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Yield curve recession warning may be wrong

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The US Treasury yield curve inverted in 1966 and 1998. Guess what? No recession followed.

Former US Federal Reserve chairman Janet Yellen: “I think the US economy has enough strength to avoid [a recession], but the odds have clearly risen and they’re higher than I’m frankly comfortable with.”  Photo: AP

In today’s ultra-low interest rate world, there are unusual structural forces pushing down long-term bond yields that help explain why the interest rate on two-year Treasury securities traded above the 10-year bond yield for the first time in 12 years.

Yellen said: “Historically, [the yield curve inversion] has been a pretty good signal of recession and I think that’s when markets pay attention to it but I would really urge that on this occasion it may be a less good signal.

“The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.”

These are some of the likely reasons that Yellen said the US is probably not heading for recession as the inverted yield curve suggests.

Structural forces

First, central banks have bought copious amounts of government bonds – artificially depressing long-term yields.

The world’s three largest central banks – the US Federal Reserve, European Central Bank and Bank of Japan – have a combined $US14.2 trillion of assets on their balance sheets.

Even though the Fed’s balance sheet has shrunk, the BoJ has been adding to its asset purchases.

Hence, Reserve Bank of Australia deputy governor Guy Debelle said on Thursday, “I’m not sure I would be relying on the yield curve as the best signal of that risk given the yield curve has obviously not got the same sort of structure that it’s had historically.”

The “term premium” – the extra return investors usually demand for the risk of holding longer-term bonds – may be “negative”, he said.

Second, an ageing population is bidding up demand for fixed income securities by pension funds and life insurers as they try to manage their long-term assets and liabilities.

Third, inflation appears to be structurally lower due to the tectonic forces of globalisation and digitisation of the economy.

Hence, the neutral interest rates of central banks are lower than in the past, meaning the yield curve is naturally flatter and easier to invert.

Risks remain

Nevertheless, there are obvious risks to the global economy, chiefly from the US-China trade and technology war, which Debelle warned was delaying business investment around the world.

Economic growth is slowing in China and Europe, with Germany fighting to stave off recession – defined as two consecutive quarters of negative economic growth.

So rationale for why “this time  is different” in the bond market will do little to prevent fear in investors around the world.

As a former political consultant to President Bill Clinton, James Carville, once famously said of his preferred reincarnation, “I want to come back as the bond market – you can intimidate everybody”.

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Hudson’s Bay Company agrees to taken company private

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Hudson’s Bay Co. will go private in a deal valuing the Canadian retailer at $1.9 billion in a bid by a group of investors led by executive chairman Richard Baker to try their hand at reinvigorating the fading 349-year-old department-store chain.


Hudson Bay Company executive chairman Richard Baker

The board of Hudson’s Bay said it entered into an agreement with investors led by Baker after the group raised its offer price to $10.30 a share, up from $9.45 a share. It approved the offer after a recommendation by a committee of independent directors.

Hudson’s Bay shares rose 7 per cent to $10.11 at 9:35 a.m. in Toronto.

Attention will now turn to minority shareholders who came out against Baker’s earlier proposal. The company needs a majority of them to approve the new deal for it to go through.

Catalyst Capital Group and other investors had said Baker’s original offer undervalued a company that’s rich in real estate holdings. Representatives for Catalyst and for Jonathan Litt, an activist investor who’s also been critical of Baker, were not immediately available for comment.

“The special committee is confident that this transaction represents the best path forward for HBC and the minority shareholders,” David Leith, head of the special committee, said in a statement.

Baker and his investment group want full control of the retailer, which also owns Sak’s Fifth Avenue, to turn the business around outside the glare of public markets. While Saks has been the group’s bright star of late, the Canada-based Hudson’s Bay chain, the oldest company in North America, is removing 300 “unproductive” brands and bringing in another 100 in a turnaround effort.


Mannequins sit on display inside a Saks Fifth Avenue.

Daniel Acker/Bloomberg News

A number of traditional retailers are struggling and closing stores as consumer preferences change and shoppers increasingly migrate online to competitors like Amazon.com Inc.

Department stores in particular have struggled to attract new consumers and maintain sales.

Luxury focused chains haven’t been exempt from the fallout: Barneys New York Inc. filed for bankruptcy protection in August amid rising rent costs and a decline in visitors. A consortium led by Authentic Brands Group LLC has been selected as its initial bidder, with the group planning to open Barneys shops inside Saks Fifth Avenue stores owned by Hudson’s Bay, Bloomberg reported on Oct. 16, citing people with knowledge of the matter.

Hudson’s Bay has been trying everything to lower debt and stop its stock’s slide, most recently selling selling the operations of its Lord & Taylor department store chain to clothing rental subscription company Le Tote.

Chief executive Helena Foulkes, who was brought in last year, also sold flash-sale e-commerce site Gilt and cashed out of European operations.

The stock traded as high as $10.72 in August on expectations the bid would be raised. It was back at $9.45, the original offer price, at the end of last week. Over the last five years, the stock has lost about half of its value.

“It’s good to see that there’s a resolution with a good, formal take-private offer and a cash bid, and I think that should be a good resolution for a lot of people,” Greg Taylor, chief investment officer at Purpose Investments, said on BNN Bloomberg.

“Certainly a lot of people would have wanted a lot more from this but in the current dynamics around department stores in North America, I think this is probably as good as they could have hoped.”

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Energy regulator says crude-by-rail shipments fell to 310000 bpd

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The Canada Energy Regulator says exports of crude oil by rail from Canada fell slightly in August to 310,000 barrels per day from 313,000 bpd in July.

The August number is up 35 per cent from 230,000 bpd reported in August of 2018 but still well below the record high of 354,000 bpd set last December.

The small change in crude-by-rail shipments came despite a threat by Imperial Oil Ltd. CEO Rich Kruger to throttle back the company’s rail movements in August and September to protest the ongoing Alberta oil production curtailment program.

He says the program damages the economic case for crude-by-rail by artificially lowering the difference in oil prices between Alberta and the end market on the U.S. Gulf Coast.

Imperial reported moving 80,000 bpd by rail in June. It co-owns an oil shipping rail terminal at Edmonton with capacity to load 210,000 barrels of crude per day.

Alberta has gradually eased the curtailment program designed to better align production with tight pipeline capacity from an initial withholding of about 325,000 bpd last January to 125,000 bpd in September.

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Hudson Bay Company agrees to pay more to shareholders for takeover bid

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Hudson Bay Company

The board of Hudson Bay Co. has agreed to a sweetened offer by a shareholder group led by executive chairman Richard Baker.

The retailer says the group has agreed to pay $10.30 per share in cash to take HBC private. The bid is up from an earlier offer of $9.45 per share.

The agreement values HBC at about $1.9 billion.

HBC says the price offered represents a premium of 62 per cent compared with where its shares were trading before the shareholder group’s initial privatization proposal in the summer.

The Baker-led group holds a 57 per cent stake in the retailer and includes Rhone Capital, WeWork Property Advisors, Hanover Investments (Luxembourg) and Abrams Capital Management.

The deal is subject to the approval by a majority of the minority of HBC shareholders, excluding the shareholder group and its affiliates, and approval by a 75 per cent majority vote at a special meeting of shareholders.

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