Friday, July 13, 2012

Welcome to Japan

Years ago, when bond yields were still at levels that made investment sense, economists and politician assured us that global interest rates would never reach the ultra-low levels seen in Japan.

So much for that.

One starts running out of adjectives to describe just how low interest rates globally have gotten. Here's one description, courtesy of Merrill Lynch's Chief Global equity strategist Michael Hartnett:

Japanification” of rates almost complete; average US/UK/German bond yield
has rallied from 5% to 1% since 2007; 17 countries now have 2-year bond yields below 1%; 10 countries (with combined bond market cap of $27 trillion) have yields out to 2-years on curve at 0%; average yield on 6-month bill auctions in Germany -0.034% and in France -0.006%, i.e. negative.

Moody’s AAA corp bond currently yielding 3.6%, lowest since June 1958;

Moody’s BAA corp bond currently yielding 5.0%, lowest since Nov 1965.

Earlier this week, the U.S. Treasury sold 10 year Treasury notes at an all-time record low yield:  1.459%.  Demand was robust,  apparently lead by the Chinese government.  Today's yields are more than 20 basis points lower than the levels seen at the height of the financial crisis in the spring of 2009.

Writing in this morning's Financial Times, Gillian Tett reports that corporate cash levels continue to move higher, despite in many cases negative interest rates.  The mood of uncertainty and fear permeates the business world, just as it does the investing public:

That is partly because many American companies are profitable. But it is also because companies are holding onto this money, rather than spending it on productive investments or giving it to shareholders, so fearful are they about the future. Cash has thus become like a corporate security blanket, something executives cling to in frightening times.

In some senses, all of this is already well known. But what is less widely appreciated is that companies are not just refusing to use their money to invest in tangible ventures – they are running scared from the capital markets too. In 2006, the AFP says, corporate treasuries placed a mere 23 per cent of their funds in banks. But last year, the proportion of funds sitting in banks doubled – and this year it rose above 50 per cent.

Interesting, all of this is occurring at a time when some economists are seeing possible signs of a economic pick-up in the second half of 2012, as the New York Times reported this morning:

Despite the recent run of disappointing economic data, a broad range of experts and forecasters expect the economy to improve slightly in coming months, thanks to lower oil prices and new signs of life from sectors like automobiles and housing....
This week, Macroeconomic Advisers, an economic consultancy often cited by policy makers, estimated the annual rate of growth in the second quarter at just 1.2 percent — well below the pace needed to reduce the unemployment rate. But the firm also projected growth to accelerate to around 2.4 percent in the third quarter.

“The pace of economic growth is picking up, but not to a rate that is very robust,” said Joel Prakken, the chairman of Macroeconomic Advisers. “It certainly is no great shakes.” 

Welcome to Japan, I guess.