18 European Nations Have Negative 2 Year Sovereign Yields (Germany’s Continue To Decline)

While the USA has seen their Treasury yields generally rising since the election of President Trump, Europe and particularly Germany have not been experiencing the same “love.”

In fact, Germany has the second lowest Bund yields in Europe after Switzerland (who maintain their own currency).


German 2 year Bund yields have been dropping like a stone since 2014.


And have been dropping even more quickly since January 2017 after a brief respite.


At the 10 year tenor, Germany has the lowest government bond yield after Switzerland. And the lowest of any nation with a positive bond yield.


The German Bund yield curve is greater than 200 basis points lower than the US Treasury curve after the 2 year tenor.


This comes as Germany’s deputy finance ministers claims that there will be debt relief for Greece.

The continuing Greek debt crisis and Germany’s insistance on not lowering Greece’s staggering debt load are not helping Greece’s financial institutions like the National Bank of Greece.


Here is an unfortunate photo of German Chancellor Angela Merkel.



Fear! Yellen wants to leave the Fed’s balance sheet alone for now

Pedro da Costa had a nice piece for Business Insider on Yellen wanting to leave the Fed’s balance sheet alone.

Essentially, Yellen is extremely cautious about unwinding The Fed’s almost $4.5 TRILLION balance sheet for fear on upsetting the proverbial apple cart.

Since The Fed’s started expanding its balance sheet back in late 2008, the stock market and both residential and commercial real estate prices have been going gangbusters. Only recently has retail real estate suffered downturns (thanks primarily to Amazon).


Critics of the bond buying programs, known as quantitative easing or QE, warned that it would lead to runaway inflation. They were very wrong. Instead, inflation has struggled to even reach the Fed’s 2% target, suggesting the labor market is still too weak to push up wages significantly.

True, the labor market remains weak despite glowing adulation from the media cheerleaders about low unemployment rates. Which is not helping retails sales for the big box stores.


Yes, Yellen and The Feds are fearful of a fundamentally weak economy and its sensitivity to winding down The Fed’s balance sheet.



Hail Zorp! The Fed’s Open Market Committee On Wednesday Feb 1 At 2PM EST

Hail Zorp, the Surveyor! Or Zorp, The Federal Reserve Chair.

Yes, Janet Yellen and the Federal Reserve Open Market Committee (FOMC) will announce their plans on Wednesday February 1 at 2pm, EST.


Fed Chair Janet Yellen could announce a change in the Fed Funds Target Rate. She could announce and unwinding of The Fed’s Balance sheet.


Think of The Fed Funds Target Rate as the cost of money. And The Fed Funds Balance Sheet as one measure of the supply of money. M2 Money is another supply measure of money.

Concerning The Fed Funds Target Rate, investors are pricing in only a 13.5% probability of a rate hike and zero probability of a rate hike.


But will the FOMC announce plans to unwind the massive Fed Balance Sheet? And risk “Zorping” financial markets?


Join with Ron Swanson as plays “Symphony for the righteous destruction of humanity  financial markets in E minor.” 




Darth Mall? Mall Owners Rush To Get Out of the Mall Business (The Obama/Fed Nonrecovery)

The anemic Obama/Fed recovery coupled online shopping retailers were a 1-2 punch against shopping malls. Or in Star Wars lingo, Darth Mall has appeared.

Wall Street Journal By Esther Fung —  More mall landlords are choosing to walk away from struggling properties, leaving creditors in the lurch and posing a threat to the values of nearby real estate.

As competition from online shopping batters retailers, some of the largest U.S. landlords are calculating it is more advantageous to hand over ownership to lenders than to attempt to restructure debts on properties with darkening outlooks.

That, in turn, leaves lenders with little choice but to unload the distressed properties at fire-sale prices.

In the period from January to November 2016, 314 loans secured by retail property were liquidated, up 11% from the same period a year earlier, according to data from Morningstar Credit Ratings.

“We’re seeing a boatload of these kinds of properties coming to market,” said James Hull, managing principal of Augusta, Ga.-based Hull Property Group, which purchased five malls from foreclosure sales in 2016. “There have been some draconian losses for the enclosed mall business.”

The moves are an echo of the housing crash, when mortgage borrowers stopped making payments and walked away from homes that had lost value. In some cases they sent back the keys in envelopes, a practice derided by critics as “jingle mail.”

As mall property values sink below their loan balances, “Some mall owners are more aggressively taking the step to walk away,” said Morningstar Credit Ratings Vice President Edward Dittmer.

Mall giant Simon Property Group early last year defaulted on a loan that was secured by Greendale Mall in Worcester, Mass., which was then foreclosed on. Simon declined to comment.

Washington Prime Group in November said it was considering turning two malls in Grand Junction, Colo., and Lancaster, Ohio, back to its lenders, mostly bondholders who hold the mortgages that have been bundled into securities. The Columbus, Ohio-based landlord also noted in an earnings call that malls in Chesapeake, Va., and Merritt Island, Fla., had been foreclosed on. Washington Prime didn’t respond to requests for comment.

CBL & Associates Properties in 2014 announced plans to prune its portfolio and so far it has unloaded 14 malls, eight of which it sold and six it handed back to lenders. The six malls that CBL returned to lenders had a debt balance totaling $381 million.

The Wausau Center mall in Wausau, Wis., was a bustling regional shopping center when it opened in 1983 with three anchor stores. Today, J.C. Penney and Sears are gone, leaving department store Younkers as the only anchor tenant.

CBL last July returned to creditors the $18 million mortgage on the roughly 424,000 square-foot property. The mortgage, which had been bundled into securities and sold to bondholders, was initially underwritten by Wells Fargo & Co. A spokeswoman for Wells Fargo said the bank couldn’t comment on specific loans but that it would continue to provide financing for malls on a case-by-case basis.

A CBL spokesman said the firm spent time and resources over a two-year period working with the city on revitalizing the mall, but was stymied by red tape.

“Delays, including the city approval process, held up the project past the point of what would have allowed for us to successfully complete it, ” he said. “As a result, we decided that the best course of action for all parties would be to return the property to the lender and allow the city to execute their plans with new owners at their own pace.”

Wausau Mayor Robert Mielke said CBL didn’t do enough marketing or maintenance, with the mall plagued by lapses in plumbing, holes in the roof and lightbulbs not getting changed.

“CBL wasn’t a very good business partner,” Mr. Mielke said.

“If a mall closes or goes into decline, you’re going to see declining property values in the area,” said Arthur C. Nelson, professor of Urban Planning and Real Estate Development at the University of Arizona. “The mall is a marker,”

Despite a strengthening economy in 2016, the delinquency rate for loans backing retail property rose by 0.6 percentage point last year to 5.76%, according to Trepp LLC, a real-estate data service. Special servicers, which deal with troubled commercial mortgage securities, managed $3.1 billion worth of mall-backed loans last year, up from $2.9 billion in 2015, according to Trepp.

This year is off to a shaky start. Earlier this month, Sears said it would close 150 stores, and Macy’s gave more details of a plan to close 100 stores.

Limited Stores Co. said it plans to close all 250 stores and filed for chapter 11 bankruptcy protection last week.

“We don’t have a favorable outlook for secondary and tertiary malls with weaker sales. We look at them with a high degree of skepticism,” said Eric Thompson, senior managing director at Kroll Bond Rating Agency.

One reason mall owners struggle to restructure loans is many were packaged into commercial mortgage-backed securities, and these bonds in turn are owned by numerous investors, making it difficult to negotiate new deals.

Landlords can negotiate with lenders a “deed-in-lieu” of foreclosure, in which they sign over ownership of the mall to the lender. If this can’t be arranged, a foreclosure process typically follows.

Borrowers typically take hits to their creditworthiness when forfeitures occur. But so far Washington Prime, CBL and Simon haven’t had downgrades to their credit ratings.

Big mall landlords such as publicly traded real-estate investment trusts say walking away is a justifiable response to shareholder pressures to shore up balance sheets and unload troubled assets. In the case of a default, creditors make claims only on the collateral that backs the loan, not on the borrower itself.

“It doesn’t negatively impact their corporate credit quality,” said Steven Marks, who heads Fitch Ratings’ U.S. REIT group. “If anything, we oftentimes view these transactions positively, as it indicates financial discipline to not commit corporate capital towards failing or uneconomic investments.”


And the value of retail real estate seems to have stalled, as The Fed slows monetary expansion.


And after hit a local high in July 2015, retail real estate investment trusts (REITs) have slumped.


This is the second terrible retail mall story in a week. The first was the sale of Pittsburgh Mills Galleria Mall that sold for a whopping … $100.

To I detect the presence of Darth Mall?


The Obama/Fed Misery Index (Terrible Wage Growth/Doubling Federal Debt And Worst Wealth Distribution Since The Great Depression)

Now that the Obama Reign of (Economic) Error has ended, let’s examine a new misery index that demonstrates how most Americans suffered from a nonexistant economic recovery even with a doubling of the Federal debt.

Here is a chart showing Federal debt held by investors (as opposed to Federal debt held by government accounts) as a percentage of gross domestic product that grew from less than 40% to over 72% of GDP. Also notice that average hourly earnings of production and nonsupervisory employees YoY never exceeded 2.8% after the end of The Great Recession.


If I use the inverse of Public Debt to Gross GDP, I get this chart which shows that the worst wage recovery for non-elites coupled with a doubling of The Federal Debt held by the public. Clearly the worst wage recovery (at least since 1965) couple with the Federal goverment gorging on debt … for which future generations will be on the hook.


But it isn’t like Federal current tax receipts haven’t been rising under Obama/Fed. They have risen  at a rapid pace.


Then, of course, we saw that The Fed’s zero interest rate policies (including QE) didn’t help stabilize the downward trajectory in the labor force participation rate. Adding thousands of pages of Federal regulations from the Consumer Financial Protection Bureau (CFPB) and the Environmental Protection Agency (EPA) didn’t help any recovery either.


And wealth distribution is now back to Great Depression levels (although not solely due to Obama/Fed policies — they only worsened the problem).


“We did not come to fear the future. We came here to shape it” (and made it even worse!) – Barack Obama.

Here are Janet Yellen and Stanley Fischer leaving The Federal Reserve at the end of their term into the worst wealth disparity since The Great Depression.



Whack-a-mole! The Case For Covered Bonds And Why It Is Difficult in the USA

My friend John Wake from Phoenix Arizona asked me about mortgage finance legend Jack Guttentag’s stance on covered bonds. I must say that I am a proponent of covered bonds for the US mortgage market.

What is a covered bond? A covered bond is a debt security backed by cash flows from mortgages or public sector loans. They are similar in ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet.  A covered bond continues as an obligation of the issuer (usually a bank).


This is in stark contrast to the experience of the housing bubble where non-bank lenders originated loans, sold them to investment banks who then issued asset-back securities. The non-bank lenders, in this case, kept little or none of the loans on their balance sheets.


Guttentag (whose blog I highly recommend) advocates for a Danish type of covered bond market. In a perfect world, I agree.

But the US mortgage market is anything but a perfect world (or market). It is dominated by The Federal government in the form of mortgage giants Fannie Mae and Freddie Mac and the Federal Housing Administration (FHA).  But lest we forget, there is also the Department of Agriculture and the Federal Home Loan Bank system playing in this market. Not to mention a myriad of regulators (The Fed, Office of the Comproller of the Currency, FDIC, Consumer Financial Protection Bureau, etc).

Like in the game “Whack-a-mole,” you can get rid of, for example, Fannie Mae and Freddie Mac, but you still have the FHA, the Federal Home Loan Banks, the Department of Agriculture remaining. Each provides taxpayer-subsidized financing and have low cost of financing.

How can a superior model like covered bonds compete with the Federal government leviathan of subsidized mortgage financing? At Professor Guttentag suggests, it will take time.

But the tangled web of bank and mortgage regulators makes it even more difficult. Hopefully, stripping the Consumer Financial Protection Bureau of some of their regulatory bite will help.  But there has to be a “meeting of the minds” between the numerous regulatory bodies to make covered bonds work.

Yes, the US mortgage market remains like a “Whack-a-mole” game. You knock down one Federal entity (and taxpayer subsidy) and another one jumps out. Not to mention regulators.



Pension Party! “Zero” Interest Rate Policies Lead To Massive Debt Gorging (CalPERS Massive Pension Underfunding)

The Federal Reserve’s zero interest rate policies (ZIRP) have an unwelcomed effect: both the Federal Government and Private Pensions gorged themselves on low-cost debt.

The Federal Reserve lowered their Fed Funds target rate starting in 2007, then started their asset purchases in late 2008, culminating in a dramatic decline in interest rates.


Then, since the end of Q4 2008, both the Federal government AND private pension funds gorged on debt: Federal devt rose by 77% though the end of 2015 and private pension debt rose by 66%.


Then we have the STATE pension funds where unfunded liabilities will hit $1.75 trillion. Weak investment performance and insufficient contributions will cause total unfunded liabilities for U.S. state public pensions to balloon by 40 percent to $1.75 trillion through fiscal 2017.


Of course, California and their CalPERS are in league of their own. California Governor Jerry Brown is eyeing a 42% increase in the gasoline tax to help bail out the woefully underfunded CalPERS system. Not to mention a 141% increase in vehicle registration fees.

What happens when interest rates RISE and pensions have to refinance their debt at higher rates (just like the Federal government?).

To quote Craig from Parks and Recreation, “What’s wrong with you? You look like Meryl Streep at the end of Iron Weed.”


I fear that CalPERS and the other state, Federal and private pension funds will look far worse.

On a side note, did you ever notice that Hillary Clinton’s outfit resembled the Gorgan from the Star Trek episode “And The Children Shall Lead”?