Bond selloff eases but risk gauges flash orange

The recent violent selloff in the $20 trillion U.S. government bond market has eased, but it isn’t over.

Signs of stress are in fact everywhere; they imply that more such episodes of turmoil or “tantrums” as they have become known lie in wait over coming months.

Ten-year Treasury yields, the main reference rate for global borrowing costs, are now around 1.4%, having spiked last week to 1.6%, a whopping 130 basis point rise from March 2020 lows.

The brutal spillover into stock markets shaved $2 trillion last week from the value of global equities, which are trading on exalted valuations following a decade-long rally.

Volatility could return if U.S. economy continues to surpass expectations and President Joe Biden’s $1.9 trillion spending plan says Salman Ahmed, global head of macro at Fidelity International, noting “risks emanating from the impending fiscal dominance that will drive a notch-up in cyclical inflation”.

Here are some indicators that show bond market stress is by no means over:

1/ VIX TO FOLLOW THE MOVE?

The global bond slump boosted the volatility index to near April 2020 highs, but it contrasts with a similar index in the equity market which is trading half of the levels seen in April.

Graphic: MOVE index versis VIX –

Reuters Graphic

2/ WIDENING SPREADS

Signalling more stress for the bond markets is the widening bid-ask spread in U.S. Treasuries, an indicator of shrinking liquidity in the deepest bond market in the world.

Data from Tradeweb, a trading platform, showed wider spreads were a feature across the yield curve, pushing them to their highest levels since the March 2020 pandemic-fuelled selloff.

Graphic: U.S. 5-yr bonds bid-ask yield spread soars –

Reuters Graphic

Graphic: Stress Signals –

Reuters Graphic

3/ EXPLODING TREASURY ETF TURNOVER

A major reason why spreads widened as volatility jumped has been a marked change in the composition of market participants in the bond market in recent years.

Traditional participants like banks have ceded market share to algorithmic trading in major markets with some estimates putting the share of algorithmic trading in U.S. Treasuries at nearly 90% compared to 50% at the start of the decade.

And as the computer-share driven trading models have become more widespread, turnover in futures and exchange traded funds have exploded while volume in cash markets have stagnated.

Graphic: Exploding interest –

Reuters Graphic

4/ NASDAQ-UST, A DEADLY COMBO?

A 60% Nasdaq and 40% US 10 year U.S. bond portfolio showed one of the largest bi-weekly declines since the global financial crisis.

Graphic: Nasdaq and US 10Y 60-40 portfolio sees huge declines –

Reuters Graphic

Donald Trump ordered to hand over tax returns to prosecutors

Donald Trump has been ordered by the US Supreme Court to hand over his tax returns and other financial records to prosecutors in New York. 

The former US president has been refusing to release the documents for several years, despite a precedent that presidential candidates should do so.

A lower court had earlier ruled that the records were pertinent to a criminal investigation.

The ruling does not necessarily mean the files will be made public.

The financial documents should be provided as evidence to a grand jury to be scrutinised in secret, and might only later become public as part of an indictment. 

A grand jury is set up by a prosecutor to determine whether there is enough evidence to pursue a prosecution. The jury is given investigative powers and can issue subpoenas to compel people to testify.

The US Supreme Court’s decision is a blow to Mr Trump, who has been in a legal battle to protect his records from a grand jury for months.

Last July, the Supreme Court ruled that Mr Trump’s financial records could be examined by prosecutors in New York.

But lawyers representing Mr Trump challenged that ruling, suggesting that the court filing was “wildly overbroad” and issued in bad faith.

On Monday, the court rejected the lawyers’ argument. 

According to US media, this was the last opportunity for the former president, who left the White House last month ahead of President Joe Biden’s inauguration, to keep the records private. 

Mr Trump has continuously denied wrongdoing and has called the investigation into his tax affairs a “witch hunt”.

In a statement on Monday, Mr Trump accused New York prosecutors of unfairly targeting him and said that the Supreme Court “never should have let this ‘fishing expedition’ happen”. 

What’s the background to this?

Manhattan District Attorney Cyrus Vance, a Democrat, has been trying for months to obtain eight years’ worth of Mr Trump’s personal and corporate tax returns. 

Mr Vance has been investigating allegations surrounding the payment of hush money before the 2016 presidential election to two women who said they had had sexual relationships with Mr Trump. 

The district attorney has said that the tax returns and financial records are pertinent to the case.

It is alleged that the payments were made by Mr Trump’s former lawyer Michael Cohen to adult film star Stormy Daniels and former Playboy model Karen McDougal.

Mr Trump denies the affairs took place and described the Supreme Court’s ruling last July as “purely political”.

Lawyers for Mr Vance later said the inquiry would extend beyond purported hush money payments. 

They citied newspaper articles about supposed bank and insurance fraud at the Trump Organization and congressional testimony by Cohen, who said the former president would devalue his assets when trying to reduce his taxes.

Mr Trump, who inherited money from his father and went on to become a property developer, is the first president since Richard Nixon in the 1970s not to have made his tax returns public.

Financial pain of Covid ‘not shared equally’

More than five million people have fallen into a “fragile” financial position owing to the coronavirus crisis, with young working adults among the hardest hit.

People from black, Asian and minority ethnic backgrounds were also more seriously affected than others, the Financial Conduct Authority (FCA) said.

The regulator said “the pain is not being shared equally”.

An estimated 14.2 million people are vulnerable to a financial shock.

‘Worrying findings’

The regulator’s Financial Lives survey is a benchmark for the state of the nation’s finances.

A total of 16,000 people were interviewed in February last year, with another 22,000 spoken to in October, after the pandemic struck.

As a result, it gives a snapshot of the first six months of restrictions caused by the coronavirus crisis.

The findings suggest that a quarter of the UK adult population now have low financial resilience. That means they have debts that are hard to manage, low savings, and are vulnerable to a financial shock such as a large, unexpected bill.

Many people have cut back on essentials, around a fifth expect to borrow from family and friends, and one in 10 plan to use a food bank.

“While there are some positives in the data, many of the findings are worrying,” said Nisha Arora, director of consumer and retail Policy at the FCA.

“The pain is not being shared equally with a higher than average proportion of younger and BAME adults becoming vulnerable since March. It is likely the picture will have got worse since we conducted the survey.”

By Kevin Peachey
Personal finance correspondent, BBC News

SoftBank posts third-quarter profit gain as Vision Fund rallies

SoftBank Group Corp on Monday recorded an 844 billion yen ($8 billion) profit at its Vision Fund unit in the three months to Dec. 31 compared with a loss a year ago as it gained from investments in Uber Technologies and other companies.

The earnings mark a sea change from a year earlier when high profile misses such as the flopped IPO of office sharing firm WeWork and the COVID-19 pandemic forced CEO Masayoshi Son to sell down assets to stabilise his investing empire.

During the third quarter net profit ballooned more than 20 times to 1.17 trillion yen ($11.09 billion). That compared with an estimate of 171 billion yen from four analysts polled by Refinitiv SmartEstimate.

($1 = 105.5000 yen)

By: Reuters

Truckmaker Volvo profit tops forecast

Swedish truckmaker AB Volvo reported fourth-quarter core earnings above analysts’ expectations on Wednesday, raised its forecasts for some of its main markets and rolled out a hefty shareholder payout.

Adjusted operating profit at the maker of trucks, construction equipment, buses and engines rose to 10.93 billion Swedish crowns ($1.30 billion) from 9.22 billion a year earlier, well above the 8.77 billion seen by analysts according to Refinitiv data.