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Friday, April 24, 2015 1:32 PM

ECB Buys Negative Yield Covered Bonds; Trade Guaranteed to Blow Up

In a move 100% guaranteed to blow up at a later date, the ECB Said to Start Buying Covered Bonds With Negative Yields.

The European Central Bank started buying covered bonds with negative yields as its asset-purchase program reduces the supply of the highly rated debt, according to two people familiar with the matter.

The central bank bought the debt in the past two weeks, said the people, who asked not to be identified because the information is private. The notes were from Germany, one of the people said.

The ECB has bought 69.7 billion euros ($75.5 billion) of covered bonds since October as part of its latest measures designed to stimulus growth in the euro area. The accumulation of assets is driving down yields and the central bank now holds about 15 percent of the market, according to ABN Amro Bank NV.

“The ECB has caused this situation by being a big buyer and has exacerbated the already negative net supply of covered bonds,” said Joost Beaumont, a fixed-income strategist at ABN Amro in Amsterdam. “If the ECB buys more, yields will go still lower and that’s going to affect the ECB itself.”

The ECB, which is also buying government bonds and asset-backed debt, has said it will buy negative-yielding securities up to its cash deposit rate of minus 0.2 percent.

An ECB spokesman declined to comment on its covered debt purchases.

“Supply in positive yields is getting scarce and the ECB may have no other choice to fulfill its targeted purchase volume than to buy negative-yielding bonds,” said Tobias Meyer, an analyst at Norddeutsche Landesbank in Hanover, Germany.
Trade Guaranteed to Blow Up

I agree with Beaumont's comment this is "going to affect the ECB itself".

In fact I will go one further and suggest this is a "trade guaranteed to blow up", I just cannot say when or even in precisely what ways.

Mike "Mish" Shedlock

12:08 PM

Durable Goods Orders Up but Core Capital Goods Negative Again

Durable goods orders are somewhat of a mixed bag today, but beneath the headline rise, weakness is easy to find.

The Bloomberg Consensus was for a 0.5% rise, and the actual result was a whopping 4% gain due to transportation.

Yet, transportation for last month was revised lower, and excluding transportation durable goods orders shrank.

More importantly, core capital goods orders declined for at least four consecutive months.

Let's dive into the Census Report on Durable Goods for more details. Here is a table of key items I made from the report.

ItemMarFebJanFeb-Mar %ChgJan-Feb % ChgDec-Jan % Chg
Total New Orders240,175230,911234,272 4.0-1.41.9
Ex-Transportation Orders159,917160,174162,227-0.2-1.3-0.9
Ex-Defense Orders228,119222,394224,6522.6-1.02.2
Transportation Orders80,25870,73772,04513.5-1.88.9
Capital Goods Orders89,67385,58886,7234.8-1.37.1
Non-Defense Capital Goods Orders80,21377,50479,2143.5-2.2-0.3
Defense Capital Goods Orders9,4608,0847,509177.7-6.3
Core Capital Goods Orders68,18968,53770,062-0.5-2.2-0.3
Core Capital Goods Shipments69,61169,88969,789-0.40.1-0.6

Line items (except the last line which shows shipments) are new orders, in millions of dollars, seasonally adjusted. Core capital goods exclude defense and aircraft.

Once again this was another weak economic report excluding aircraft orders that have long lead times and are frequently cancelled.

Mike "Mish" Shedlock

2:34 AM

Supersaturation and Store Cannibalization: McDonald's to Close 700 Stores, 350 Already Took Place First Quarter

McDonald's is closing 700 stores this year, 350 of which took place first quarter. That sounds like a lot but it pales in comparison to the 32,500 stores in the chain.

Still it is a sign of Multiple Problems for McDonald's

On Wednesday, McDonald’s had reported an 11% decrease in revenue and a 30% drop in profit for the first three months of year, a continuation of its troubles in the last two years as it has struggled to compete with new U.S. competitors, a tough economy in Europe and a food safety scare in Asia.

McDonald’s CFO Kevin Ozan told analysts that the shuttered stores in China, where comparable sales fell 4.8% in the first quarter, had been underperforming for years. In Japan, where McDonald’s is still reeling from the food safety scare last summer, the closed stores were “heavy loss maker restaurants.” As for the U.S., comparable sales were down 2.3%, one of their biggest drop in years as chains like Chipotle ate into sales.

In the last few months, it has made a few moves that telegraph where it is heading, though it is pretty clear how big the challenge will be for the Golden Arches.

For instance, earlier in April the company announced it is testing out a larger, pricier, third-of-a-pound burger for $5, two years after dropping the similar Angus burger line because they were too pricey for McDonald’s diners. Despite that earlier failure, new CEO Steve Easterbrook expressed confidence his customers would go for premium burgers.

But he faces an uphill battle in winning over the millions of burger-eaters in the U.S. that have a dim view of McDonald’s offerings: Nation’s Restaurant News published a survey this month rating 111 limited-service chains on 10 attributes including food quality, and McDonald’s was ranked No. 110, ahead only of Chuck E. Cheese. In-N-Out Burger topped the list.

And he also has to get the thousands of franchisees, who own 80% of McDonald’s locations, on board as he works to transform the company, even as many are still smarting from his decision to raise wages at company-owned U.S. restaurants.
Low Quality at Premium Prices

Can you sell low-quality "premium" burgers in a place that looks like crap? Other than its breakfast menu there is almost nothing I will touch at McDonald's.

Fools cheered when McDonalds and Walmart raised wages.

Here is the other side of the coin: Is McDonalds or any chain going to expand rapidly if wage pressures mount?

Store Cannibalization

Every hike in wages is another marginal store that won't make it, or will not get built in the first place. All these chains do is cannibalizing each other's business.

Every market share gain by Chipotle is a loss by McDonald's, Applebees, Burger King, or someplace else.


Cities are supersaturated with fast food junk. Saturation also applies to grocery stores, sporting goods stores, Target, Home Depot, Lowes, etc.

I keep wondering when it ends.

I don't have the answer, but it will, and I actually suspect soon. The trigger could easily be the rise in wages. When it happens it will be sudden and "unexpected".

Expect another round of "no one could possibly see this coming".

Mike "Mish" Shedlock

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