“Sell in May and go away?” as US/German bond yields jump

Economic growth


Index May15A strange thing happened to German 10-year interest rates last week – they rose quite sharply, by a further 0.2%. That may not sound a lot, but it is when the starting point is so low.  On 20 April, they were at 0.07%, and on Friday they closed at 0.37% – for a total rise of 0.3% in 10 days.

Thus their gain since the start of the European Central Bank’s €60bn/month ($67bn) QE programme was wiped out.

This followed a similar jump in US 10-year bond yields, from 1.87% on 17 April to 2.11% on Friday – a 13% rise in 2 weeks.  And the US 10-year bond is the benchmark for the global bond market, as it is supposedly “risk-free”.

Of course, this may just be the result of trading gambles as yet unreported.   But as the Financial Times warned on Friday:

While the stock of outstanding US high-grade corporate bond has risen since 2008 from $2.8tn to $5tn, the level of market turnover has tumbled to at or close to the lowest levels on record”.

Liquidity matters in financial markets.  The big players need to know they can buy and sell large volumes – if they can’t do this, then volatility can suddenly increase.  And a new Report from the Institute of International Finance (IIF) on Thursday highlighted how the sudden drop in liquidity has also hit emerging markets (EM):

EM bank lending conditions tightened abruptly to their weakest level in three years in 2015Q1. The main driver was a plunge in loan demand, led by EM Europe and EM Asia. In addition, funding conditions continued to tighten, in part driven by a sharp deterioration in access to external funding in Latin America and Sub-Saharan Africa. Meanwhile, nonperforming loans maintained their upward trend, especially in EM Asia and Latin America, causing banks to continue tightening credit standards for new loans.”

The problem according to the IIF is “lack of demand, (with) demand for credit falling sharply across all 5 regions”.

These two developments confirm that the impact of China’s New Normal policies is now spreading into the financial sector.  Commodity prices were first hit as China’s demand growth came to an end in H2. Now commodity exporters are running out of cash, and have few opportunities to replace the income they have lost from the downturn.

The IeC Boom/Gloom Index of market sentiment is also warning that markets are increasingly stressed.  It jumped with news of the ECB bond-buying early in the year, but has since fallen back sharply, as the chart shows.

Equally important, perhaps, is that last week’s bad news on US GDP led yields to rise, not fall.  If so, this could be awkward timing for markets.  They traditionally slide between May to September, giving rise to the saying “Sell in May and go away”.  New research shows this pattern persists in 36 of the 37 countries studied back to 1694.

The key to the slowdown is lack of liquidity:

  • Historically farmers would raise cash in May to finance their harvest, and would then reinvest when they sold it
  • Today, most investors take holidays over the summer, thus reducing levels of activity

Central banks have created a debt-fuelled ‘Ring of Fire‘ in recent years, in their vain efforts to return us to BabyBomer-led SuperCycle growth levels.  It may just be that investors are starting to realise that much of this debt can never be repaid, now the world has lost its demographic dividend and has moved into demographic deficit.


My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Benzene Europe, down 39%. “Supply had been curtailed by exports out of the region to the US market since the end of March, and with crackers switching over to lighter feedstocks now that the winter season had drawn to a close.”
Brent crude oil, down 37%
Naphtha Europe, down 34%. “Naphtha prices have increased this week on the back of upstream Brent crude oil futures”
PTA China, down 28%. “Downstream polyester sectors in the key China markets slowed down as compared to the previous week”
HDPE US export, down 18%. “Export prices moved higher across the board in response to higher prices in Asia and Europe”
¥:$, down 18%
S&P 500 stock market index, up 8%


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