Bond Market Flight to Safety as Investors Sweat Over Brexit Risk, Wobbly US Economy, Negative Rates

George Soros appears to have timed his return to trading and his bearish bets perfectly.

The Financial Times reports on the panic in the global bond markets today as investors came to terms with the rash of bad news over the last week. Not only did revisions make the cheer about improving labor market conditions look like one big headfake, but as Wolf Richter pointed out, hiring of temps also declined. This is particularly worrisome since trends in those short-term positions are often a harbinger of future hiring plans.

Earlier this week, the Wall Street Journal flagged another major negative indictor: a decline in birth rates to the lowest level recorded in the US.

Screen shot 2016-06-11 at 4.46.03 AM

The drivers of economic growth are increases in population and productivity. US population was forecast to fall in the 1990s, and demographers were surprised at the end of the decade to have been proven wrong. The culprits were immigration and higher than expected birth rates, mainly among Hispanic households. The story tried to put a positive spin on the news, and there were indeed some good elements (teen births are down), but was also optimistic about fertility rates picking up again in the not-too-distant future. Given the propensity of advanced economies to have birth rates at less than replacement rates, combined with low household formation among the young due to high student debt levels, high unemployment among the young, and short job tenures, it’s hard to see why one should expect to see a reversal absent a big improvement in the state of the economy, when there’s no reason to expect that to occur. And that’s before getting to the fact that some young people are choosing not to have children, not out of economic concerns, but environmental ones. They foresee disruption due to climate change and escalating fights for resources between nations and potentially within nations, and they don’t think they should bring children into a world like that.

Michael Shedlock highlighted yet another worrisome sign mid-week: both personal tax receipts and the Evercore ISI Tax Receipts Survey have dropped sharply. When that’s happened previously, a recession has already started.

But a very big jolt to investors came yesterday, via an online survey in the UK’s Independent showing that votes for Leave were a full 10 points higher than Remain. Online polls are notoriously subject to gaming and sample bias, but one would think the Remain backers would have made a point of weighing in. The ugly truth is that the proponents of Remain have alienated a lot of citizens by screeching how terrible a Brexit would be, and by having banks like Goldman and JPMorgan, who arne’t well liked, be in the forefront of the campaign. In addition, the expert commentary has also likely backfired, since many voter recognize that those same experts failed to see the financial crisis coming and are employed by the people at the top of the food chain, who don’t represent their interests.

A final source of worry is the continued spectacle of negative interests rates and QE. The Fed and ECB have hoovered up safe assets and entered into a reckless experiments they have no idea how to exit. The faith that central banks would watch investors’ backs has now turned into revulsion as the monetary authorities are hurting banks, pension funds, insurers, and other long-term investors, and that pain has done nothing to help the real economy. Indeed, as Ed Kane pointed out years ago, super low rates hurt economic activity by reducing the income of savers, like retirees.

Key points from the Financial Times:

The global rally in government bonds broke records on Friday while equities buckled as a combination of anxiety over the world economy and Britain’s referendum on EU membership sent investors racing to safety.

Bears took charge of financial markets already grappling with the effects of negative interest rates in the eurozone and Japan as European equities suffered their worst day since the market meltdown at the start of the year.

“To see the 10-year Bund [yield] so close to zero is shocking,” said Philip Brown, head of sovereign capital markets at Citigroup. “Equities are falling and fixed income is rallying in a flight to quality — there are real fears in markets about global growth.”…

The succession of record lows across European and Japanese government bond markets this week is stirring concern over the long-term effects on savers and pension plans, as well as the wider threat of financial instability should the rally unwind sharply.

Insurers and asset managers, including Larry Fink, BlackRock chief executive, have warned of the potential damage from the central banks’ monetary policies. Bill Gross, founder of Pimco and now at Janus Capital, dubbed the trend in negative rates a “supernova that will explode one day”.

Jens Weidmann, Bundesbank president, said on Friday that asset managers “might become increasingly nervous” over the record low level of yields and that “policymakers have to take this into account in order to avoid unintended consequences”….

Ten-year Treasuries were among the biggest beneficiaries from deteriorating sentiment, with the yield on the global benchmark tumbling 5 basis points to 1.64 per cent — a level not touched since February’s acute market stress. Gold rose 0.4 per cent to $1,274.2 an ounce in the rush to safe havens. Japanese 10-year bonds touched a new low of a negative yield of 0.17 per cent.

The considerable financial market and political disruption that a Leave vote would usher in would have knock-on effects in the US. Recall that Sanders started surging against Clinton when the US financial markets were roiled in January and February. Upset markets and a weakening economy work against the Clinton presidential campaign. And if Trump looks like a strong contender come the fall, you can expect Mr. Market’s tizzy to only get worse.

Print Friendly, PDF & Email


  1. EndOfTheWorld

    What will happen—-deflationary spiral, perhaps? So commodities, including precious metals, will go down along with the stock market? Somebody please tell me what will happen because I’m not smart enough to figure it out.

    1. cnchal

      . . .Somebody please tell me what will happen because I’m not smart enough to figure it out.

      There is a near 100% certainty that the sun will rise tomorrow.

      1. Qrys

        There is a near 100% certainty that the sun will rise tomorrow.

        One good axial rotation of the Earth, deserves another…

      2. NotSoSure

        I utilized Bayesian conditional probability to come up with the same conclusion. On the other hand though, how believable is the Independent’s survey? Do they cater to a specific demographics?

    2. Tinky

      Aside from short-term gyrations, precious metals will not be going down with the stock market. Quite the opposite, in fact, and for a variety of reasons.

      1. Sunny129

        GOLD is just a trade!

        Gold has been and being manipulated and (paper GLD) priced at Gold Futures Exchange for decades by ‘primary’ dealers just like Libor rate! Deutsche bank just admitted to that effect a couple weeks ago although SEC was ignorant of that until probed by Fin media!

        GLD miners at least have some dividends. For ‘insurance’ purpose one can trade with ETFs & ETNs ( NOT for buy & hold). One can also use options, both ways!

    3. Jim Haygood

      Sadly, no one — not even Soros or his ex Quantum Fund partner Jim Rogers — knows what’s going to happen (though I’d claim that Soros and Rogers were like Lennon and McCartney: more than the sum of their individual parts).

      For an alternate take on commodities, though, consider the mean reversion argument offered by Ivy Portfolio author Meb Faber:

      Three down years in a row from one asset class is still quite rare. It has only happened six times across 378 total years, or less than 2% of the time. But when it happens the returns are impressive.

      A basic rule of thumb is that if the asset is down two, three, four, and five years in a row you can expect future two-year total returns of 40%, 60%, 80%, and 100%. (So multiply the number of years down in a row by two.)

      On the large asset class level, we have two assets that are down three years in a row. As mentioned above, this is just the fifth and sixth times across 378 years that this opportunity has existed. What are they?

      Emerging stocks and commodities.

      Just this month, commodities have risen dramatically from their bed of nails. Take a look at the chart of USCI, an unleveraged commodity fund based on a model by Yale professor Geert Rouwenhorst:

      The nice thing about buying a depressed asset class like commodities is that downside is limited, because it’s already been beaten up and left beside the road.

    4. Edward

      I can tell you exactly what will happen; the governments will transfer more tax dollars to the banks.

  2. Harry

    Imagine an drop in risk asset prices right now.

    What would happen to new lending? What would happen to new hiring or investment? Consumption? Stock prices are the key determinant of investment and hiring decisions in the modem economy.

    Bear in mind that, as Yves was saying, the marginal data is suggesting new recession or at least a downtick. Not so weird cos what do you think the standard periodicity of an economic cycle is? About 8 years? Policy is going to be a bit stuck right now cos Obama is in full lame duck mode. So tough to transition to fiscal policy right now. I say that cos I am hearing that the economic establishment had finally come to the obvious realization that fiscal policy is the only way out.

    If you were Hillary or any democratic or republican grandee, do you think you will welcome a sudden economic collapse right now?

    1. Synoia

      Not so weird cos what do you think the standard periodicity of an economic cycle is? About 8 years?

      It is a chaotic system. It has no “standard periodicity” (aka: Resonance).

      All asset pickers who relay on harmonic resonance, overtones,, harmonics, tea-leaves, the color of Warren Buffit’s stool, etc, are all believers in Superstition.

      And I categorically believe it is unlucky to be Superstitious.

  3. Sound of the Suburbs

    In 2008, I discovered we live in a world of clueless elites that don’t know what they are doing.

    Since our elites were determined not to learn from their mistakes, I decided to look into things.

    I had to dig all the way down to the very nature of money and debt itself to find out what went wrong.

    The establishment itself seems unable or unwilling to acknowledge the problem and continues on a path that ensures the problems of 2008 will resurface.

    If you want to get ahead of today’s technocrat elite, discover how money is created and destroyed on bank’s balance sheets.

    “Where does money come from?” available on Amazon

    When you are ahead of the technocrat elite you will know how money works and how its creation and destruction on bank balance sheets makes debt inflated asset bubbles so dangerous.

    1929 – Lending on margin into the US stock market
    1989 – Inflating real estate prices in Japan through debt
    2008 – Inflating real estate prices in the US through debt, leveraged up with derivatives.

    Spain, Ireland – more of the same.

    Around the world – housing bubbles that bankers lend into and Central Bankers do nothing about, they don’t understand money and debt.

    The people that don’t understand money and debt designed the Euro.

    Let’s see what Richard Werner thinks about the Euro, one of the people that wrote “Where does money come from?”, he understands money.

    ”When visiting Europe at the time (I was based in Tokyo in the 1990s), and meeting my peers, the chief economists at other banks, I would of course discuss what in my view was the highly worrying prospect of these plans to abolish the D-Mark. I was astonished by their reaction. About half of them insisted that those plans were so lunatic that, of course, they would not be implemented.“

    “The other half of the chief economists, like me, recognised that a single currency would be introduced, no matter how nonsensical the economics, since it was a political project. (The economics being bad, the politics was even worse: the end of democracy in Europe). They agreed with me that it was going to be a disaster“

    Brexit or no Brexit the whole thing is going to hell in a hand cart.

    1. Sound of the Suburbs

      The experts at the FED and the ECB!

      The new (supply side / neoclassical / Neo-Liberal) economics makes very simplistic assumptions about money and debt, leaving its disciples blind to debt inflated asset bubbles.

      2008 – “How did that happen?”

      Steve Keen used realistic assumptions about money and debt in his models.
      In 2005, Steve Keen saw the crisis coming and the debt bubble inflating.

      Ben Bernanke used flawed assumptions about money and debt in his models.
      In 2007, Ben Bernanke could see no problems ahead.

      The Euro, a disaster from the offing, then the ECB made it worse (Richard Werner again):

      ”in the event the European Central Bank was to exacerbate matters greatly by creating massive credit bubbles, banking crises and recessions in its first decade of operation. The ECB then ensured a prolonged crisis by not ending these banking busts, such as in Ireland, quickly and without costs to the tax payer (as central banks are uniquely able to do). Instead, the ECB forced governments to incur massive national debts to rescue their now defunct banking systems. This way, Ireland moved from fiscal poster boy to virtual default, needing an IMF rescue.“

  4. Steve H.

    That graph is amazing. The pill was approved in 1960 and the birth rate plummeted, and it sure seems an indication of what women’s preferences are when given a choice. There are words and then there are deeds indeed.

    1. Steve H.

      Pardon a followup with questions. Words v deeds goes to gaming polls, and I read this morning that three Cali counties have flipped to Sanders with continued tallies. Polls are words and votes are deeds, and the paper ballots can’t be gamed.

      On birthrates, the cliff edge happened with the pill, but I notice a peak birthrate a few years before, and I wonder why and how.

      Finally, most relevant to this site:
      – super low rates hurt economic activity by reducing the income of savers, like retirees.
      With Much Ado being Done, I’ve been reading Mosler and he recommends low rates. I’m still working this out, but he says ‘Savings is the accounting record of investment.’ Which means Kane has it backwards, if there were investment the rates would be higher. Is ‘savers’ another word for rentiers. Is this more ‘MMT for me and austerity for thee’?

    2. PlutoniumKun

      It is interesting – the US has always been something of a demographic outlier, in maintaining quite high birthrates after development – most countries of a similar level of per capita development in Europe and Asia have significantly lower birthrates. Demographers tend to look at two explanations – one is the flexible US job market (especially in traditionally female sectors) which allows women to drop in and out as they have babies, the second is immigration from countries with traditionally high birthrate.

      I would suspect that a key reason for a recent drop would be difficulties in the job market. Quite simply, women are afraid to quit or take extended leave in case they find there are no jobs when they come back. I suspect the rising cost of educating kids is another major factor. It may well show that long term fears over jobs and inequality is becoming ‘internalised’ and so is being reflected in smaller families.

        1. PlutoniumKun

          Yes, Ireland has always been an outlier, both for a high birth rate (which interestingly managed to co-exist with one of the oldest average ages for marriage in the world), but it continued through and beyond the economic boom.

          The demographic analyses I’ve always read attributed high birth rates in prosperous countries to two factors – either a very strong social welfare system aimed at mothers and young families (e.g. Sweden or Denmark or to a lesser extent Germany and France) in addition to generous maternal benefits, or to countries with a relatively high turn over of work (i.e. labour ‘flexibility’), allowing women to skip in and out of the workforce (US, UK). Low birth rates have tended to be associated with countries with poor maternity benefits and rigid labour markets where babies can be career suicide for a woman (North Mediterranean, some of eastern Europe, Japan, S. Korea, Taiwan, Singapore, etc).

          I’m sure there are many more complicating factors, but those seem to be the key variables determining which side of the long term demographic trends countries follow (birth rate always seems to fall with prosperity, the question is whether it falls below the replacement rate).

          Ireland has a moderately generous social welfare system which (I think this is a key point) has a strong focus on families. Its no Scandinavia, but in general for people at the lower end of the socio economic stage, having young children is not a big financial cost when you factor in the tax and social support mechanisms. And for wealthier people, there is a fairly good set of legal protections for those taking maternity leave, so professional women don’t lose out too much.

          So Ireland I think is in a sweet spot demographically between the US and European systems. While there are obviously cultural aspects at work (not so much catholicism, because Spain and Italy are catholic too, and they have very low birth rates), its more a cultural focus on the family, I believe there is evidence that immigrants to Ireland tend to have more children than in their ‘home’ countries – especially those from Asia or Eastern Europe, so I suspect that it is related more to structural than cultural factors.

        2. PlutoniumKun


          This is my second go, I replied to you a few hours ago, but it seems to have been swallowed up (I never quite know when to give up a post here as lost).

          As the CIA list shows, there is a pretty clear link between overall development and birth rate. But there is significant variation between developed countries that likely can’t be ascribed largely to cultural factors. Ireland is a case in point – its maintained (for a developed country) a very high birth rate which seems pretty much impervious to how the economy is doing.

          So far as I know, demographers ascribe the differences between the birth rates of developed countries as being almost entirely down to how easy it is for women to combine work with raising children. Very low birthrates tend to be associated with countries such as Italy, Spain, much of Eastern Europe and almost all the developed Asian countries. What they have in common is both poorly developed welfare systems, rigid labour markets in terms of mobility, and poor maternity rights. Countries which have maintained relatively good birth rates (i.e. at the replacement rates or slightly above), tend to be ones with either flexible labour markets allowing women to hop in and out of the labour market (the US and maybe UK), or very strong legal protection for working women having children, and/or strong welfare states.

          My feeling about Ireland is that it is at a ‘sweet spot’ in those variables. The Irish labour market is fairly flexible, the Irish welfare system, while nowhere near as comprehensive as the Scandinavians, is oriented strongly towards younger families, while there are moderately good protections for working women taking maternity breaks. For lower income families, the combination of welfare and tax breaks (along with free schools and subsidised medical care for children) means it doesn’t actually cost much to have kids. For the mid to upper classes, in most sectors a professional woman won’t lose out too much in having kids (at least not in comparison to many other countries).

          So far as I know, there is evidence that immigrants to Ireland from ‘low’ birth countries have substantially more kids than their home countries, so that would indicate I think that its structural factors, not cultural ones that lead to Ireland maintaining a fairly high birth rate. But there is a societal and cultural element too – its not often you meet people in Ireland who decide not to have children, or just have one, but (anecdotally), I’ve met many people from Asia and continental Europe who quite casually make that choice.

      1. Harry

        Forgive me but that’s a mealy mouthed explanation for an obvious phenomenon. The US Is unlike western Europe in that it had maintained much more immigration and much less equality. The birthrate is higher here among the underclass immigrant population. Not the wealthier demographics.

    3. Edward

      Another cause of declining birth rates is the presence of endocrine disrupters in our food and environment.

      1. Pavel

        This is a key point. The BPAs are still allowed in many products in the US (I believe they have been banned in the EU). I recall reading 5 years or more ago about declining birth rates and sperm counts in Japan. There are multiple causes (esp for the former) but it seems that all the very popular “instant ramen” cup soups on sale in the hundred million konbini (convenience store, e.g. 7-Eleven, found literally on every corner in Japanese cities) contain BPAs which are released when hot water is added. This is a major scandal on the level of DDT and other poisons. (Further evidence is the increased rate of precocious puberty in girls.)

        1. Edward

          Yeah, this SHOULD be a major scandal, except in the U.S. these days nothing is a scandal until it reaches a Flint, Michigan-scale crisis. Global warming is another example. This may partly be the fruit of the Clinton-Gore “reinventing government” effort, which as I understand it involved making regulatory agencies financially dependent on the industries they regulated. I don’t think “reinventing government” was ever explained to the public. It was merely presented as a slogan.

  5. Larry

    Economics definitely play a role in declining birth rates. If you’re staring down student debt payments and experiencing increased costs of living I suspect you don’t see much room left in the budget for childcare while maintaining a job. And job tenures a tenuous at best. It’s one thing to maintain your own household during unemployment, but it’s another thing entirely to deal with that with a child.

    1. Mike Sparrow

      Not with this. Births are the same level they were since the bottom. Notice, 2015 will probably be revised upward.

      1. Yves Smith Post author

        Oh, come on. You are telling me you have a time machine? You’ve made two confident claims with no substantiation, just presenting your pet opinion as fact. If you do this one more time, I’m blacklisting you. I don’t mind people given other views, but this is pure bullshiting.

  6. sd

    I mentioned this a few days ago. That the economy of 2016 is rhyming with 1992 which brought Bill Clinton to the White House. Coincidence or deliberate manipulation? Granted, it’s based only on personal anecdotal experiences but that said, the personal is the political. So I voice my fears so I can more clearly see them and in turn, debunk them.

  7. Jim Haygood

    In the U.S., the lowest yield EVAH on the 10-year Treasury was recorded on July 25, 2012, when it sank to 1.43%. Daily data can be downloaded from FRED (DGS10). This is the 5-year chart (yield x 10):

    Today we’re just 0.20% above that trough, which was associated with one of the recurring crises in Eurosclerotia, the dying giant across the eastern seas.

    Old-school bond bulls like Lacy Hunt at Hoisington are snorting and pawing the ground, anticipating a fresh collapse of Treasury yields into the zero handles.

    But commodities and the old yellow dog, both correlated to Treasury yields, are starting to tell a different story.

    All we know for sure is that the Yellenites dare not hike rates with global sovereign yields sinking through the zero bound. Even with the cognitive handicap of a PhD Econ, they aren’t that nuts.

    1. harry

      Yeah, its like the markets are saying “I dare you. I double dare you… ”

      Mind you, isnt it just as dumb to bring in negative rates into that environment?

    2. Ishmael

      old yellow dog, both correlated to Treasury yields, — If you are referring to gold I am a little confused. Why would lower rates mean lower gold prices. Gold pays no yield but lasts forever which is not true about most political units. So if interest rates go down or even go negative it makes owning gold make that much more sense. In fact gold denominated in most currencies besides the US dollar has been going up as interest rates went down. Besides the interest issue, if the US enters a recession and or depression then the dollar will weaken which should be another reason to hold gold. Finally as turbulence in a nations politics increases the demand for gold also increases.

      I firmly believe that the US will be in a recession/depression in the near future or already is in one. I consult for a lot of businesses across the US and only hear doom and gloom. You can only attempt to solve too much debt with more debt for so long. There is a long list of zombified companies. I joking say my little consulting firm has made more money than several Fortune 500 companies over the last few years, but they still have a market cap in tens of billions of dollars. You can only fool the laws of physics and mathematics for so long. As I just posted on another article — If the economy and market collapses before the election Trump wins. If it collapses after the election Clinton wins but will probably be known as the President during the Greatest Depression and we all know she is no FDR and more like a Hoover. Prepare for the saying, “It isn’t worth a Clinton.”

      1. Jim Haygood

        “Why would lower rates mean lower gold prices.”

        It makes more sense with causation viewed in the opposite direction: gold has been falling for five years; so have global rates.

        Likewise, a sustained rise in gold and commodities eventually would manifest in higher inflation and rising rates.

        Gold especially benefits from negative real rates. Despite the stunning increases in nominal rates during the first and second oil shocks, real rates remained negative until Paul Volcker finally ambushed them with his Saturday Night Special bazooka.

        You are right about the prevalence of doom and gloom. Which makes me skeptical that this consensus could be correct. Let’s see whether the S&P 500 busts out to new highs on Weds. afternoon, after release of the “mush from the wimps” apologia statement from the Yellenites.

        1. Ishmael

          If you step back to 2000 (the start of the on going disaster) you will see the 10 year yield was approximately 6% and it is currently at 1.63%. Gold on the other hand was approximately $280 an ounce rose to a peak of $1,900 and is currently at $1,276. Gold has gone up 500% while interest rates have gone down 73%. I would say it is very difficult to look at yields and gold since 2009 due to central bank intervention and QE. Clearly as rates have gone down gold has gone up. There is a reverse correlation to interest rates and gold.

          Gold has been reacting very positively in the last few months as interest rates around the world have gone negative. This is especially true as people are beginning to be charged interest to keep money in banks.

  8. allan

    ” … super low rates hurt economic activity by reducing the income of savers, like retirees.”

    Fortunately, our innovative FIRE sector delivers an innovative rent extraction financial product to help these people continue being productive consumers:

    If you don’t have a reverse mortgage and don’t know anyone who does, your familiarity with the product probably comes from television commercials. There, often late at night, Pat Boone and Henry Winkler have peddled them with great sincerity.

    Sound sketchy? The loans, which allow people age 62 and older to pull some of the money from their home equity without having to make any monthly payments on the debt, have a pockmarked history. Financial con artists have persuaded borrowers to put the proceeds in inappropriate investments, and some spouses who weren’t on the mortgage have lost their homes.

    So it may surprise you to learn that some community bankers are quietly offering the loans, too, bringing a kind of Main Street respectability to a product that has long lacked it.

    Who needs (or wants) the Fonz to market these things when you have George Bailey?

  9. Gaylord

    Wake up, you stupid rich bastards — drop some of your money on us poor struggling masses and then watch the economy soar! Start investing in human resources instead of speculative ponzi schemes.

    1. Buddy Harroll

      But are there really “economic” problems outside the general market corrections?. I found the 10 year yield stupidly priced. Noticed Stocks aren’t following it down. I think it is a suckers rally. My guess when Brexit nonsense ends(and fails, sorry those polls were sure right on Scotland……..whoops, they are poorly sampled) and we see confirmation of the RE ramp up in credit markets, they could be the next “bubble” to pop.

      This isn’t 1992 at all. This is 1996 and don’t be the fool to pay that price.

  10. Mike Sparrow

    Tax Receipts and nominal income are surging in the 2nd quarter. Shedlock will be panicking by July. Total recovery and resumed growth by the 3rd quarter. Ouch!!!!!!

    1. Yves Smith Post author

      Making stuff up is against house rules. Your point is inconsistent with the actual data Shedlock provided. I’m not going to let a comment like this from you through again without a link substantiating it.

      And that’s before you factor in possible Brexit blowback.

  11. cassandra

    Suicides are up, bitrhrates are down: scary similarity to Russia in the 90’s. Take home lesson in Russia was that there was a politico-economic system worse than communism: namely, neoliberalism, and some other path must be found. Why is neoliberalism still being tolerated in the west, let alone defended.

    Oh; I forgot.

Comments are closed.