in Paris have lost over eight percent since
the UK vote. Major US indices, Dow Jones, the S&P 500 and the
Nasdaq are down over one percent for the period.
Among
major Asian markets, Japan's Nikkei has lost over five percent, the
Hong Kong exchange is almost two percent lower and only China's
Shanghai Composite saw gains of over four percent since the
referendum.
The
Brexit vote sent shockwaves through global financial markets wiping
off trillions of dollars in value during the two-day selloff
following the referendum.
However,
after two days of losses, London's FTSE 100 has managed to recover
and hit a ten-month high last week.
Some
analysts continue to warn the recent market recovery might only be
temporary.
“Considering
there's been no additional clarity on the terms of Brexit or the
outlook for the UK economy and the global economy since Britain's
decision to leave the European Union, we don't see fundamental
support for the recent moves,"Kathy
Lien, managing director of foreign exchange strategy at BK Asset
Management, told the BBC.
London's
FTSE was trading lower on Wednesday, down around 1.5 percent as of
14:00 GMT.
EU Banks Crash To Crisis Lows As Funding Panic Accelerates
Tumbling
to a fresh post-Brexit low, Europe's Stoxx 600 Bank Index is testing
EU crisis lows...
With
Credit Suisse smashing to record lows...
and
Deustche Bank crashing towards the inevitable Lehman moment...
As
it seems the most systemically dangerous bank in the world is
liquidating aggressively (via
Reuters)
Deutsche Bank is looking to sell at least $1 billion of shipping loans to lighten its exposure to the sector whose lenders face closer scrutiny from the European Central Bank, sources told Reuters.
While the oil tanker trade has picked up, the container and dry bulk shipping industries are struggling with their worst downturn due to a glut of ships, a faltering global economy and weaker consumer demand.
Banking and finance sources familiar with the matter said Germany's biggest lender was initially looking to offload at least $1 billion.
"They are looking to lighten their portfolio and this includes toxic debt. It makes commercial sense to try and sell off some of their book," one finance source said. "They are not looking to exit shipping."
Deutsche Bank, which has around $5 billion to $6 billion worth of total exposure to the shipping sector, declined to comment.
Senior
and Sub CDS are widening dramatically today with Italy's
short-sale ban on Monte Paschi shares sparking a 10% bounce in the
stock but CDS are unchanged implying a 66% chance of default.
Notably
BMPS shares are leaking back lower after the opening ramp (desk
chatterof takeover rumors have been dismissed) and the rest of the
Italian banking sector is catching its cold (as we warned it would
when Consob instigated the short-sale ban)
Which
helps explain the crisis
in Europe's funding markets as USD demand smashes higher (-9bps
to -49bps in EUR-USD basis swaps)...
With
counterparty risk concerns growing in Sterling banks...
Charts:
Bloomberg
Three UK Asset Managers Freeze Withdrawals From Property Funds
In the wake of Brexit, investor fears on the value of property, especially in London have surfaced.
A
flurry of redemptions from property funds is so great that three UK
fund managers froze redemptions. And the British pound is at 100-year
lows.
Three
Funds Freeze Withdrawals
Bloomberg
reports Brexit
Erodes U.K. Economic Pillars as Property Investors Flee.
Three asset managers froze withdrawals from real-estate funds following a flurry of selling and the pound plunged to a 31-year low less than two weeks since the nation backed quitting the European Union. Rushing to fill the political vacuum, Bank of England Governor Mark Carney signaled easier monetary policy and urged prudence on households.
“I am expecting quite a sharp reduction in investment spending, a sharp hit to the commercial property market, probably a check to consumer spending, all of which could push us towards zero or below growth,” John Gieve, a former deputy governor of the Bank of England and veteran of the last crisis, told Bloomberg Television.
Reacting to a rush by investors to redeem their money, M&G Investments and Aviva Investors followed Standard Life Investments in suspending trading in commercial-property funds that together total 9.1 billion pounds ($11.9 billion dollars). Industry analysts have warned that London office values could fall by as much as 20 percent within three years of the U.K. leaving the EU.
20%
Correction a Bad Thing?
Property
values in London are so ridiculous, one has to ask: Are falling real
estate prices a bad thing or a good thing?
Is
20% just a start of what’s to come? Is Brexit to blame or simply a
catalyst for an eventuality already baked into the cake?
On
a side note, I seldom link to Bloomberg anymore. In fact, I seldom
even read Bloomberg anymore thanks to auto-play videos that are hard
to kill. I cannot stand autoplay, and nearly every Bloomberg article
comes loaded with the damn things.
Mike
“Mish” Shedlock
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