Negative real Yields-MS

From Morgan Stanley

Negative real yields: The continued rise of the gold/copper ratio is a disinflationary sign, supporting the message of increasingly inverted G10 sovereign yield curves suggesting that the demand and supply of capital has shifted, which indicates increasing recession risks. The US 10-year sovereign real yield (as provided by the inflation breakeven market) has tipped into the red, leaving within the G10 Italy as the only country printing positive real yields. With inflation-adjusted coupon income turning negative, investors consider the equity markets as the alternative. The spread between the US 30-year nominal bond yield and the S&P 500 dividend income has turned negative, which happened before in 2016 and 2008. In both cases, aggressive easing measures pushed bond yields up again relative to the dividend yield.

Hurdles for successful reflation are high and rising: This time, the hurdle for this to happen seems higher for three reasons. First, debt has increased, reducing the effectiveness of the monetary policy tool kit. Second, rates and yields dropping into negative territory have pushed non-US bank equity prices often below book value, reducing the scope for commercial banks to increase their balance sheets or the risk structure of their credit portfolios. Hence, the money multiplier declines while credit flows into ‘safe’ but low productive areas of the economy. Banks seem willing to fund low-yielding real estate but stay on the sidelines in meeting the funding demand from venture capitalists. Funds flow into sectors almost guaranteeing low productivity gains and, implicitly, low returns. Third, global trade is in retreat, breaking efficient global production chains, acting like a tax on the corporate sector. This is why this cycle is slowing down from the supply side.

Morning 8-29

Risk On!


  • China MOFCOM: Wiling to resolve trade issue with calm attitude; asks US to show sincerity, concrete action and to meet China halfway; both trade teams have been in touch; China has ample retaliatory measures; both sides are discussing previous talks; most important thing is to continue negotiations; if China officials visit US in September both sides should create conditions for progress (ITC markets)
  • BBG: US Tsy Sec Mnuchin: US doesn’t intend to intervene in currency mkt’s for now, but signaled he’d prefer any future moves to be coordinated with the Fed & global allies; Ultra-long US bonds 50 and 100 year maturities  are under very serious consideration. Thus the drop in the Long end yesterday afternoon and the continued weakness today 30 and 10  year yields  higher by 1 bps or so.
  • German Inflation data Missed to down side, Strengthening case for Stimulus from ECB,  Euro steady

Spoos +29 handles +1% Closed higher yesterday by +.85 Nasdaq +1.23%   Italy’s Mib +2%, Dax +1.2%, Bunds -20 ticks   Copper +.9% Silver impressive run continues +1% Soybeans and corn +.6%. As Long as trump does not tweet risk Sentiment should stay intact. Second look at Q2 GDP is of minor importance.


Bloomberg’s Cameron Crise flagged up this discussion earlier today,Since I am trying to understand how Overnight index swaps work and their meaning I figured I would write it up.

Below is the 30 year OIS which is at 3 year lows and trending lower ,if I Understand correctly this is what the market expects the Average Fed Funds rate to be over next 30 years.I don’t know yet if this is predictive or reactive A bit more research is needed. Either way both of these metrics are well below the fed funds rate of 2.125 and market saying lower rates ahead

10 year OIS swap at 1.08%