Category: Macro Posts

Rising govt deficits at the time when household savings are coming down is the only reason that bond yields refuse to come down because supply of govt bonds is going up at the time when demand in the form of savings is coming down

Eram Tafsir writes…..
The Indian economy would run the risk of a wider current account deficit along with its associated consequences in case the gross household financial savings net of financial liabilities continue to grow slower than the net borrowings of central and state governments plus extra budgetary resources (EBR) and the gap is funded by external sources, as per India Ratings and Research (Ind-Ra). Further, the rating agency believes that despite policy rate cut by the RBI, a slower growth of gross household financial savings net of financial liabilities compared to net borrowing of central and state governments and EBR will keep the 10-year government securities (G-Sec) yields at relatively elevated levels. For ratio of gross household financial savings net of financial liabilities compared with net borrowings of central and state governments and EBR to improve either the former has to increase or the latter has to decline.

read full post below

https://www.financialexpress.com/economy/low-savings-high-real-interest-rate-is-indias-economic-growth-sustainable/1541914/

April 5 – New York Times (Dealbook): “’It doesn’t take a genius’ to know capitalism needs fixing. Capitalism helped Ray Dalio build his investment empire. But in a lengthy LinkedIn post, the Bridgewater Associates founder says that it isn’t working anymore. Mr. Dalio writes that he has seen capitalism ‘evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots.’ ‘Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another.’ ‘The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.’ ‘We are now seeing conflicts between populists of the left and populists of the right increasing around the world in much the same way as they did in the 1930s when the income and wealth gaps were comparably large.’ ‘It doesn’t take a genius to know that when a system is producing outcomes that are so inconsistent with its goals, it needs to be reformed.’ Stay tuned: Mr. Dalio says that he’ll offer his solutions in another essay.”

I’m reminded of back in 2007 when Pimco’s Paul McCulley coined the term “shadow banking” – and the world finally began taking notice of the dangerous new financial structure that had over years come to dominate system Credit. Okay, but by then the damage was done. As someone that began posting the “Credit Bubble Bulletin” in 1999 and had chronicled the prevailing role of non-bank Credit in fueling the “mortgage finance Bubble” fiasco (on a weekly basis), I found it all frustrating.

Why wasn’t the discussion started in 2001/02 when mortgage Credit began expanding at double-digit rates, and there were clear signs of Bubble formation? Oh yea, that’s right. There was desperation to reflate the system and fight the “scourge of deflation” after the bursting of the “tech” Bubble. Excess was welcomed early on – and later, when things got really heated up, nobody dared risk bursting the Bubble.

Reading Mr. Dalio’s latest, I have to ask, “What ever happened to ‘beautiful deleveraging’?” And I’m not on the edge of my seat waiting for his “solutions.”

There was a window of opportunity early in the mortgage financial Bubble period for “statesmen” to rise up and call out the recklessness of the Fed spurring mortgage Credit excess and house price inflation in the name of system reflation. Statesmen and women should have excoriated governor Bernanke for suggesting the “government printing press” and “helicopter money” – the type of crazy talk that should disqualify one for a position of responsibility at the Federal Reserve. Fed chairman? You’ve got to be kidding.

There was a window of opportunity to rein the Fed in after QE1. The Federal Reserve should have been held to their 2011 monetary stimulus “exit strategy.” Instead they doubled down – literally – as the Fed’s balance sheet doubled in about three years to $4.5 TN. Mr. Dalio – along with virtually everyone – didn’t seem to have any issues. Indeed, an unprecedented expansion of non-productive debt (certainly including central bank Credit and Treasury borrowings) somehow equated with “beautiful deleveraging.” It was ridiculous analysis in the face of the greatest global Bubble in human history.

Central banks aren’t fully to blame, but it’s an awfully good place to start. Three decades of “activist” monetary management has left a horrible legacy. The Institute for International Finance reported this week that global debt ended 2018 at a record $243 TN. This debt mountain simply would not have been possible without “activist” central banking. Despite a lengthening list of risks, global stocks have powered higher in 2019 to near all-time highs. A relentless speculative Bubble has only been possible because of central bank policies.

I’m not all that interested in Dalio’s “solutions.” In my book, he missed what was an exceptional opportunity for statesmanship. Bridgewater’s investors were the priority and have been rewarded handsomely. Pro-central bank “activism” has been the right call for compounding wealth for the past decade (or three). But no amount of ingenuity will resolve the historic predicament the world finds itself in today. Markets are broken, global imbalances the most extreme ever, and structural impairment unprecedented – and worsening, all of them.

Most regrettably, the type of structural reform required will only arise from a severe crisis. The Fed and global central bankers have been reflating Bubbles for more than three decades. Highly speculative global markets at this point completely disregard risk. And with borrowing costs incredibly low, what government (ok, Germany) is going to impose some spending discipline and operate on a fiscally responsible trajectory? At this point, finance is hopelessly unsound – and, importantly, hopelessly destructive on an unprecedented global basis.

I had the great pleasure to spend part of my Friday with the University of Oregon Investment Group. I gave a talk, “Money, Credit, Inflation and the Markets.” Being with bright, intellectually curious and enthusiastic university students gives me hope – and a smile.

From my presentation: “And it just breaks my heart to see young people turn away from Capitalism. I anticipate spending the rest of my life trying to explain that the culprit is unsound finance and deeply flawed monetary management – and not the system of free-market Capitalism. History teaches us that credit is inherently unstable. I would argue that the experiment in New Age unfettered credit – with its serial booms and busts – evolved into a failed experiment in “activist” monetary management – another debacle in “inflationism.”

“The result has been a period of historic bubbles – in the markets and in economies – on a global scale. And protracted Bubbles become powerful mechanisms of wealth redistribution and destruction. Central banks readily creating new “money” and favoring the securities markets are fundamental to the problem. Such policies benefit the wealthy and worsen inequality. We’re witnessing the resulting rise of populism and a mounting crisis of confidence in our institutions. Even with 3.8% unemployment, near-record stock prices and one of the longest economic expansion on record, our country is deeply divided and resentful. I fear for the next downturn.”

A Friday Business Insider headline: “Hedge-fund billionaire Ray Dalio says the current state of capitalism poses ‘an existential threat for the US’”; Barron’s: “Hedge Fund Billionaire Ray Dalio Says Capitalism ‘Must Evolve or Die’”; and Vanity Fair: “Billionaire Hedge-Fund Manager Warns a ‘Revolution’ is Coming.” Observer: “Ray Dalio on Capitalism Gone Wrong: America May See Dire Consequences.” And CBS: “Billionaire investor Ray Dalio: Capitalism run amok is ‘economically stupid’”

I’m reminded of an analogy I’ve used in the past. One could make a reasonable argument that our eyeballs are flawed. How could something of such importance be so soft, delicate and vulnerable? Yet this vital organ is not flawed – imperfection is not a legitimate issue. It is the nature of its function that dictates its characteristics and vulnerabilities. It cannot sit within a protective ribcage like the heart, or within the hardened skull as the brain does.

To be able to see the world – looking at distant mountain ranges and then immediately shifting focus to the pages of a wonderful book – requires an exquisitely complex organ functioning right out there exposed to the elements and largely unprotected. Importantly, we recognize and accept our eyes’ sensitivities and vulnerabilities. We would not wander into a metal shop without wearing protective eye coverings. We don sunglasses on bright days – darkened snow goggles for spring skiing. We learn at a very young age not to stare into the sun.

I disagree with the increasingly popular view that Capitalism as flawed. At the same time, I have been long frustrated by those dogmatically preaching the virtues of Capitalism without accepting the reality of inherent delicacy, vulnerabilities and weaknesses. As we are with our eyes, we have to be on guard, take precautions, and definitely avoid doing anything stupid. Who is reckless with their eyes? There’s too much to lose. No one wants to contemplate being blind for the rest of their life.

How could we ever have allowed Capitalism to be so irreparably damaged? There are innate instabilities in Credit and finance that have been disregarded for way too long. Unsound “money” is a primary (and insidious) risk to capitalistic systems. I would further argue that persistent asset inflation and recurring speculative Bubbles pose a major risk to sound finance and, as such, to Capitalism more generally. Moreover, inflationism – “activist” central banking – with its asset market focus, manipulation and nurturing of speculative excess and inequality, is anathema to free-market Capitalism.

When the Fed slid down the slippery slope and implemented QE, the economics profession and investment community failed society. The case against QE shouldn’t have been primarily focused on inflation risk. The overarching danger was a corrosive impairment of markets and finance, with resulting dysfunction for Capitalism more generally. The risk was destabilizing inequality, insecurity and resulting societal stress. There was the peril of a fragmented society, divided nation, political dysfunction and waning trust in our institutions. Somehow, everyone was content to ignore the reality that unsound “money” reverberates throughout the markets, the economy, society, politics and geopolitics.

Over the years, I’ve referred to the “first law of holes.” If you find yourself in a hole, the first requirement is to stop digging. Similarly, I’ve repeatedly noted the long-ago recognized issue with discretionary monetary management: One mistake invariably leads to only bigger mistakes. And I’m fond of reminding readers that “things turn crazy at the end of cycles.” Historic cycle, historic “crazy.” I’ll repeat what I’ve written many times before: From my analytical perspective, things continue to follow the worst-case scenario.

It was yet another mistake for the Fed to go full U-Turn dovish. It was another blunder for the global central bank community to signal they were willing to move quickly and aggressively to bolster international markets. The 2019 speculative run in the markets only exacerbates underlying fragilities – worsens inequality – and sets the stage for an only deeper crisis.

I’ll be curious to see if Ray Dalio’s “solutions” include having the Fed disavow aggressive monetary stimulus, while letting markets begin functioning on their own. The biggest problem with Capitalism these days is that the system is not self-adjusting and correcting. Structurally distorted markets and deeply maladjusted economies are incapable of correction. Global imbalances only worsen every year. Speculative Bubbles inflate on further.

Global central banks are understandably distressed about the potential for market dislocation and crisis. Yet recurring efforts to forestall upheaval increasingly risk financial collapse. There is no real solution until deeply flawed monetary management is recognized and changed. The current course will only exacerbate inequality and foment Dalio’s “revolution.” Any soul-searching and scrutinizing of Capitalism must begin with central banking and monetary mismanagement. Where were the likes of Dalio, Dimon and Buffett when it could have made a difference? Faux Statesmanship.

Read Full Article below

http://creditbubblebulletin.blogspot.com/2019/04/market-commentary-faux-statesmanship.html

There is nothing that a human mind can’t conceive. It can shoot for the stars or dive in the ocean which twinkles in the shadows of stars and ascend back with sparkling mind bearing uncanny ambition only to float contended.  

Today, we live in fear of losing wealth, we worry what economic consequences would do to our cash, we look through a microscope and scrutinize every word, every policy, every regulation or find something to put above ‘every’ and list out the glaring negatives with a slight trace of approval. If only one could notice the lens of the microscope, would then one could tell reel and real apart.

Such is the case of negative interest rates. It is dealt differently by different flock of loaded individuals, generally in ways which would not only prevent losses but essentially gain cash. This flock stands on one side of the transaction contemplating means to win regardless of the loss that still deliberating other doomed flock endures. Well, this is how the world works. It is a Bernoulli trial. But there exists a splash of humble wit folks floating beneath the starry sky delighted by the victory of each one and beaten down none.

Theory? Without thinking too much, negative rates indicate that the economy is unable to generate sufficient income to service its debt. Almost always, all roads leads us back to debt sustainability levels. In order for an economic system to reduce debt, it requires growth or inflation or currency devaluation. For an economic system to exercise one of the two (growth not included), capital transfer is to be facilitated. This capital movement in negative rates environment is from the savers to the borrowers. Your invested value, the money you gave to borrowers would have a value lower than the face value. Barbaric! Savers should be the winners not the borrowers!

So each flock as per their liking would act in a way that makes them the gaining side. In real world scenario, one flock could be investors who when yields falls even deeper into negative territory scoop a profit through capital gain. Flock of foreign investors may try to earn through currency appreciation. Another flock would focus on real rates even though they are negative as that would preserve their capital under deflationary conditions when nominal yields would decrease their capital. Who would want that!

Investopedia gave an example, “In 2014, the European Central Bank (ECB) instituted a negative interest rate that only applied to bank deposits intended to prevent the Eurozone from falling into a deflationary spiral.”

Let’s recall a real practical example. The case of Switzerland. Paul Meggyesi of JP Morgan said, “The defacto negative interest rate regime lasted until October 1973. The negative interest rate was re-introduced in November 1973 at 3% per quarter and then increased to 10% per quarter in February 1978. All though this period capital inflows were being sustained by the global monetary turmoil/inflation that characterized the first years of floating exchange rates, not to mention the SNB’s singular focus on   promoting monetary and price stability through money supply targeting. Ultimately the SNB abandoned these purely technical attempts to curb capital inflows and embraced a much more effective policy of currency debasement, namely it abandoned money supply targeting in favor of an explicit exchange rate target that required huge amounts of unsterilized intervention, money supply expansion and ultimately inflation. (Suffice to say this policy lasted only until 1982, when the Swiss realized that inflation was too high a price to pay for a weak currency).”

He continued “Negative interest rates will only deter capital inflows if they are sufficiently large to offset the capital gain an investor expects to earn through capital appreciation. CHF rose by 8% in nominal and real terms in 1972-1973. Appreciation in 1973 – 1978 was 62% in nominal and 29% in real terms.”

In fact, during global financial crisis many central banks reduced their policy interest rates to zero. A decade later, today, still many countries are recovering and have kept interest rates low. Severe recessions in the past have required 3 – 6 percent point cuts in interest rates to revive the economy. If any crisis were to happen today, only a few countries could respond to the monetary policy. For countries with already prevailing low or negative interest rates, this would be a catastrophe.

Today, around $10 trillion of bonds are trading at negative yields mainly in Europe and Japan as per Bloomberg.

Poisons have antidotes, and sometimes one need to gulp down the poison to witness the mystique surrounding the life and glide with accidental possibilities, the possibilities which one wouldn’t seek if they remain wary of novel minted cure. 

Here enters a splash of humble wit folks! They want a win – win. So these folks came up with an idea, an idea with legal and operational complication but they have swamped themselves with research to find ways to not stumble in future and yes they do have a long way to go but we have a start. These folks are our very adored IMF Staff.!

They are exploring an option that would help central banks make ‘deeply negative interest rates’ feasible option.

Excerpt from their article ‘Cashing In: How to make Negative Interest Rates Work’:

“In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. When cash is available, however, cutting rates significantly into negative territory becomes impossible.”

“…Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.

Because of this floor, central banks have resorted to unconventional monetary policy measures. The euro area, Switzerland, Denmark, Sweden, and other economies have allowed interest rates to go slightly below zero, which has been possible because taking out cash in large quantities is inconvenient and costly (for example, storage and insurance fees). These policies have helped boost demand, but they cannot fully make up for lost policy space when interest rates are very low.”

“… in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.

The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money).

E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money.

To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.

At the same time, shops would start advertising prices in e-money and cash separately, just as shops in some small open economies already advertise prices both in domestic and in bordering foreign currencies. Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits. This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash.”

Negative rates are coming whether we like it or not. There is only so much growth we can get in steady state among rising debt levels. The only hurdle to implementing negative rates is currency in circulation and that’s why more and more countries are trying to outlaw cash. Interesting and profitable times ahead for those who understand the brave new world

( with inputs from Apra Sharma)

Key highlights of the fortnight:

·  For the fortnight ended Mar 31, 2019, banking system credit growth remained steady at 14% yoy (v/s 14.5% for last fortnight). 

·   Amid global and domestic monetary policy accommodation, tepid domestic growth-inflation mix along with FPI interest/OMO purchases is expected to keep bond yields in check.

· Due to strong demand growth, cement production remains healthy on relatively strong base. Steel production has been steady around 5% for last 12 months.

·  Diesel demand growth has remained low as it is impacted by subdued industrial demand. Petrol consumption has been steady relatively on a higher base. Increase in fares and supply disruption among key carriers has led to deceleration in air passenger traffic growth second month in a row.   . . In February, the fiscal deficit widened to 3.9% of GDP from 3.7% of GDP in January, mainly due to weak receipts. The expenditure continued to register double digit growth mainly due to strong revenue expenditure. In order to meet the fiscal deficit target the government may curtail spending in March due to likely slippage in tax collection targets

DXY leads the increase in reserve and not the other way round. If you are able to decipher Dollar movement over next couple of years …. you can know the fate of any market in the world

The US financial conditions index is at a new low The Fed is creating a new and bigger asset bubble … Pay attention to Bitcoin in recent days … and the Fed might get bullied into lowering interest rates

Germany’s ongoing preference to rely on other countries stimulus rather than rely on its own economy for demand is a mystery … Germany, has become too reliant on exports, sort of like China back in 2007

US imports showing no sign of pick even in late March.

One last time: The market is not the economy The economy is not the market Liquidity, artificial or otherwise, is the market. Sven Henrich

Caixin China March Services PMI 54.4; Est. 52.3 Highest reading since Jan. 2018 Employment falls to 50.2 vs 50.3 in Feb. the lowest reading since Sept. 2018 Prices fell No as robust as the headline number

The two safest assets are (arguably) the German bund and the US 10-yr… However, the US debt is rising and the German debt is falling. German debt, however, may contain more risk due to the Eurozone contagion risk. High deficit or high Eurozone risk. Who wins?

This was the decade of de-leveraging that wasn’t. A decade ago, as the world began to piece the financial system back together after an epic credit crisis, there was agreement on one thing: Too much debt had caused the crisis, and so there must be a huge de-leveraging. It has not worked out like that.

click at the link below to compare debt in 2007 and 2018

https://www.bloomberg.com/graphics/2019-decade-of-debt/

Mahesh vyas writes in CMIE……

Financial statements of Indian companies show that they have been very reticent, in recent years, in investing in fixed assets and particularly so in investing in plant and machinery. In 2017-18, net fixed asset investments of non-finance companies grew by 7.9 per cent in nominal terms. At the same time, investments into plant and machinery grew by a significantly lower 6.8 per cent. These were the lowest growth rates since 2004-05, i.e. in 13 years.

These growth rates were earlier estimated to be a bit higher at 8.4 per cent and 10 per cent. However, the latest estimates based on a larger sample of companies (8,544) shows that the growth rates in 2017-18 were substantially lower than estimated earlier. As the sample size increases further, the growth rates could decline a little more because companies that enter the sample late are usually also the ones whose performance is less-than the average.

While companies have reduced the growth in investments into fixed assets, they have awarded share holders increasingly higher dividends. Simultaneously, the share of profits retained in the company for possible future investments has also reduced substantially in recent years.

Put together, the above set of data indicates that corporate India has been giving investments into new capacities a thumbs down in recent years. Further, the data shows that this restraint of corporate India towards investments has been pronounced since 2014-15.

In 2017-18, 64.4 per cent of the net profit of non-finance companies was distributed as dividends. This is close to the average of 65 per cent recorded in the past four years – since 2014-15.

The average payout ratio in the four years before 2014-15, i.e. from 2010-11 through 2013-14 was much lower at 45 per cent. It was even lower between 2006-07 and 2009-10, at 26 per cent. The dividend payout ratio has been rising steadily since 2007-08 when it was at its historic low of 22 per cent. However, while the payout ratio never crossed 60 per cent till 2003-14, it has been consistently above 60 per cent since 2014-15. In fact, it peaked at nearly 71 per cent in 2015-16.

Companies have reduced the proportion of profits retained back for possible future investments. In 2017-18, about 25 per cent of net profits were retained.

The average share of retained profits in net profits in the four years till 2017-18 was 23 per cent. This compares very poorly with retained profits accounting for 47 per cent of net profits in the preceding four years.

Evidently, companies have not only shied away from investments in new capacities they have also left behind much less for future investments. Instead they have awarded shareholders with a larger-than-ever share of profits in the past four years.

Dividend payout is mostly insulated from a shrinking of profits. Net profits of non-finance companies have shrunk in nine of the 28 years since 1990-91. But dividends have shrunk only twice – once in 2008-09 and then in the latest year – 2017-18. Aggregate dividends shrunk 6.7 per cent in 2008-09 and by a negligible 0.2 per cent in 2017-18.

Dividends received by an investor was exempted from taxes for a very long time – from 1996-97. This changed in 2016-17 when dividend income in excess of Rs.1 million was taxed 10 per cent in the hands of investors. This could explain partly, the fall in the payout ratio from the peak of 71 per cent in 2015-16 to 61 per cent in 2016-17 and 64 per cent in 2017-18.

However, the 61-64 per cent payout ratio in spite of taxation of dividends – both at the company level and at the level of investors besides the taxation of profits at the company level indicates that investors are quite intent on taking out profits from companies and leaving little behind.

Companies have been drawing out dividends and not retaining profits in spite of the steady increase in cost of borrowing. At close to 9 per cent on an average, interest incidence in the past four years has been the highest compared to the past 15 years. This should have motivated companies to retain profits for investments rather than borrow. But, companies have been taking out profits in larger proportions.

Contrary to popular perception, the balance sheets of non-finance companies are not stressed to stop them from borrowing. The debt to equity ratio in 2017-18 was at a record low of 0.84 times. Corporate India has never seen such a low gearing ratio ever in the past. But, borrowings growth at 4 per cent in 2017-18 was at a 13-year low.

If the high cost of borrowing holds them back then they should have retained the profits. But, if they neither borrow nor retain profits, then one inference of their behavior is that they do not find sufficient need to invest at the moment. This is corroborated by the very low asset utilisation ratio that non-finance companies face. At 0.68 times in 2017-18, the total income to total assets ratio was the lowest in the history of Corporate India. Never in the past has Corporate India been able to extract so little from its assets.

There’s been a significant divergence between inflation expectations and oil prices recently. This suggests that either the oil rally has gotten ahead of itself or worries about global growth are a bit overdone. h/t @LaMa2anee

Global manufacturing PMI for March matched Feb reading but when India and Mexico (which were too late this month to be included) are added, it likely slipped again for the 11th month in a row—matching the longest stretch of weakness seen in 2008.

Historically, reversals in the long-term relative performance of growth and value stocks, large and small cap stocks, and U.S. and international stocks have been marked by yield curve inversions. Read more => https://www.schwab.com/resource-center/insights/content/inversions-and-reversals-leaders-and-laggards-may-be-changing-places …

US real yields (measured by 10y TIPS) have collapsed to 0.59%, suggesting way lower US GDP growth.

The share of US adults reporting no SEX in the past year reached all time high in 2018.

‘Positioning is super short in VIX. A worrisome signal of (too) uniform market thinking… Short positioning in VIX is now more extreme than prior to Feb-18 and Oct-18 sell-offs in equities” . Nordea Markets

Mad world. While Stocks have gained $9tn in mkt cap, global bonds have gained a whopping $1.8tn in value in Q1 2019 as cheap money from the central banks have inflated all assets. Part of this crazy world is that bonds in a volume of $11tn have negative yields.

Commodities had their best quarter in 3yrs, driven by supply concerns and optimism over demand. In Q1, Bloomberg Commodity Index rose 6%, most since Q3 2016. Crude oil paced the advance, while nickel led gains in industrial metals. Soft commodities like coffee & wheat fared worst..Holger

Nirmal Bang writes in a note…

The government announced the borrowing programme for FY20 which suggests clear front loading of borrowing which is unlikely to bode well for yields. The government will borrow 62.3% of budgeted gross borrowing or Rs 4420 bn in H1FY20. This is significantly higher than Rs 2880 bn (47.6% of budgeted  gross borrowing) in FY19, and also slightly higher than the historical average of 60%. With redemptions amounting to Rs 1018.7 bn, the net borrowing in H1FY20 amounts Rs 3401.2 bn, up from Rs 2004.3 bn in FY19, and at the highest level in the past  seven years.  With total budgeted gross borrowing of Rs 7100 bn, the  gross borrowing in H2FY20 will be Rs 2680 bn. With redemptions of around Rs 1350 bn, net borrowing in H2FY20 will be Rs 1330 bn, a  seven year low.

In their view, benign inflation and seasonally weaker credit demand in the first half of the financial year only partially justifies  a heavy front loading of the government borrowing programme.  Liquidity conditions are likely to remain tight given elections,  while redemptions are back ended. With the front loading of government borrowing, all hopes of a rally in bond yields can be laid to rest, despite expectations of easing by the Reserve Bank of India or RBI. Meanwhile the fiscal deficit  for April – February 2019 stood at 134.2% of revised estimates,  compared to 120.3%  a year ago. Divestment  receipts  witnessed a spurt in March, exceeding the target of Rs 800 bn, but tax revenues are falling short. In our view, only a cut in expenditure will allow the government to meet the fiscal deficit target of 3.4% of GDP.  On a year to date basis, capital expenditure is down by around 8%, while revenue expenditure is up 12.5% YoY, but lower than the budgeted 13.9%.The current account deficit  or CAD for Q3FY19 stood at US$16.9 bn or 2.5% of GDP, down from  US$19.1 bn or 2.9% of GDP in the previous quarter. It was however slightly above our estimate of Us$15.1 bn or 2.3% of GDP. It was also higher than US$13.7 bn or 2.1% of GDP in Q3FY18.  For the period  April- December FY19, the CAD stood at 2.6% of GDP. Consequently, we have revised up our CAD estimate for FY19 marginally to 2.4% of GDP, from 2.3% earlier. The balance  of payments recorded a deficit of US$4.3 bn in Q3FY19 primarily on account of portfolio outflows. Nevertheless, the sequential moderation in the CAD, and the recent return of FPI flows suggests a  relatively benign outlook for the INR in the near term, although we continue to expect it to trade with a depreciation bias.