WIXLIB

TuesdayJune 14, 2016www.bloombergbriefs.comMay Retail Sales, Import Prices; MSCI ClassificationQUOTE OF THE DAYBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS"The issue is not whether or notthere is a bubble — it’s whetheror not the Fed actually movesand we move toward a flat topotentially inverted yield curve.It's not the level of interest rates,it's the level of the yield curve. Ifit starts to get inverted or getreally flat, that’s trouble."WHAT TO WATCH: Germany’s 10-year government bond yields tumbled below zerofor the first time on record, while four polls in the U.K. put the “Leave” campaign aheadof “Remain.” U.S. retail sales are expected to advance 0.3 percent in May following a1.3 percent gain in April, 8:30 a.m. Ex-autos sales are forecast to rise 0.4 percent. Alsoprinted at 8:30 a.m., import prices are expected to gain 0.8 percent last month after a0.3 percent gain in April. Business inventories for April are expected to rise 0.2percent following a 0.4 percent gain the month before, 10 a.m.ECONOMICS: The Federal Reserve begins its two-day policy meeting. The NFIB'sSmall Business Optimism Index rose to a level of 93.8 in May from a print of 93.6 themonth before.— Peter Borish, chief strategist at Quad CapitalGOVERNMENT: The District of Columbia holds its Democratic primary, the finalcontest in the U.S. presidential race.COMMENTARY IN THIS ISSUEMARKETS: MSCI Inc. will announce the results of its 2016 Annual MarketClassification Review shortly after 5 p.m., including whether Peru remains as anemerging market. Reclassification as a frontier market could trigger billions of dollars ofoutflows. The MSCI China A and MSCI Pakistan Indexes are also on the list for apotential reclassification to emerging markets.Never before have bond traders paid somuch to own trillions of dollars in debt andgotten so little in return: Susanne WalkerBarton and Liz Capo McCormick.(All times local for New York.)Retail Sales Green-Light Fed's 2016 Growth TargetU.S. consumers have long had animpressive propensity to get into debt —lately, though, the government has beenplaying a much bigger role in enablingthem: Mark Whitehouse.UBS Investment Bank's Drew Matusdiscusses corporate debt, globalmonetary policy and market distortion:Michael McKee and Tom Keene.DATA MONITORWhile the fate of the June FOMC meeting was sealed by the weak May jobs report, retailsales data could adjust the lens through which policy makers view current economic trends.Weak results could influence how the FOMC characterizes consumer activity, and in turn, howit views overall growth momentum, which is now tightly linked to consumers. The April retailsales report provided important confirmation that consumers were up to the task of boostingeconomic activity after a frail first quarter. Rising gas prices will lift the overall May results.BI Economics estimates total sales for the second quarter need to rise roughly 3.5-4 percentfor growth to be on track to hit the Fed's target for 2016. This appears to be within reach.— Carl Riccadonna, Bloomberg Intelligence EconomistClick here to view a live version of this chart on the Bloomberg terminal.Source: BloombergRisk aversion prevailed in markets, spurringslides in Asian and European stocks onBrexit anxiety. The pound fell with oil, whilesovereign bonds rallied.

Bloomberg BriefJune 14, 2016CREDITEconomics2SUSANNE WALKER BARTON AND LIZ CAPO MCCORMICK, BLOOMBERG NEWSMost Expensive Bond Market in History Has Come Unhinged. Or Not.Today’s bond market is defying justabout every comparison known to man.Never before have traders paid somuch to own trillions of dollars in debtand gotten so little in return. JackMalvey, one of the most-respectedfigures in the bond market, went back asfar as 1871 and couldn’t find a time whenglobal yields were even close to today’slows. Bill Gross went even further,tweeting that they’re now the lowest in“500 years of recorded history.”Lackluster global growth, negativeinterest rates and extraordinary buyingfrom central banks have all keptgovernment debt in demand, even asyields on more than 8 trillion of thebonds dip below zero. But as investorsforgo any margin of safety to bid upprices higher and higher, the big worry isthat the insatiable demand has blindedthem to potential dangers that may resultin painful losses — especially as theFederal Reserve considers raising rates.“This absolutely leaves the markets alot more vulnerable,” said Torsten Slok,the chief international economist atDeutsche Bank AG.Beyond the bubble of the bond market,history offers some clues. Ten-year U.S.government notes now yield less thanstocks pay in dividends — just the thirdtime that’s happened in the past halfcentury. The last two times, Treasuriessuffered their biggest annual losses onrecord.The stakes couldn’t be higher. Averageyields for 10-year notes in the U.S.,Japan, Germany and the U.K., whichhave issued more than 25 trillion ingovernment debt, fell to 0.69 percent lastweek, data compiled by Bank of NewYork Mellon Corp. showed. That’s thelowest on record and well below the 5percent average over the course of 145years.With yields so low, bond buyers areleaving themselves no room for error. Inthe U.S., a metric known as the termpremium now stands at minus 0.47percentage point for 10-year notes. Themeasure, which the Fed uses as a tool inguiding monetary policy, reflects theextra compensation investors demand tohold longer-maturity debt instead ofsuccessive short-term securities.Global Benchmark Yields PlungeRead the full story with a live version of this chart on the Bloomberg terminal here.As its name suggests, the termpremium should normally be positive andhas been for almost all of the past 50years. But since the start of the year, thepremium has turned into a discount,suggesting that bond investors can’t seeany risks on the horizon that would pushyields higher. The same is true in Japan,Germany and the U.K., where the termpremium has gone negative asbenchmark yields in all three markets hitall-time lows last week.The “term premium should almostnever be negative, but we’re in a newnormal,” said Stanley Sun, a New Yorkbased strategist at Nomura Holdings Inc.,one of 23 dealers that trade directly withthe Fed.For the pessimists, there are plenty ofreasons to keep paying up for the safetyof government debt — even at sky-highprices.The odds of the U.S. entering arecession over the next year is now thehighest since the current expansionbegan seven years ago, according toJPMorgan Chase & Co. TheOrganisation for Economic Cooperationand Development also warned thismonth the global economy is slipping intoa self-fulfilling “low-growth trap.” What’smore, Britain’s vote on whether to leavethe European Union this month has beena major source of market jitters.“Markets are becoming increasinglyconvinced that developed nations maybe less able to create inflation even ifthey want to,” said Neela Gollapudi, thehead of portfolio management andresearch at Gentrust WealthManagement, which oversees 1 billion.Last year, inflation in developedeconomies slowed to 0.4 percent and isforecast to reach just 1 percent in 2016— half the 2 percent rate most majorcentral banks target, data compiled byBloomberg show.Yet some say that quantitative easing,or the aggressive bond-buying stimulusthat central banks in Europe and Japanare currently pursuing, is causing manydebt markets to become unmoored fromtheir fundamental value.That may help to explain the recorddemand at U.S. government debtauctions this year. With almost all thenegative-yield debt concentrated in theeuro area and Japan, investors arepouring into Treasuries, which offer someof the highest yields in the industrializedworld. Demand at sales of two-, five- andseven-year notes last month soared to alltime highs, according to data compiledby Bloomberg. Foreigners also boughtthe most Treasuries at the May auctionssince 2011, data compiled by TDSecurities showed.

June 14, 2016Bloomberg BriefEconomics3

Bloomberg BriefJune 14, 2016COMMENTARYEconomics4MARK WHITEHOUSE, BLOOMBERG VIEW COLUMNISTWhat American Consumers Owe to Uncle SamU.S. consumers have long had animpressive propensity to get into debt.Lately, though, one lender has beenplaying a much bigger role in enablingthem: Uncle Sam.Total U.S. consumer credit — whichincludes credit cards, auto loans andstudent debt, but not mortgages — stoodat 3.54 trillion at the end of March,according to the latest data from theFederal Reserve. That's the most onrecord, both in dollar terms and as ashare of gross domestic product.What's really unusual, though, is thesource of the money: The federalgovernment accounted for almost 28percent of the total. That's up from lessthan 5 percent before the 2007-2009recession, thanks in large part to thegovernment's efforts to promoteeducation by making hundreds of billionsof dollars in student loans directly, ratherthan going through banks. Here's howthat looks (top chart).To some extent, the government'sgrowing role makes sense. Amid a deepeconomic slump and slow recovery, itwas best equipped to satisfy the demandfor credit among Americans looking toimprove their job prospects througheducation. Without the government'sinvolvement, consumer credit as a shareof gross domestic product would still bewell below the pre-recession level (allelse equal). Here's how that looks(bottom chart).That said, the government assist hashelped push total student debt to a record 1.3 trillion, much of which has beenspent on rising tuition costs or on coursesthat didn't do much to improve people'searning potential. Because student debtis extremely difficult to discharge throughbankruptcy, it will weigh on the borrowers— and on the U.S. economy — for manyyears to come.The Barack Obama administration hassought to ease the burden, for exampleFederal Government Share of Consumer CreditConsumer Credit as a Share of GDPwith a plan that limits payments to 10percent of a borrower's income.Ultimately, though, the government mayhave to write off a lot of the debt — attaxpayer expense.This column does not necessarily reflect theopinion of the editorial board or Bloomberg LPand its owners.