A once unthinkable collapse in global bond yields is forcing pension funds to buy bonds that offer negative returns.  Many institutions are warning of a severe mismatch between expected benefits and returns. Japan’s Government Pension Investment Fund, the world’s largest, cautioned of an expected negative return across all major assets classes that are producing a severe funding shortage.

A major question at hand is how leveraged is the bond market?  In 2008 most people in the markets had no idea about the leveraged web of instruments that were ultimately linked to the housing market.  A strong argument that a similar environment exists today as related to sovereign debt.

There have been numerous instances of liquidity mismatches albeit most of these issues are focused in Europe.

Will pension liabilities/mismatches become an electoral issue?  What happens if worst fears do materialize and the ensuing selloff is as great as the year to date advance.  On January 1 the 10-year was yielding around 2.69%.  Today is yielding around 1.44%, a rally no one expected.

Ten years ago a bill introduced into Congress by Senator Tom Harkin, a bill that had several sponsors, that would permit the government to seize private 401K accounts to fund the short falls in public service pensions, partially the result of the financial crisis.  The bill died in Committee but I ask will such legislation again be introduced because of negative yields and the progressiveness of the 22 Democratic Presidential candidates.

Changing topics, I think there is now little argument the markets are entirely dominated by five word headlines.  I ask what happens if an event occurs after the market closes that causes massive market imbalances at the market open that swamps an ETF sponsor or clearing house?

The narrative and bond yields are suggesting Armageddon is at hand.  The data does not.  Consumer Confidence is considerably stronger than expected, only 2.6 points below the highest level in over a decade.  The Conference Board survey’s job plentiful index in August rose by the greatest amount in history.  Housing prices are rising in secondary and tertiary cities.  Manufacturing activity is accelerating.

At some juncture something has to give.  Either the economy slows considerably or bond yields must rise.  In my view the disconnect between the two is now too great to ignore.

As written above, the markets are entirely dominated by five word headlines that have created a massive market imbalance.  The question at hand are these issue systemic?  Unfortunately only history can answer this question.

Commenting about yesterday’s market activity, equities closed lower after a seesaw session as all digested the most recent twists in the tumultuous trade talks.  Treasuries again rallied with the 3o year now again below 2.0%.

Last night the foreign markets were mixed.  London was up 0.14%, Paris down 0.70%,  and Frankfurt down 0.83%.  China was down 0.29%, Japan up 0.11%  and Hang Sang down 0.19%.

The Dow should open mildly lower waiting for new developments in the increasingly unpredictable Sino-American trade war.  The 10-year is up 3/32 to yield 1.46%.  The 30-year is yielding 1.92%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.