Good and Bad News Affects Fixed Income (Reuters)
Fixed income investors awoke to both good news and bad news this morning — unfortunately both came from the same economic data. First, the good news: the average price for U.S. homes rose again in May. Not surprisingly, consumer confidence also rose for the month. While both are signs of a strengthening U.S. economy, when they are combined with the ongoing $85 billion in monthly quantitative-easing (QE) stimulus, the result may be a growing perception of too much easy money in the market. So much easy money, in fact, that some analysts, like Elwin de Groot, senior market economist for Rabobank, state short-term bond investors are over reacting and pushing fixed income prices lower. As usual, such forecasters advise patience. We’ll see how it plays out.
China Looks Worse (CNNMoney)
According to the International Monetary Fund, China’s rapidly expanding credit bubble must be reined in quickly, if the world’s second-largest economy is to avoid a credit crisis similar to that plaguing Europe. Compounding the potential for trouble, consensus estimates for China’s economic growth this year are being pulled back from 8 percent to 7.75 percent, on average. Should economic growth continue to evaporate, and credit continue to grow through riskier assets and unregulated lenders, there could come a time when borrowers default, leaving the debt to a shrinking economy. We’ve seen this equation before, and it never ends well for investors. And when we’re talking about hundreds of millions of investors, that’s a cause for concern, worldwide.
Swiss Uncovering New Ways to Fence Sit (Bloomberg)
For the past two years, Switzerland and the United States have been engaged in a legal battle regarding the country’s offshore tax haven status, and whether or not it needs to hand over records from 14 companies with offshore accounts. Switzerland desperately wants to avoid a second judgment against it, like that filed against Wegan & Co., which resulted in a $1.2-billion tax liability. Earlier this year, Julius Baier, the country’s third-largest wealth manager, advised clients that their accounts meet the requirements for handing over information to the Internal Revenue Service (IRS). These accounts could amount to more than $10 billion in assessments, if carried through successfully. However, according to Swiss Finance Minister Eveline Widmer-Schlumpf, “The Swiss won’t pay anything.” With the resolution of this case expected to come as early as next week, we’ll find out if Widmer-Schlumpf’s view wins or the Internal Revenue Service does.