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Treasury sell-off reignites question: how high can yields go?

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It is the question that has gripped investors as the US election looms and coronavirus cases have surged: just how far can Treasury prices fall after a momentous rally this year?

Money managers have been left grappling with that issue once more after the 10-year Treasury was hit with its biggest bout of selling in three weeks on Thursday and the yield on the benchmark sovereign bond hurtled back towards a four-month high. The decline put a months-long sell-off in US government bond prices back in motion, interrupting a mini-rally in Treasuries this week that had been sparked by the worsening pandemic.

At 0.82 per cent on Friday morning, the yield on the 10-year note is once again near the top-end of the range in which it has traded since late March, having risen 0.14 percentage points this month. The move on Thursday was enough to kick Treasury volatility to its highest level since June, according to Ice Data Services.

The shift out of Treasuries in recent weeks has been fuelled by the rising prospect of a so-called “blue wave” at next week’s US election, a scenario where the Democratic party wins the presidency and both houses of Congress. Some investors have placed bets that the bigger fiscal stimulus expected under a Biden administration would mean a stronger recovery, pushing up inflation expectations — and forcing bond yields higher.

Line chart of Yield on 10-year US Treasury note (%) showing US government bond sell-off kicks back into gear

“The market has had a pretty big sell-off, and it could go further, but I think it will be misguided,” said Robert Tipp, chief investment strategist at PGIM Fixed Income. “In 12 to 24 months, we will still be working to revive the economy, not [dealing with] an overheating.”

According to modelling conducted by Gregory Daco at Oxford Economics, a Biden stimulus package could help fuel a roughly 5 per cent inflation-adjusted expansion in the US economy next year. A continuation of the status quo in Washington would see real GDP rise 3.7 per cent in 2021, while a Republican sweep would deliver growth of about 2 per cent.

Dan Ivascyn, group chief investment officer at investment firm Pimco, which manages $2tn in assets, says the 10-year yield could top out at 1.25 per cent — still some way below the 1.9 per cent level where it started the year.

“Any type of contested election scenario or a material deterioration in virus containment, and a resulting further shutdown of segments of the global economy, can absolutely lead to a meaningful rally in Treasury bonds,” he said.

Any sharp climb in yields would crash up against the Federal Reserve, fund managers say. Having taken unprecedented action this year to stave off a much more pronounced financial crisis, the central bank is unlikely to tolerate a destabilising rise in corporate borrowing costs.

“I don’t think we have to fear a bear market in [US government] bonds that gets out of hand,” said Alessio de Longis, a senior portfolio manager at Invesco. “The role of the Fed and the amount of support for the bond market that is coming from quantitative easing is very, very powerful.”



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Can international markets outperform the US? | Charts that Count

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Decade-long bull run on global markets hits new heights in November



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Iron ore hits 7-year high after Vale lowers output forecast

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The price of iron ore reached a seven-year high on Wednesday after the biggest global producer of the material lowered its output forecasts, giving further momentum to what has been the best-performing major commodity of 2020.

At its annual investor day, Brazilian miner Vale said it expected to produce 300m to 305m tonnes of the steelmaking ingredient this year, below a previously lowered target of at least 310m tonnes — blaming heavy rains and a delay in obtaining a regional licence.

For 2021, it forecast output of 315m to 335m tonnes, below the market consensus estimate of 353m tonnes. “We prefer to be more conservative,” said Marcello Spinelli, head of Vale’s iron ore division, referring to next year’s target.

Tyler Broda, analyst at RBC Capital Markets said Vale’s new forecasts would provide “significant support” to the price of iron ore “with another 20m tonnes out of market [in 2021] we already calculate is in a 50m deficit”.

A combination of supply disruptions and strong demand from China, where steel production has smashed records, has pushed the price of iron ore up more than 40 per cent this year.

Line chart showing $ per tonne of iron ore

It traded at a seven-year high of $136.75 per tonne on Wednesday, according to a price assessment by S&P Global Platts, and remains on course to average $100 a tonne over the year for the first time since 2013.

The bull market in iron ore has generated a huge cash windfall for Vale and other big producers, a group that includes Anglo American, BHP, Fortescue Metals Group and Rio Tinto. Vale’s cost of production is just over $13 a tonne.

Christopher LaFemina, analyst at Jefferies, said there was now a chance that iron ore could rise above $150 a tonne in January and February when heavy rains and cyclones typically disrupt operations in Brazil and Australia. “Based on Vale’s record, we expect 2021 production to be near the bottom of the guidance range,” said Mr LaFemina.

He added that other miners would also benefit from Vale’s lower production volumes. Vale’s Brazil-listed shares were down about 3 per cent in morning trading, but are still up 50 per cent this year. The shares of Rio and BHP were up about 5 per cent following the news, while Anglo rose almost 2 per cent.

Vale’s production suffered in the second quarter when the company was hit by the full impact of the pandemic, wet weather and maintenance at its huge mine in the Amazon rainforest.

But after a good third quarter, analysts thought the company was set to produce 310m tonnes this year, and add about 40m tonnes of additional output in 2022 as mines that were closed following last year’s Brumadinho dam disaster either restarted or hit full capacity.

The company also said on Wednesday it was investing $2bn to reduce its carbon footprint and wanted its Brazilian operations to be powered by renewable energy by 2025. 

Investors focused on environment, social and governance metrics are putting pressure on mining companies to set emission reduction targets. By 2035, Vale is targeting a 15 per cent reduction in the emissions produced when a customer uses its iron ore in a blast furnace.



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ESG is a-changin’, water disclosure demands, greenwashers beware CA100+

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One thing to start: we’re launching a series of in-depth reports under the banner of the Moral Money Forum, and we’re keen for your insights. Our first report, to be published early next year, will ask how investors and the companies they invest in can encourage long-term behaviour in a world of short-term pressures. Are quarterly earnings getting in the way of building sustainable businesses? How can boards best navigate the trade-offs? And what’s the most compelling research and data that would inform our reporting. Share your thoughts here.

Deluge of ESG announcements show shift in zeitgeist

There have been so many announcements this year about the corporate world embracing ESG principles that it is temptingly easy to roll your eyes whenever a new survey drops. But sometimes, Moral Money remembers to stop being (almost) blasé and marvel about a crucial point: today’s corporate zeitgeist looks notably different versus two years ago, never mind a decade back.

A recent HSBC survey of 10,000 of its global clients found that 78 per cent of companies have environmental targets, and 72 per cent have social ones. That marks a jump of 10 and 12 percentage points compared with last year. The increase underscores a key point we keep hearing: Covid-19 has not derailed ESG talk, or not among companies that seem able to survive.

Even more startling is that 86 per cent of HSBC clients expect sustainability to boost their profits next year. They view doing good as a revenue-enhancing strategy to a degree that might make Milton Friedman, the economist who promoted the shareholder-first mantra, spin in his grave.

Maybe that is overly optimistic. Some consumer behaviour these days is contradictory (HSBC officials say that while consumers are increasingly picking companies according to their sustainability image, they are not always choosing sustainable products.) But the survey suggests “consumers are the strongest driver for automotive and construction firms to enhance sustainability, whereas government action influences natural resource-intensive businesses in the agricultural, oil and mining sectors”.

Companies are also responding to the mood shift from banks. An FT Moral Money panel at a banking conference on Tuesday showed that entities such as NatWest and UniCredit were increasingly imposing tougher ESG criteria on loans, echoing a wider shift in the industry.

Jean Pierre Mustier, the head of UniCredit, argued that the embrace of sustainability was so marked that Covid-19 was turning into the “redemption moment” for financiers. Cynics might scoff. But the key point remains: this is not language that bankers used during the past decade’s crisis. Sometimes the biggest zeitgeist shifts are the ones that keep stealthily swelling so they become the “new normal” that we almost take for granted — until we stop to look, afresh. (Gillian Tett)

The new frontier for disclosures

© Springdt/Dreamstime

Shareholder resolutions calling for better disclosures of climate change risks and carbon emissions scored successes in 2020, but a lurking problem with equally dangerous risks remains: the scarcity of disclosures around clean, accessible water.

In a report published this week, DWS, Deutsche Bank’s asset management arm, said investors do not have basic information to assess companies’ water risks. Perhaps more troubling, investors lack an understanding of water risks, DWS said.

The debate about water is in its early stages, but will eventually become as important as air and CO2 concerns, DWS said. The group urged other asset managers and companies to adopt a water charter that details guidelines for businesses.

Michael Lewis, head of DWS’s ESG thematic research, said water was viewed as a free resource, but “this idea that it is plentiful and cheap is just wrong”. He called for a water-themed version of the Climate Action 100+, the influential group of nearly 600 investors agitating for global warming prevention. 

“What we have done with climate we could replicate with water,” he told Moral Money. For example, the Task Force on Climate-related Financial Disclosures could be expanded to include water risks, he said.

Companies can expect more pressure from shareholders in 2021 to disclose water risks. This year, As You Sow, a pressure group, filed shareholder proposals at Baker Hughes, Diamondback Energy, Entergy and other energy companies demanding reports on water usage. Several of these petitions were withdrawn after companies agreed to make the requested disclosures.

With CDP, the nonprofit formerly known as the Carbon Disclosure Project, now looking to expand its sustainability questionnaire to include water security, we should expect more companies and asset managers to take DWS’s warnings seriously. (Patrick Temple-West)

Shareholder engagement group plans to tighten screws on greenwashers

When investment managers want to signal they are getting serious about climate change, one of the first things they tend to do is to sign up with groups such as the Climate Action 100+ group we mentioned above.

But there’s just one problem: the act of joining the CA100+ (or many of the other similar groups out there) doesn’t always mean much in practice, a new report from ShareAction has found.

Some notable laggards include BlackRock, which joined the CA100+ this year, but only supported 11 per cent of the climate resolutions that crossed its desk, and Lyxor Asset Management, which joined in 2018 and supported just 2 per cent.

To be sure, the goal of the CA100+ is to cast a wide net and get as many investors involved as it can. Many members do support climate propositions, and the group has made some important progress on getting companies to disclose better climate data and commit to go net zero.

But the potential for greenwashing is clear. And there is little to prevent bad faith actors from joining simply to bolster their ESG branding.

Mindy Lubber, chief executive of Ceres, the sustainability non-profit that founded the CA100+, recognises the problem. “We don’t like it any more than you, if they’re using it for cover,” she said. “They were invited in to help move companies, and they should be doing that. If they’re not doing that, they shouldn’t get away with having the imprimatur.”

Ceres publishes a yearly report on the CA100+ that calls out investors that don’t vote their proxies. And Ms Lubber says the next phase of the CA100+ will be getting asset owners and managers to make their own net zero commitments. Those that don’t comply may be “invited to leave”.

But until that happens it is hard to put much stock into investors touting CA100+ commitments. Without doing your homework, it is impossible to know if they have done anything beyond signing their name to a piece of paper. (Billy Nauman)

Nasdaq to require women, minorities on corporate boards

In one of the biggest corporate governance developments of 2021, the Nasdaq stock exchange on Tuesday proposed a new rule that requires its US listed companies to have at least one woman and one person who self-identifies as an under-represented minority or lesbian, gay, bisexual, transgender or queer.

Companies will have four to five years to find qualified board candidates, Nasdaq said. How significant do you think this will be in driving change throughout corporate culture? Please email us your thoughts at moralmoneyreply@ft.com.

Grit in the oyster

In an example of the challenges countries face to become carbon neutral by 2050, Sony has warned the Japanese government it may have to shift manufacturing out of the country unless rules on renewable energy are relaxed.

The comments from chief executive Kenichiro Yoshida underscore the pressures Japanese businesses are under to erase the carbon footprint of their manufacturing facilities as Apple, Facebook and other technology groups seek to shift their global supply chains to 100 per cent renewable power.

Chart of the day

October marked the highest ESG monthly flows on record at $36bn (+45% vs $25 Sep flows); 64% passive, 36% active

Despite efforts by the Trump administration to chill ESG investing, investors in October poured a record $36bn into sustainability funds, according to Morgan Stanley. ESG exchange traded funds saw $9.6bn of inflows (compared with a 12-month average of $5.2bn).

This haul accounted for 35 per cent of flows into ETFs broadly. And the whopping amounts came as ESG indices underperformed. The broader market has beaten MSCI’s socially responsible investing indices since mid-October, Morgan Stanley said.

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

In its first China Stewardship Report, Fidelity International found that investors have focused more on stewardship — both through voting and engagement — than ever before and have started to influence corporate behaviour for the better in China.

Voting participation has been steadily rising, even though the speed of progress may look slow to western investors. The average voting participation rate at companies without a controlling shareholder jumped to 36.5 per cent in 2019 — from 33.1 per cent in 2017. Shareholders have also started to use their votes to voice their opposition more openly. The number of resolutions receiving more than 10 per cent “against” votes increased to 385 last year, an increase of approximately 20 per cent over two years.

The report also provided a few examples of Chinese companies — both state-owned and privately owned — that have responded to engagement constructively. For example, a large oil and gas producer in China has addressed its aspirations to cut carbon emissions to near zero by 2050, after a series of informal conversations and engagement calls.

Hurdles remain for overseas ESG investors. But the progress thus far is astonishing for a country where there is no widely accepted Chinese translation for the words “stewardship” or “engagement” yet.

Smart reads

  • Republican SEC commissioner Hester Peirce on Tuesday renewed her concerns with ESG investing. “[F]or all its hype, ESG investing does not require us to turn our rules inside out to accommodate it any more than any other broad genre of investing, like value investing, requires us to do,” she said at an agency meeting. Companies should treat ESG topics with the same materiality filter they apply to everything else, she said.

  • Cargill and Nestlé USA faced the US Supreme Court on Tuesday in a case concerning when companies can be sued for allegedly violating international human rights. Check out the Reuters report on the oral arguments here.

Further reading

  • Amazon to roll out tools to monitor factory workers and machines (FT)

  • Managers Point to Diversity Efforts to Justify CEO Pay (FundFire)

  • Biden’s renewable energy deadline too ambitious says power boss (FT)

  • Reinventing Workers for the Post-Covid Economy (NYT)

  • Activist Shareholders Press Pfizer, J&J, and Other Pharma Companies on Covid Vaccine Price and Access (Barron’s)

  • Bank of America Says It Won’t Finance Oil and Gas Exploration in the Arctic (Bloomberg)



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