23/9/19: Corporate Finance in a Chart

The glut of debt and the unbearable lightness of corporate leverage:

24/2/19: Eurozone's Corporate Yields are not quite in a crisis territory... yet...

Euro area high yield corporate credit rates are under pressure to continue moving:

But they are far from being dramatic, even though banking sector margins have now surpassed ex-crises averages:

The problem, however, is what awaits on the horizon. So far, the ECB is planning on hiking rates in the second half of 2019. If it does, with one 25 bps hikes to the end of 2019, we are looking at high yield rates jumping close to a 7 percent mark:

That is a bit more testing than the current above-the-average yields.

30/7/18: Annotated History of the U.S. Treasury Yield Curve

Courtesy of the forgotten source (apologies) a neat summary chart plotting the timeline of the 10 year U.S. Treasury yield:

For referencing purposes… 

10/6/17: Cart & Rails of the U.S. Monetary Policy

So, folks, what’s wrong with this picture, eh?

Let’s start thinking. The U.S. Treasury yields are underlying the global measure of inflation since the onset of the global ‘fake recovery’. Both have been and are still trending to the downside. Sounds plausible for a ‘hedge’ asset against global economic stagnation. And the U.S. Treasuries can be thought of as such, given the U.S. economy’s lead-timing for the global economy. Except for a couple of things:

1. U.S. Treasury is literally running out of money (by August, it will need to issue new paper to cover arising obligations and there is a pesky problem of debt ceiling looming again);
2. U.S. Fed is signalling two (or possibly three) hikes over the next 6 months and (even more importantly) no willingness to restart buying Treasuries again;
3. U.S. political risks are rising, not abating, and (equally important) these risks are now evolving faster than global geopolitical risks (the hedge’ is becoming less ‘safe’ than the risks it is supposed to hedge);
4. U.S. Fed is staring at the prospect of potential increase in decisions uncertainty as it is about to start welcoming new members ho will be replacing the tried-and-trusted QE-philes;
5. Meanwhile, the gap between the Fed policy’s long term objectives and the reality on the ground is growing: private debt is rising, financial assets valuations are spinning out of control and 

So as the U.S. 10-year paper is nearing yields of 2%, and as the premium on Treasuries relative to global inflation is widening once again, the U.S. Fed is facing a growing problem: tightening rates is necessary to restore U.S. dollar (and U.S. Treasuries) credibility as a global risk hedge (the key reason anyone wants to hold these assets), but raising rates is likely to take the wind out of the sails of the financial markets and the real economy. Absent that wind, the entire scheme of debt-fuelled growth and recovery is likely to collapse. 

Cart is flying one way. Rails are pointing the other. And no one is calling it a crash… yet…