Another day, another mind-blowing new record in the debt markets... $17 trillion in negative-yielding debt and counting... The first negative interest rate mortgage is here... Prepare for a bond-market reversal...
Regular Digest readers know that what is happening in the global financial markets today is anything but normal...
Central banks have unleashed an unprecedented monetary experiment. And there may be no better posterchild for this insanity than the growing pool of negative-yielding debt.
Just over one month ago, we noted that the total amount of this debt had surpassed $13 trillion for the first time.
Two weeks ago, we noted that it had already set another record. As we wrote in the August 7 Digest...
The spread of negative interest rates has been accelerating. And as you can see in the following chart, it just surpassed $15 trillion this week...
Incredibly, this trend has continued to accelerate since then...
On Tuesday, the value of negative-yielding debt passed $16 trillion for the first time. And as of this afternoon – just three days later – it has already touched $17 trillion.
It's not just government debt anymore, either. As my colleague Dan Ferris noted in the July 16 Digest, even some high-yield – or "junk" – debt is now trading with a negative yield.
All told, roughly a quarter of the entire global bond market – including both government and corporate debt – now trades with a negative yield.
This trend has become so extreme, we're now seeing the first negative-yielding mortgages as well...
That's right... A Danish bank is now effectively paying borrowers to take out a loan. As U.K. newspaper The Guardian reported on Tuesday...
A Danish bank has launched the world's first negative interest rate mortgage – handing out loans to homeowners where the charge is minus 0.5% a year...
Jyske Bank, Denmark's third largest, has begun offering borrowers a 10-year deal at -0.5%, while another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.
Under its negative mortgage, Jyske said borrowers will make a monthly repayment as usual – but the amount still outstanding will be reduced each month by more than the borrower has paid.
Here in the U.S., bond yields remain in positive territory...
But they have been plunging, too.
On Wednesday, the yield on the 30-year U.S. Treasury bond fell to a new all-time low. It fell again yesterday, dipping below 2% for the first time in history.
These moves have caused some analysts to begin to worry that it's simply a matter of time before U.S. Treasury yields dip below zero as well.
That's certainly possible...
But we believe that is unlikely in the near term. In fact, we believe it is far more likely that long-term interest rates will move significantly higher over the next several months.
Our colleague Chris Igou shared one big reason in yesterday's Digest.
In short, according to the U.S. government's weekly Commitments of Traders ("COT") report, speculative traders are more bullish than they've been in years. And that is usually a bad sign for bond prices. As Chris explained...
Futures traders recently hit a multiyear bullish level on bonds.
That's the most bullish they've been on higher bond prices in four years...
We saw similar cases in 2013, 2016, and 2017. Each time led to losses in bond prices going forward.
Bond prices fell 16% in the four months following the 2013 extreme. Bond prices dipped double-digits again after another extreme in 2016... ultimately falling 18% by mid-March 2017. And the most recent case in 2017 led to a 9% fall in bond prices.
Today, futures traders are "all in" on higher bond prices. But thanks to these extreme bullish bets, lower bond prices are much more likely.
Because bond prices and yields (interest rates) trade inversely, this means yields are likely to rise.
But this COT extreme isn't the only sign that a bond-market reversal is likely...
Yesterday, our friend Jason Goepfert at SentimenTrader noted that his own proprietary sentiment indicator shows bullishness on U.S. Treasury bonds had reached its second-highest level in history.
Likewise, the Daily Sentiment Index ("DSI") – a reliable measure of sentiment among short-term traders – recorded back-to-back days of 98% bulls this week. For context, readings of 85% or higher are considered extremely bullish and suggest a short-term top is likely. Readings of 15% or less are considered extremely bearish, and suggest a short-term bottom is likely.
This week's readings were tied for the second-highest on record. In fact, the DSI for Treasury bonds has only been higher on one other day in history.
It reached 99% on December 16, 2008... the day the Fed first announced that it may begin buying U.S. Treasury bonds as part of its quantitative easing ("QE") program.
On that day, virtually everyone was bullish on Treasury bonds...
And frankly, who could blame them...
Bonds had been soaring nearly nonstop since that spring. That rally had caused the yield on 30-year U.S. Treasury bonds to plunge from more than 4.8% in June 2008 to well below 3%.
Yet, the Fed had just announced that it could soon start buying billions of dollars' worth of Treasury bonds each month. Surely, that was a recipe for higher prices still?
Not exactly...
It turns out that the U.S. Treasury bond market peaked just two days later on December 18.
Prices plunged more than 20% over the next six months... causing the 30-year yield to soar from roughly 2.5% to back over 4.8% by mid-June.
Given today's bullish extremes in U.S. Treasury bonds, we could easily see a similar move this time around.
So, if even 'risk-free' Treasury bonds aren't safe today... then what is?
As we said last Friday, gold has long been one of the best defenses against global uncertainty and monetary "shenanigans"...
We've had both in spades this year... and we don't expect that to change anytime soon.
So if you're looking for even more guidance in navigating the ups and downs of the gold and silver markets, be sure to join us next Wednesday, August 21, at a special event...
Renowned gold analyst John Doody has officially joined the Stansberry Research team. And next week, he's sharing his latest thoughts on the precious metals bull market... but you have to reserve your seat to get access. Click here to learn more.
New 52-week highs (as of 8/15/19): Axis Capital (AXS), Alexco Resource (AXU), Sprott Physical Gold and Silver Trust (CEF), DBGold Double Long ETN (DGP), SPDR Gold Shares (GLD), Barrick Gold (GOLD), Leagold Mining (LMCNF), NovaGold Resources (NG), Polymetal (LSE: POLY), Vanguard Inflation-Protected Securities Fund (VIPSX), and short position in Interpublic Group of Companies (IPG).
In today's mailbag: More feedback on the new Stansberry Research mobile app... and a question about the bullish extremes in the U.S. Treasury bond market. What's on your mind? Let us know at feedback@stansberryresearch.com.
"Hi guys, really love the new app. Keep up the good work! Cheers." – Paid-up subscriber Bernard H.
"Thank you for the Stansberry app! Just downloaded it... Love it!!" – Paid-up subscriber Catherine M.
"Oh my, please remind subscribers to install the new app. There is no comparison. Your original app was like a wanna-be e-reader. This new one is a full-on communications tool. I love it! Thanks for investing in your business to make it better each year." – Paid-up subscriber Bryan D.
Brill comment: If you've not yet tried our new and improved (and FREE) Stansberry Research app, we hope you'll take a few moments to check it out this weekend. Apple users can download it from the Apple App Store here, while Android users can download it in the Google Play store here. And please, be sure to let us know what you think at feedback@stansberryresearch.com.
"If everyone is lining up to buy TLT [as noted in Thursday's Digest], why don't we buy TBT??" – Paid-up subscriber Craig R.
Brill comment: You're right, Craig... If we expect U.S. Treasury bond prices – as tracked by the iShares Barclays 20+ Year Treasury Bond Fund (TLT) – to move significantly lower, then buying shares of the ProShares UltraShort 20+ Year Treasury Fund (TBT) would be one way to profit as they do. In fact, Steve Sjuggerud has recommended buying TBT to take advantage of similar opportunities in the past.
However, as we often remind you in the Digest, we don't recommend making investment or trading decisions based on investor sentiment alone. Today's bullish extreme could become even more extreme before it finally reverses.
Meanwhile, as Chris Igou noted yesterday, TLT remains in an uptrend for now. So folks looking to profit from this situation would be wise to wait for a confirmed breakdown in TLT before considering this trade.
Regards,
Justin Brill
Baltimore, Maryland
August 16, 2019