Tuesday, November 2, 2010

The Race to the Bottom Continues

It looks like emerging markets are getting pulled into the race to the bottom whether they like it or not...

First, Bloomberg details expectations for QEII:

The Federal Reserve will probably begin a new round of unconventional monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.

New York Fed President William Dudley set expectations for $500 billion in purchases when he said in an Oct. 1 speech that purchases totaling about that amount would add as much stimulus as lowering the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point.

Which Japan may try to one up via an ETF purchases:
Bank of Japan board members said purchases of exchange-traded funds and real-estate investment trusts could increase transactions by supporting investor sentiment, minutes of the bank’s Oct. 4-5 board meeting show.
Where will all this liquidity go? Hopefully the actual economy, but more likely over the short-run... speculative investments, including emerging markets, in yet another reach for yield.

Example one:
Yields on bonds from junk-rated companies in emerging markets are approaching the lowest relative to investment grade since June 2008 as less creditworthy borrowers benefit most from cash pouring into developing countries.

“People literally cannot buy enough” junk bonds of companies in developing nations, said Steve Gooden, managing director of emerging markets in London at Macquarie Group Ltd., Australia’s biggest investment bank. Investors are buying corporate junk notes from such nations because high-grade supply can’t keep up with demand, he said.
Example two:
China’s U.S. dollar borrowing costs fell in October by the most since January as investors bet record currency reserves of $2.65 trillion will help the world’s fastest-growing economy win a higher debt rating.

The yield on China’s $1 billion of 4.75 percent notes due October 2013 dropped 31 basis points last month, or 0.31 percentage point, to 1.46 percent, according to Royal Bank of Scotland Group Plc prices. The extra yield over similar-maturity U.S. Treasuries narrowed 15 basis points to a three-month low of 95.

The race to the bottom continues...


  1. Are these reasons to buy U.S. Treasuries even at negative yields?

  2. As in TIPS? The reason you invest in TIPS (5 year TIPS have a -0.5% real yield) is only because they are relatively attractive (even at a negative real yield) than similar duration (5 year) Treasuries yielding 1.1% if you believe in inflation higher than 1.6% over the next 5 years or 0% nominal yielding short terms treasuries / checking account yielding an even larger negative amount.

  3. no matter what happens with QEII, a buy and hold investor will only receive the yield. if you don't have to buy... don't.