- Amount of negative-yielding debt plunges by $7.3 trillion due to higher government and corporate bond yields
- Markets hope for third virus-relief bill by Monday
- Fed and central banks around the world slowly calm the markets with liquidity measures
- Crude oil prices surge 24%
Amount of negative-yielding debt plunges by $7.3 trillion due to higher government and corporate bond yields — Almost $7 trillion of global debt has moved from negative to positive-yielding territory just since last Monday. Specifically, the Bloomberg Barclays Global Aggregate Negative-Yielding Debt series plunged to $7.68 trillion on Thursday from last Monday’s 6-month high of $14.94 trillion.
The sharp drop in negative-yielding debt was caused by the recent surge in government bond yields that occurred because the bond markets will have to finance massive quantities of government virus-rescue plans in coming months. Also, corporate bond yields have surged because of the much higher credit risk that corporations are now facing due to the shut-down of major portions of the U.S. and European economies.
Markets hope for third virus-relief bill by Monday — Senate Republicans late Thursday unveiled the outlines of the third virus-relief bill that will likely top $1 trillion. Republican and Democratic leaders on Friday will begin hashing out a deal that can get bipartisan support since the bill will have to get at least 60 votes for cloture in the Senate and a majority vote in the Democratic-controlled House.
Treasury Secretary Mnuchin Thursday evening called on Congressional leaders to act by Monday on the new stimulus bill, saying, “Our objective is to have Congress pass legislation on Monday and have the President sign it.”
The proposed bill includes (1) tax rebates of $1200 to individuals and $2400 to married couples with incomes under certain levels, (2) $208 billion of loans for large companies suffering from the pandemic including $58 billion for the airline industry, (3) $300 billion of relief for small business, (4) the waiver of penalties for withdrawing money from 401k’s, (5) a delay in paying employer-side payroll taxes to the IRS, and (6) the expanded ability of companies to deduct interest and use business losses to offset taxes.
The markets will carefully watch to see whether Republicans and Democrats can quickly come together on a bill that can pass Congress. The stock market will quickly plunge if there are any major delays in getting the bill passed. Some in Congress remember that the S&P 500 index back in September 2008 plunged by -9% after the House failed to pass the TARP bailout bill on its first attempt, which prompted quick passage on the second try.
Fed and central banks around the world slowly calm the markets with liquidity measures — The Fed continued its busy rescue week by satisfying more of the huge emergency global demand for liquidity in the dollar. Some of the pressure came off dollar loan premiums, but the dollar index rallied sharply on Thursday by another +1.58% and posted a new 3-year high.
Specifically, the Fed on Thursday provided dollar swap lines to nine more foreign central banks, allowing those central banks to lend out dollar liquidity to their domestic banks and their customers. The Fed this past Sunday already announced the expansion of its dollar swap lines with the major central banks of Europe, UK, Switzerland, Canada, and Japan.
The markets on Thursday reacted favorably to the ECB’s announcement late Wednesday of a massive 750 billion euro bond purchase program to be executed by year-end, which added to the ECB’s already-existing QE program. Also, ECB President Lagarde on Thursday said what the markets like to hear during times of crisis, i.e., “extraordinary times require extraordinary action” and there are “no limits to our commitment to the euro.”
The ECB’s massive new QE purchase program had an immediate impact on the Eurozone bond markets since the spread of the Italian 10-year bond yield over the 10-year German bund yield on Thursday plunged by a total of -86 bp to 193 bp from Tuesday’s 10-month high of 279 bp. Thursday’s plunge reversed more than half of the surge seen in the past several weeks as worries grew about the ability of Italy to finance its coronavirus rescue efforts given that Italy’s national debt is already massive at 135% of GDP.
Meanwhile, the Bank of England on Thursday cut its benchmark interest rate by another -15 bp to 0.10% and boosted its asset purchase program by 200 billion pounds to 645 billion pounds. The Bank of Japan on Thursday bought 201.6 billion yen ($1.8 bln) of ETFs, the biggest daily purchase on record, and 1.3 trillion yen ($13.1 billion) of JGBs.
The U.S. stock market on Thursday closed mildly higher on the moves by global central banks to stabilize the financial system and by indications that the U.S. is gearing up to tackle the coronavirus. The S&P 500 index (SPX) on Thursday closed +0.47% and remained above Wednesday’s 3-year low, where the index fell by a total of -32.8% from the mid-Feb record high. The VIX index on Thursday fell back from Wednesday’s 11-1/4 year high of 85.47 (mildly below the Nov-2008 record high of 89.53) and closed the day -4.45 at 72.00.
Crude oil prices surge 24% — May WTI crude oil prices on Thursday surged by a record +24.39% to $25.91. That followed Wednesday’s -24.42% plunge to an 18-year low. Oil prices on Thursday rallied on the U.S. Department of Energy’s announcement of the purchase of 30 million bbls of oil to add to the Strategic Petroleum Reserve (SPR).
Also, President Trump said that he was searching for middle ground on oil prices, suggesting he may try to encourage Saudi Prince MBS and Russian President Putin to reach a production-cut deal for Q2. As Saudi Arabia’s military protector, the U.S. certainly has leverage to use against MBS.
