Sunday Evening Update

January 25th, 2015 8:46 pm

The still investment grade 10 year Treasury note is trading at about 1.76 percent on the victory of the anti austerity party in Greece. At one point the  S and P had dropped 18 points but has since recovered. The 30 year Treasury had reached 2.34 percent which is about as low a yield as we have observed on that instrument since man first learned to walk erect.

Dealers report real money buying in the 7 year through 10 year sector.

Corporate Bond Spreads

January 23rd, 2015 9:24 am

Via a fully paid up subscriber:

1/22 CLOSE    1/23 OPEN      CHANGE

GE  24        89/86          87/84            -2
WFC 24      113/110        109/106          -4
JPM 25      140/137        137/134          -3
BAC 24      142/139        137/134          -5
C  24      146/143        143/140          -3
GS  25      154/151        150/147          -4
MS  24      144/141        140/137          -4
IG23        67¾/68¼      67/67½          -¾

Greek Election Notes

January 23rd, 2015 9:22 am

A fully paid up subscriber across the pond forwarded this my way:

Sunday 25th January, 2015: Greek Elections

On Sunday, the Greek electorate will head to the polling stations. Current polls indicate a victory for the Syriza party; the main question is now whether or not they will have enough support to gain an absolute majority in Parliament or whether they will have to rely on a coalition partner.


• Sunday 25th January, 2015: Polling Hours: 07:00-19:00EET (05:00-17:00GMT)

•  Vote Counting starts immediately after the polling stations close (i.e. 19:00EET/17:00GMT), so exit polls expected soon after.

• Should have a good estimated results around 22:00EET (20:00GMT); Final results by Monday morning


• Voting in Greece is compulsory (but none of the existing penalties have ever been enforced)

• Turnout is never 100%, but has consistently been around 70-80% of the voting population over the last 30 years. Votes of Greeks living in other EU member states are also counted

• Small parties need at least 3% of the vote to be represented in parliament

•  250 of the 300 Parliamentary seats are allotted proportionally to parties gaining more than 3% of the votes.

• The party with most votes is awarded a 50-seat bonus

• Parliamentary majority achieved by a party (or coalition) that commands at least 151 of the 300 total seats.

Coalition Options:

• Current polls put Syriza (Tsipras) significantly ahead of New Democracy (Samaras), but still a few seats short of a majority in Parliament (151 seats). If this happens, coalition negotiations will start straight away.

• The largest party (without majority) has three days to form a coalition according to the Greek constitution; if they fail, there is a strong possibility of another election.

• Usually the second largest party would be given the chance to form a coalition but, given recent poll data, it does not look possible to form a government without the largest party.

• Tsipras would require a considerable majority of parliamentary seats to form a stable government – given Syriza is not technically a single party but a combination of Greens/Socialists/Communists etc., Tsipras could find it challenging to garner support from his own party over difficult issues.

• Left-wing liberal, pro-European Potami is regarded as a one of the main potential coalition partners for Syriza (but as likely to demand more in the negotiations (e.g. FinMin position))

• Parts of PASOK and the Independent Greeks (ANEL) would also possibly join a coalition

Then What?

• First port of call for Syriza would be to extend the EFSF program which expires on February 28th

• Negotiations with Troika would resume on: (i) completion of obligations under existing program so delayed €7bn tranche can be released; (ii) components of a new program (e.g. ECCL from ESM); (iii) discussion on restructuring of current loans

• Greek parliament to elect a new President (only after government has been formed)

What to Watch Today

January 23rd, 2015 7:05 am

Via Bloomberg:

* (All times New York)
Economic Data
* 8:30am: Chicago Fed Nat Activity Index, Dec., est. 0.48
(prior 0.73)
* 9:45am: Markit US Manufacturing PMI, Jan preliminary, est.
54 (prior 53.9)
* 10:00am: Existing Home Sales, Dec., est. 5.08m (prior
* Existing Home Sales m/m, Dec., est. 3% (prior -6.1%)
* Existing Home Sales m/m, Dec., est. 3% (prior -6.1%)</li></ul>
* 10:00am: Leading Index, Dec., est. 0.4% (prior 0.6%)


January 23rd, 2015 6:39 am

Via Marc Chandler at Brown Brothers Harriman:

ECB Drives Markets

- The ECB’s announcement helped spur a new round of dollar-buying against most of the majors, save the yen
- For us, the biggest surprise was the open-ended nature of the ECB’s purchases, while the more significant problem is its efficacy
- In Greece, Samaras has made a couple of political gambles and lost
- For now, ECB QE is feeding into a general EM rally more than the renewed wave of dollar appreciation is hurting it

Price action:  The dollar continued rallying overnight against majors, though some EM currencies have gained.  The euro made a decisive break below the $1.1300 level and is now trading near $1.1240 against the dollar (a level last seen in mid-2003) and naer £0.75 against the pound (a level last seen in early 2008).  Sterling broke below $1.50 for the first time since mid-2013, despite solid UK retail sales figures for December.  The Australian dollar is underperforming, trading below 0.80 for the first time since mid-2009.  The dollar is back above the ¥118.0 level against the yen.  On the EM side, TRY and MXN are lower, giving up some of yesterday’s gains, but RUB, TWD, and INR are outperforming.  MSCI Asia Pacific index was up 0.9% with the Nikkei up 1.0%.  Euro Stoxx 600 continues to rally, up 1.4% near midday, while S&P futures are pointing to a lower open.

  • The ECB’s announcement helped spur a new round of dollar-buying against most of the majors, save the yen.  After a quiet Asian session, Europe has extended the euro’s drop to $1.1220, which corresponds to the 61.8% retracement of the entire rally from record lows to record highs.  We had thought that much of what the ECB would announce had already been largely discounted.  The evidence was the rally in European stocks and bonds, and the persistent decline in the euro.  There was not only no bout of profit-taking, but existing trends accelerated.  
  • The asset purchases are not really much larger than expected.  The 60 bln euros a month includes the covered bonds and asset-backed securities, which are already being purchased at a rate of about 10 bln euros a month.  It appears 5 bln euros of EU institutional bonds will be bought a month.  This leaves about 45 bln a month of sovereign bonds.  There is some pooling of risk but only for the buying of European institutions’ bonds, like the EU and EIB.  The total amount to be bought in the eighteen months from March through September 2016 will be roughly 10% of eurozone GDP.  This is in line with the first round of asset purchases by the Federal Reserve and Bank of England.  In the period of time it takes for the ECB to buy a tenth of its GDP, the BOJ will be buying a quarter of Japan’s GDP (worth of assets).
  • Perhaps one of the bigger surprises was the open-ended nature of the purchases.  Draghi was very clear on this point:  “They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation” (emphasis ours).  Critics will focus on this or that technical hair-splitting detail.  They were forged not in the head of some academic, contemplating the theoretical best solution, but in the furnace of institutional and political reality.  
  • The more significant problem is one of efficacy.  Will it boost inflation?  Reports indicate that the ECB’s model shows the asset purchases could boost CPI by 0.4 percentage points this year and 0.3 percentage points in 2016.  The experience of other central banks makes us more skeptical.  The Swiss National Bank expanded its balance sheet to 80% of GDP and still was experiencing deflation, even before it abandoned its currency cap.  The BOJ has been unable to engineer much inflation, and, in fact, revised down its forecast for core CPI (adjusted for the sales tax increase).  
  • The currency channel may be from where the biggest boost to inflation may come from.  Consider that from March through early October last year the euro declined by 5.4% on a trade-weighted basis.  Since the middle of December, it has depreciated another 7.8%, thanks in part to the SNB’s recent decision.  The ECB’s new purchase program will not start until March (by which time inflation will likely be even lower).  Meanwhile, investors’ attention is shifting from monetary policy to European politics.  Greece’s national election is Sunday.  The party that has a plurality of votes will be given 50 extra seats in the 300-person parliament and will have three days to put together a government.  Polls have consistently shown Syriza ahead, and if anything, that lead has grown.  Italy’s presidential election starts next week as well.  
  • Meanwhile in Greece, Samaras has made a couple of political gambles and lost.  He first gambled that parliament would eventually support his presidential candidate.  It did not.  He then gambled that demonizing Syriza would drive voters to him.  He ran a lackluster campaign.  He did not permit another candidate from his party, who has less political scar tissue and few enemies, to take the reins, even though that would have increased the likelihood of success.  Rather than campaign as a reformer as he did in 2012, Samaras ran defending a poor, even if somewhat improved, status quo.  
  • Just as Greece was the canary in the coal mine in 2010, so too now, it needs be recognized that it is not a one-off.  Pademos in Spain, which is ideologically kindred spirit with Syriza, is leading in polls there for the national election later this year.  Between the changes in the way the EC will enforce fiscal discipline and the new monetary action by the ECB, policy is evolving away from the austerity demands seen earlier.  However, it may be too little too late.  
  • For now, ECB QE is feeding into a general EM rally more than the renewed wave of dollar appreciation is hurting it.  The medium-term impact of QE on Eastern European assets seems positive, on balance.  For dollar-based investors, CE3 currencies will be dragged down with the lower euro.  But the ECB is doing some of the easing for those central banks and, assuming it works to some degree, they will benefit in terms of flows and potential growth spill overs.  More broadly, emerging markets stocks continue to rally.  For example, over the last five sessions the Russian equity market has gained 6%, Mexico 5%, while India and Turkey have risen about 4%.  Gains in the fixed income space have been just as expressive. All of this, of course, comes with anecdotal reports of foreign inflows return.  Still, we think that concerns that EM currencies will follow DM currencies lower will keep many investors reluctant to increase exposure.
  • The passing of Saudi King Abdullah should not lead to any sustained impact on oil markets.  He has been succeeded by his half-brother and we expect policy continuity.  Oil price remain volatile, but have been trading within the same wide range for about two week.  For Brent, the range has been roughly $47-50 per barrel.  For WTI, that range is roughly $46-49 per barrel, despite news of the biggest inventory build in the US for the last 14 years.
  • It is not about the data today though there has been a slew of data that in other times would have move the market.  The flash HSBC China PMI was reported above expectations at 49.8 from 49.6 in December, which shows that the manufacturing sector of the world’s second largest economy is still slowing.  Eurozone’s flash PMI was also a bit better than expected, consistent with 0.2-0.3% GDP growth.  The UK reported considerably better than expected retail sales, but sterling remains offered.  December retail sales were expected to have fallen 0.6.% but instead they rose by 0.4%.  Excluding autos, retail sales rose 0.2%.  They were expected to have fallen by 0.7%.  We also note that Korea’s Q4 GDP grew at the slowest pace since 3Q 2012, at 2.7% y/y and slightly below expectations.  The economy is facing strong headwinds and little in the way of price pressures. The last PPI figures came in at -2.0% y/y and CPI at 0.8%, compared with the 2.5-3.5% target range.  The BOK kept rates steady last week but we think it will cut rates this year, and the sooner the better.  
  • Brazil reported mid-January IPCA inflation slightly higher than expected at 6.69% y/y vs. 6.46% in mid-December.  This brings inflation back above the 2.5-6.5% target range after a brief dip below.  With electricity costs likely to be hiked this year, the inflation outlook remains pretty bad.  Brazil will report December current account data later today, expected at -$9.7 bln.  This would keep the deficit above -4% of GDP for the second straight month.  For USD/BRL, support seen near 2.55 and then 2.50, resistance seen near 2.60 and then 2.65.  

Drachma Pricing

January 23rd, 2015 6:33 am

In case you are wondering about the value of a new Greek Drachma here is an excerpt from the morning research note of Kit Juckes at SocGen.

Via SocGen:

Fair value of the drachma – Should Greece leave the eurozone in a well-controlled fashion, a new Drachma (GRD) could fall at least 11% in real terms based on a Natrex model. This drop will depend crucially on the considerable amount of debt that would have to be forgiven/restructured and the credibility of the authorities.

January 23 2014 Opening

January 23rd, 2015 6:26 am

Prices of Treasury coupon securities rallied in overnight trading as they traded in sympathy with a continued rally in European sovereign bonds. In the overnight session the 10 year Bund traded as low as 31 basis points.  The spread between Germany and the US in the 10 year sector has widened to 147 basis points from 139 basis points yesterday morning.  Dealers report that the rally triggered stops in the Bund futures and that motivated the trade down to 31 basis points in GermanyI do not follow 2 year Germany regularly but that traded -17 basis points so at about 50 basis points we are a steal. The 10 year benchmark Spanish issue traded down to 1.29 percent. That places the issue about 53 through the 10 year Treasury. Yesterday morning at this hour the spread was 38 basis points. Similarly, in Japan the 10 year touched a new low at 21 basis points and currently rests at 23 basis points. Finally sovereign and supra national paper issued in US dollars rallied strongly ,too. For the uninitiated many Europeans sovereigns will issue intermittently in dollars and supras such as KFW and EIB will issue in dollars. Spread movement in that paper generally is glacial, moving at most 1/2 to 1 basis point. Last night that paper tightened 5 basis points to 7 basis points. Against that background it will be difficult to have a sustained mover higher in yields.  One dealer in an email note disagrees and thinks that the stop out in Bunds last night is the last gasp of the shorts. He anticipates that with funding levels so cheap European corporations will mimic their North American cousins and issue bonds and buy back stock. We shall see.

Dealers report fast money sellers in the belly of the curve as well as some buying of the belly by asset managers in Asia and Europe. Dealers also report impaired liquidity conditions as the markets pirouettes violently.

I am not giving any levels this morning as we have moved quite a bit since I recorded then at 545AM (forty minutes earlier).

Corporate Bond Trading Yesterday: Very Heavy

January 23rd, 2015 6:01 am

I rarely,if ever, comment on this post but there is an interesting nugget in here which deserves highlighting. Bloomberg reports that secondary market trading of corporate bonds totaled $18.2 billion yesterday. If I am reading the story correctly then it was the 20th busiest day since 2005 and beat 99.2 percent of all the trading days back to January 2005.

Via Bloomberg:

IG CREDIT: Secondary Trading Volume Remains High
2015-01-23 10:36:07.43 GMT

By Robert Elson
(Bloomberg) — Trace count for secondary trading closed at
$18.2b yday vs $18.5b Wednesday, $15.8b last Thursday; $18.2b
yday, more than on 99.2% of trading days since Jan. 2005; $18.2b
yday, 20th highest since Jan. 2005.
* 10-DMA $15.9b
* 144a trading added $2.8b of IG volume yday vs $3.3b
Wednesday, $2.1b last Thursday
* Most active issues longer than 3 years
* DG 3.25% 2023 was the day’s most active issue with
client flows accounting for 97% of volume
* VZ 5.15% 2023 was next with dealer-to-dealer trades
taking 79%
* MS 2042, 2024, 2019 issues took the next 3 slots
* MS 2042, 2024, 2019 issues took the next 3 slots</li></ul>
* MDT 3.50% 2025 was most active 144a issue; client flows took
100% of the volume
* BofAML IG Master Index at +151 vs +152; 2014 range was +151,
seen Dec 16; +106, the low and tightest spread since July
2007 was seen June 24
* Standard & Poor’s Global Fixed Income Research IG Index at
+181 vs +182, the wide for 2014-2015; +140, a 2014 low and
new post-crisis low was seen July 30, 2014
* Click here for S&P spread history in a 10-year lookback
* Markit CDX.IG.22 5Y Index at 68 vs 70; 76.1, the wide for
2014 was seen Dec 16; 55 was seen July 3, the low for 2014
and the lowest level since Oct 2007
* IG issuance was $8.1b vs $11.8b Wednesday, $8.4b Tuesday
* Pipeline of expected domestic, SSA January issuers and M&A-
related deals for 2015

Eclectic Stuff Via Merrill Lynch Research

January 22nd, 2015 8:47 pm

Via Merrill Lynch Research

  • The relative underperformance of credit today reflects on the ECB’s decision to bypass corporate bonds as eligible for QE.
  • While US credit benefits indirectly from today’s ECB announcements, risks such as oil prices and Greece remain.
  • Thus we maintain our bearish stance on US IG credit spreads over the next 1-2 months.
  • All but corporate bonds. With the ECB delivering more than expected in today’s QE announcement – see the analysis by our European colleagues below – not surprisingly the EUR dropped 2.1% against the USD and risk assets rallied with US and European stocks up 1.5% and 1.7%, respectively, and US and EUR IG credit 2.1bps and 1.4bps tighter, respectively. While this relatively modest market reaction highlights that that ECB had already communicated the bar high, the relative underperformance of credit reflects on the ECB‘s decision to bypass corporate bonds as eligible for central bank purchases. While US credit benefits indirectly from today’s ECB announcements, these effects are minor compared with the impact of the unfolding macro story of continued collapsing oil prices, as well as other risks including Greece. Thus we maintain our bearish stance on US IG credit spreads over the next 1-2 months.
  • US IG credit benefits from the ECB action as investors are sent our way. First, the greater than expected expansion of the ECB’s balance sheet implies that for non-official European fixed income investors the investment opportunity set shrinks. The effect is that more European investors will be forced into US IG. Second, while the absence of corporate bond purchases removes the potential for a big move tighter in spreads, in the short term certain sectors in US credit could benefit as investors unwind their expressed views that the ECB would buy corporate bonds. For example an investor that wanted exposure to a certain name that had both EUR and USD bonds outstanding might have been willing to give up spread by buying the EUR bond, in order to profit more from an ECB corporate bond buying announcement. Now with that upside potential eliminated, the investor may rationally swap to the generally more attractive credit spreads offered in USD tranches. – Hans Mikkelsen (Page 4)
  • ECB review: QE-AD, QE ahead of the curve. ECB: ticking all the boxes, and more. Draghi’s job today was particularly tricky. Given the magnitude of the intentional or unintentional news-flow from the ECB since the December meeting, expectations regarding QE had constantly risen. Not disappointing was probably the ECB’s first goal. Draghi achieved it, and beyond, demonstrating once more that, in spite of its inner complexity, the institution is always more pragmatic than expected. Since the central bank told us that the signalling/confidence channel was crucial to the success of QE, from that point of view they have already scored an important goal in our view. – Gilles Moec, Ralf Preusser, CFA, Athanasios Vamvakidis (Page 8)
  • ECB QE: US rates implications. As our European colleagues argue (link), ECB President Draghi delivered at the upper end of market expectations of sovereign QE, and European markets generally reacted according to our expectations: the Euro weakened, peripheral spreads tightened, Bund ASW widened and equities rallied. Bund yields declined, however, with the long end leading the way despite the general risk-on tone due to the surprise element of longer maturities being included in the purchase program. – Priya Misra, Shyam S.Rajan (Page 7)
  • ECB Conference Call: ECB – Bold enough? Please join our senior macro analysts on a call on Friday 23rd January at 2pm GMT / 3pm CET / 9am ET for their assessment of the ECB meeting announcements. With expectations running high into the event the team will discuss if Draghi’s plan is bold enough, together with cross asset implications. Plenty of time will be allocated for Q&A. We look forward to your participation. Please see separate invite for dial-in details.
  • Inflows to safety. Last week (ending on January 21st) mutual fund and ETF investors bought fixed income assets with limited or no credit risk, including high grade (+$4.16bn), government bounds (+$1.41bn) and munis (+0.77bn). At the same time riskier investments such as stocks (-$5.99bn), EM bonds ($-1.21bn), leveraged loans (-$0.85bn) and high yield (-$0.35bn) saw outflows, although outflows from stocks and HY were fairly moderate. As usual, the flows last week followed returns. The price of risk assets (such as stocks and high yield) is little changed so far in January following much volatility – hence the outflows. Interest rates are significantly lower, however, helping attract the inflows to fixed income.
  • In high grade, virtually all of the inflow last week was outside of short-term funds, where the net flow was flat (+$0.06bn). Notably, this was the first week without a significant outflow from short-term high grade funds since November, suggesting that the recent rebound in the front-end bond valuations is starting to have an impact on flows. Also, the weekly data for high grade ex. short-term funds could be overstating the underlying inflows. This is because PIMCO funds, which again experienced large outflows in December, are not included in the sample of funds that report flows weekly (PIMCO reports only on a monthly basis) while some funds receiving the offsetting inflows are likely a part of the weekly sample. – Yuriy Shchuchinov (Page 5)
  • Nothing unusual. Initial jobless claims fell to 307,000 in the week ending January 17, down from an upwardly revised 317,000 (from 316,000) initially. This was in-line with expectations of 300,000 and brings the 4-week moving average up to 306,500 from 300,000 in the prior week, still a healthy level of claims. The Labor Department stated that there was nothing unusual affecting claims last week and no states estimated claims, making this a clean report. Lisa C. Berlin (Page 9)

Canarsie Crash

January 22nd, 2015 5:55 pm

This is an amazing story here in which a hedge fund manager morphed $98  million of assets (last March) into just $200,000 in assets this week. One of the principals of the firm was just 28 year old and 26 when he launched the ill fated enterprise.

Even more interesting is that one of his principal colleagues was Kenneth deRegt who the WSJ reports was long time head of risk at Morgan Stanley. He certainly did not bring his risk management talents to the game here.

Via the WSJ:
Hedge Funds
Canarsie Hedge Fund Collapses
Losses Slash Assets from $60 Million to $200,000 in Three Weeks; Manager: ‘I Acted Overzealously’
Juliet Chung and
Susan Pulliam
Updated Jan. 22, 2015 5:36 p.m. ET

A $60 million hedge fund led by a high-profile Wall Street executive lost all but $200,000 of its assets in about three weeks, a stunningly quick fall for the well-heeled investors in the fund.

The collapse of Canarsie Capital LLC caught the attention of Wall Street because it was run by the longtime former head of risk management at Morgan Stanley — Kenneth deRegt —along with Owen Li, a 28-year old former Galleon Fund Management trader. Among the fund’s wealthy investors, according to a person familiar with the matter, was Richard Axilrod, a top lieutenant to Louis Bacon of Moore Capital Management.

Messrs. Li and DeRegt didn’t return requests for comment and telephone calls to the firm weren’t picked up. Mr. Axilrod declined to comment.

In a letter to investors sent Thursday morning, the fund said that Mr. Li was stepping down and that Mr. deRegt would take over the fund’s unwinding, according to a person familiar with the matter.

The details behind the fund’s fall aren’t clear. In a letter to his investors earlier this week, Mr. Li—who named the fund after the Brooklyn, N.Y., neighborhood where he grew up—said he was writing to express his “sorrow and deep regret for engaging in a series of transactions over the last several weeks that have resulted in the loss of all but two hundred thousand dollars.”

According to a March 2014 regulatory filing, the fund had a “gross asset value” of $98 million, which included leverage, or borrowed money, according to a person familiar with the matter. The fund managed $60 million, not including borrowing, at the start of this year, the person said.

In March, Morgan Stanley, Carnarsie’s sole prime broker, executing and financing the fund’s trades, told the fund it was uncomfortable with its risk practices, people close to the situation say. Canarsie at the time hired an independent consultant to look into Morgan Stanley’s concerns, one person familiar with the firm said.

About a month later, Morgan Stanley told Carnarsie it would need to move its assets to another clearing firm because of remaining questions about the fund’s risk profile, the people said. Several months ago, Goldman Sachs Group Inc. began clearing for Canarsie, some of the people said.

Mr. Li launched Canarsie in January 2013 and focused on investing in technology, energy, financial and consumer growth stocks, people close to the situation say. In 2013, he ended the year up 50%, one investor said, partly stemming from heavy leverage, or borrowing, by the fund and big investments in social media, including Facebook Inc. and Twitter Inc.

In 2014, Mr. Li invested in some less-successful IPO stocks, including FireEye Inc. and Splunk Inc., both of which foundered last year.

In his letter to investors, dated Jan. 20, Mr. Li said the fund’s losses happened after “I engaged in a series of aggressive transactions over the last three weeks that—generally speaking—involved options with strike prices pegged to the broader market increasing in value, but also involved some direct positions.” In his letter, Mr. Li didn’t elaborate on the soured trades.

He wrote later on in the letter, “I acted overzealously.”