Yellen Speech

March 27th, 2015 4:44 pm

Via Stephen Stanley at Amherst Pierpont Securities:

If anyone out there thought that Janet Yellen is anything other than radically dovish, today’s 19-page treatise on monetary policy should close the books on those misconceptions.  She laid out a detailed explanation of her thinking that serves in my view as an explanation/defense for the sharp lowering of the FOMC “dots” revealed last week.  At every turn, when given a chance, she takes the dovish argument.  The only mitigating factor in her speech is that monetary policy has gone from a phase where the FOMC does what it thinks is right regardless of the data to one in which policy has become more data dependent.  Thus, her arguments are much more of a conditional forecast than would have been the case before.  She acknowledges in many places that the timing and pace of rate hikes will be very much data dependent, so if her arguments that the economy will continue to exhibit slack and low inflation prove wrong, then so will her policy prescriptions.  That is different than where we were up until recently, so the focus is slightly less on Yellen’s pronouncements and more on the data than would have been the case a year ago.

Having said that, her view of the world obviously holds considerable weight on how the data are interpreted, so we should care what she thinks.

·         On the economy, she remains convinced that despite rapid progress in recent months, there is considerable slack in labor markets.  She leans toward an equilibrium unemployment rate of 5.0%, the low end of the FOMC central tendency range, so there is still half a point to go on the traditional unemployment rate.  In addition, she points to high levels of involuntary part-time employment and low levels of labor force participation.  I have argued that these are both to varying degrees structural (not that there is no cyclical component, but that it is less than Yellen thinks).  In the end, the proof is in the pudding.  When wages begin to accelerate, we will all know that labor markets are getting tight.  I see that sooner, she obviously believes later.

·         She downplays the strength in activity by noting that it has only come because the Fed has run an extraordinarily easy policy.  I think this reflects a common conceit of the Fed’s that the level of their policy rate is always and everywhere the key fundamental driving the economy.  I believe that the level of short rates, within a range from here up to some more reasonable level, say 2%, are far down the list of drivers of real activity.  Financial engineering?  Absolutely.  But business decision makers have not and are not going to alter their plans based on the difference between crazy easy and ridiculously easy monetary policy.

·         On inflation, she is concerned about the low level of inflation, but continues to believe that things will begin to move in the right direction soon.  This is why she notes that “I expect that conditions may warrant an increase in the federal funds rate target sometime this year.”

·         She goes into some detail on what she wants to see to have “reasonable confidence” on the inflation outlook.  It is not necessarily a pickup in wages or prices (because if the Fed waits for the whites of the eyes, it will be too late).  The first thing she wants to see is further progress in labor markets.  While she does not have to see wages and/or price inflation accelerate to move, obviously, a sooner-than-projected pickup in either or both as well as in inflation expectations will get her motivated earlier (and vice versa).  This is my favored forecast scenario.

·         Turning to the longer-run landscape, she argues that the equilibrium real interest rate for the economy is quite low, perhaps close to zero.  This metric, which of course cannot be directly measured, should gradually rise over time, but headwinds continue to hold it below “normal.”  This is her argument for why the trajectory of rate hikes over the next few years can be so gradual.  Obviously, I am more skeptical of that line of thinking.

·         As the speech winds down, she lists three risks to her outlook.  The first two are secular stagnation and the zero bound, two reasons for the Fed to liftoff later and stay low for longer.  Part of her argument in defense of both risks is the low level of long-term interest rates, which she claims represents a statement by market participants that the outlook is gloomier than the Fed itself thinks.  This is in my view another common fallacy held by dovish Fed officials, especially policy activists.  The Fed has immensely distorted the financial markets via QE (Stanley Fischer recently asserted based on academic research that QE has lowered long-term interest rates by over 100 BPs).  Chair, you can’t have it both ways.  If QE worked, then long-term rates are not an accurate gauge of market participants’ long-run economic views.  The supply-demand balance was broken by QE3.  The level of long-run rates is telling us no more, no less than that.

·         She does provide some window dressing in the other direction at the end of her speech, acknowledging that there are risks of the Fed staying too low for too long.  However, this is clearly secondary in her mind to the risks of going too soon and/or too aggressively.

So, my main takeaway from her speech is that she will view the data with an open mind but that she begins the data-dependent era viewing the numbers through a very dovish prism.

The Only Perfect Hedge is in a Japanese Garden

March 26th, 2015 4:45 pm

Via the WSJ:

March 26, 2015 3:25 p.m. ET
Rocked by months of plunging crude prices, oil producers are harvesting financial bets to raise, for some, much-needed cash.

Using specialized trades with nomenclature like “three-way collars” and “butterfly spreads,” producers have long used futures, options and other financial contracts to help lock in minimum prices for oil.

But after the drop in oil from more than $100 a barrel to about $50 in a matter of months, some of these hedges have shifted from a form of insurance to a source of income.

While hedges are typically held until they expire, some companies are starting to close them out early, enabling them to reap gains, sometimes hundreds of millions of dollars, bankers and traders said. Others are adjusting hedges to better protect themselves against possible further price drops.

Carrizo Oil & Gas Inc. had placed several hedges on roughly 12,100 barrels a day that guaranteed it at least $91 a barrel, on average. The company has already locked in a gain of $166.4 million from those hedges, more than its total revenue of $163.3 million last quarter, which it will collect as the hedges expire this year and next. Carrizo also added new contracts guaranteeing a minimum price of $50 a barrel for some of its oil this year and next, protection in case oil prices, as some analysts predict, fall further.


“We did this because we wanted to lock in the value we have in that asset,” said Jeffrey Hayden, vice president of investor relations at Carrizo. The company didn’t immediately need the cash, he said.

Craig Breslau, managing director at French bank Société Générale SA, said companies noticeably picked up activity this year. “We’re seeing a lot more restructuring or termination of hedges in the early part of this year than we did in the fourth quarter of last year,” he said.

On Thursday, oil for May delivery gained 4.5%, to settle at $51.43 a barrel, on the New York Mercantile Exchange. The price of crude has plunged 52% since a high hit in June, as the shale-oil boom in the U.S. has led to increased production and a surfeit of supply.

Taking the money now and putting new contracts in place “could very well be a smart move,” said Thomas Heath, president of trading and financial firm ARM Financial, which helps about 90 oil producers hedge. “As long as you keep the hedge, you’re not gambling.”

Some producers are restructuring hedges at the behest of their lenders, which want companies to pay down debt or move hedges from the next six months to later in the future, said Paul Smith, chief executive of energy-advisory firm Mobius Risk Group in Houston.

Oil companies are still making money from the oil and natural gas they sell, but many need additional cash to make debt payments from rapid expansion over the past several years and cover operating costs amid the decline in crude prices.

Cashing out of hedges provides a one-time windfall but could leave producers in a tight spot if oil prices remain in a prolonged slump as many market watchers expect. Companies are also potentially leaving money on the table if they take profit on contracts but then oil prices fall further.

And the move can be unpopular with shareholders, who may be wary of oil companies that are forgoing protection against another leg down in prices in exchange for money now. And companies are notoriously bad at choosing when to put on and take off hedges.

“If a company has put on hedges…we would like to see that remain in place, rather than using that to take a bet on oil prices,” said Matt Sallee, a portfolio manager at Tortoise Capital Advisors LLC in Leawood, Kan., who said he prefers exposure to well-hedged companies for this $17.5 billion fund.

Though many U.S. oil companies, especially smaller producers, routinely use hedges to lock in prices, many were less hedged than usual heading into the oil-price plunge that started in June. Companies were reluctant to hedge last year because a quirk in the futures market made oil prices in 2015 and 2016 much lower than 2014 prices. Producers reasoned that near-term prices would hold at about $100 a barrel, as they had for three years, meaning that the low prices offered in the market in future years weren’t worth it.

Producers typically hedge about half their output for a calendar year by the end of the prior year. On average, producers have hedged 31% of their 2015 production at an average price of $83.80 a barrel and 11% of their 2016 production at $79.63 a barrel, according to investment bank Simmons & Co. International, which tracks about 40 producers.

Oklahoma City-based Continental Resources Inc. saw its share price hammered shortly after it dropped nearly all its oil hedges when crude was still priced at about $80 a barrel in early November. The oil company earned $433 million from the move, which was unanimously approved by its board, and it used the cash to cover operating costs and keep its investment-grade credit rating, Chief Executive Harold Hamm said in an interview in late February. Continental reported $1.3 billion in revenue in the last quarter.

Continental had previously locked in prices as far out as 2016, and the company left tens of millions of dollars on the table by cashing out when it did. But “that wasn’t when we needed the money,” Mr. Hamm said. “We need it now.” Continental’s stock has dropped about 23% since Nov. 3.

Cashing in hedges is part of the survival strategy being used by Energy XXI Ltd., which booked a $377 million loss in its fiscal second quarter ended in December after taking on nearly $1 billion in debt to buy a rival last summer. The Houston-based company got $73.1 million in January and February for cashing in some of this year’s hedges. The company also put on new hedges at lower prices and increased the percentage of production hedged.

“We basically did it to give us some protection on the downside and still have some room on the uptick if oil happens to run,” said a spokesman.

During an earnings call last month, Energy XXI Chief Executive John Schiller Jr. said the company has been focused on cost savings and low-risk projects. The company didn’t respond to requests for comment.

Similarly, Austin, Texas, producer Parsley Energy Inc. said it brought in $63 million in the past few months by cashing in a portion of its hedges. The company also put on new hedges at lower prices. Parsley Energy declined to comment.

Some oil companies are satisfied not to hedge.

Apache Corp.’s hedges ended at the end of 2014 and haven’t been replaced, a spokeswoman said.

“Hedging is something we are constantly considering,” she said, adding that Apache feels its international operations give the company exposure to higher global crude prices and more predictable cash flows.

Strong Dollar and Corporate Earnings

March 22nd, 2015 8:21 pm

Via the WSJ:

March 22, 2015 5:21 p.m. ET
The soaring dollar is crunching profits at giant U.S. multinationals, prompting Wall Street analysts to make their deepest cuts to earnings forecasts since the financial crisis and boosting the appeal of smaller, domestically focused companies.

The dollar has jumped 12% in 2015 against the euro and is up 27% from a year ago. The WSJ Dollar Index, which measures the dollar against a basket of currencies, is up 5.3% this year. The dollar’s surge against the euro has been driven by an aggressive European Central Bank monetary-easing program that has come as the U.S. central bank is preparing to raise interest rates.

Analysts, citing the dollar’s strength as a key factor, are predicting that profits at S&P 500 firms for the first quarter will show their biggest annual decline since the third quarter of 2009.
As a result, investors are keeping a continued bias toward U.S.-based stocks that do less business abroad, such as shares of small companies that tend to be more domestically focused, and on companies outside the U.S. that stand to benefit from a weakening of their home currency as the dollar strengthens, particularly European manufacturers.

“What is remarkable is the speed with which the dollar has accelerated, and that speed brings with it some complications,” said Anwiti Bahuguna, senior portfolio manager on Columbia Management’s global asset allocation team, which oversees $68 billion. “The dollar strength is moving at a much, much faster pace than you’ve seen in history.”


Many investors say the dollar’s rise is behind the relatively strong performance of smaller-company stocks, which are often more domestically focused than large-company stocks. The Russell 2000 index of small-capitalization shares is up 5.1% this year and 10% in the last six months. That compares with gains in the S&P 500 index of 2.4% in 2015 and 4.9% over six months.

The dollar’s jump has come as the ECB embarked on a new, aggressive easing of monetary policy. Investors expect the Fed to respond to a healthier U.S. economy by raising rates later this year, though many analysts are expecting later, slower increases following Wednesday’s dovish Fed policy statement.

The complications of dollar strength have been visible in corporate profit reports.

On Friday, Tiffany said sales fell 1% in the January quarter but would have risen 3% if not for currency moves. It expects “minimal growth” in earnings this year, in part due to the stronger dollar. Oracle said Tuesday that net income would have risen 7% in the February quarter if not for dollar strength. Instead, it fell 3%.

“This is the most significant fiscal-year currency impact we have ever incurred,” Jon Moeller, chief financial officer of Procter & Gamble, told investors in late January. The consumer-products maker expects currency swings to curb after-tax profits by $1.4 billion, or 12%, this fiscal year, ending in June.
Corporate managements have been caught off guard by the speed of the dollar’s rise, said Brian Lazorishak, portfolio manager of the $103 million Chase Growth Fund. “If you have a gradual move, it’s easier for managements to adjust to, to prepare for, to hedge if they want to.”

Mr. Lazorishak has reduced his position in shares of Microsoft, which generates half of its sales overseas. He has bought shares of Southwest Airlines, which draws less than 2% of its sales from overseas, and other firms that are more U.S.-focused.

Karl Schamotta, director of currency research at Cambridge Global Payments, a Toronto firm that helps corporations employ strategies in the currency market to protect foreign revenues from currency swings, is telling clients to prepare for the value of one euro to fall to parity, or $1. A euro was buying $1.0821 late Friday in New York.

“Many large firms…are now trying to recover exchange-rate-related losses,” he said.

Against this backdrop, analysts are slashing profit forecasts. Back in September, analysts expected S&P 500 profits to grow at 9.5% in the first quarter from a year earlier and at 11.6% for all of 2015, according to FactSet.

Today, analysts expect first-quarter profits to fall by 4.9%. For all of 2015, profits are expected to grow just 2.1%.

The last time analysts cut their outlook on annual profit growth by that scale was in the six months leading to March 2009, according to FactSet, as stocks were tumbling to their crisis-era lows. And should profit growth come in at the 2.1% rate for all of this year, it would be slowest pace of earnings growth since profits shrank 7.9% in 2009.

David Kostin, chief U.S. equity strategist at Goldman Sachs Group Inc., said that when the dollar has rallied in the past, consumer-discretionary and consumer-staples stocks have fared better than the broader market. These sectors have relatively low exposure to overseas markets.

Goldman Sachs expects the euro to fall another 12% against the dollar over the next 12 months. “That’s an enormous headwind for companies that are selling internationally,” Mr. Kostin said.

According to FactSet, companies that generate more than 50% of sales outside the U.S. are expected to post an earnings decline of 11.6% in the first quarter when results start rolling in next month. Companies that generate less than half of sales outside the U.S. are expected to post flat earnings for the quarter, according to FactSet.

Companies in the S&P earned 46% of their sales outside the U.S. in 2014, according to S&P Dow Jones Indexes. By contrast, 19% of sales for Russell 2000 companies comes from outside the U.S., according to Bank of America Merrill Lynch.

The flip side of the stronger dollar is the boost to non-U.S. stocks. Most notably, Germany’s DAX, with its high concentration of manufacturing exporters, is up 23% this year. In dollar terms, the index has gained 9.2%.

“European companies will be in a much better situation as the currency weakens,” said William Kennedy, who manages the $11.5 billion Fidelity International Discovery Fund. Mr. Kennedy has tilted the foreign-stock fund to shares of companies that stand to benefit the most from a weakening euro, such as German auto makers and other exporters as well as hotel operators.

—James Ramage contributed to this article.

Write to Dan Strumpf at

Curtailing the Power of the New York Fed

March 22nd, 2015 3:45 am

Aloha from Hawaii.

I am enjoying the fruits of  retirement for a few weeks and that is why blogging has been non existent.

Attached is a link to an interesting article at which addresses the possibility the the time has arrived when the special status of the New York Fed in the monetary policy firmament will be dimmed.

See you in a week or so.


March 12th, 2015 6:42 am

Via Marc Chandler at Brown Brothers Harriman:

Dollar Rally Stalls Ahead of Retail Sales

- We warned of an overstretched dollar rally as we started the week, and today’s price action fits into this narrative
- During the North America session, attention will be focused on US retail sales for February
- Australia reported firm February jobs data; RBNZ left rates steady at 3.5% late yesterday
- China money and loan data came in on the strong side; BOK delivered a dovish surprise
- India reports February CPI and January IP; Peru central bank meets and is expected to keep rates steady at 3.25% but with potential for a dovish surprise

Price action:  The dollar is broadly weaker in corrective trading ahead of US retail sales data.  The antipodeans and the Scandies are outperforming, while the yen and sterling are underperforming.  The euro made a marginal new cycle low just below $1.05 earlier before bouncing to trade near $1.06 currently.  Cable was unable to push below yesterday’s cycle low just below $1.49, recovering to trade around $1.50 currently.  Dollar/yen is holding above 121.  EM currencies are mostly firmer, with RUB, ZAR, and TRY outperforming.  KRW, IDR, and TWD are underperforming.  MSCI Asia Pacific rose 1.2%, driven by a 1.4% gain in the Nikkei as it traded briefly at new 15-year highs above 19000.  The Shanghai Composite rose 1.8% on better than expected China money and loan data.  Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a higher open.  Global bond yields are mostly lower.

  • We warned of an overstretched dollar rally as we started the week, and today’s price action fits into this narrative.  The dollar is broadly weaker as market participants take profit ahead of US retail sales today and the FOMC meeting next week.  Nothing has changed fundamentally, and so we believe many will re-establish long dollar positions at better levels.
  • Take the euro, for instance.  It traded to a marginal new cycle low earlier today just below $1.05, but has since bounced.  Given the lack of a true correction over the past month, we see scope for a corrective bounce to perhaps the $1.07-1.08 area.  Same goes for cable.  After being unable to push below yesterday’s cycle low just below $1.49, sterling has today pushed back to near $1.50.  We see scope for corrective bounce to the $1.51-1.5150 area.  Dollar/yen could fall back to the 120 area.  However, the medium-term dollar bull trend remains intact.  
  • EM currencies are also seeing a respite today.  Yesterday’s move by Banco de Mexico to boost its dollar auctions was not overly aggressive, but did highlight the fact that the weak peso was becoming a concern.  Mexico is quite hands off with regards to the exchange rate, and so the move should be seen as made to prevent excessive and potentially disruptive moves rather than to protect or defend any particular level.  If the EM sell-off resumes as we expect, more and more central banks are likely to take measures as well.  Again, not to defend levels but to hopefully minimize large-scale moves that could disrupt bond and equity markets too.    
  • There has been little data to note out of Europe.  Eurozone reported January IP at -0.1% m/m vs. +0.2% consensus.  However, the y/y rate still edged up into positive territory at +1.2% vs. +0.1% consensus and a revised +0.6% (was -0.2%) in December.  Elsewhere, the UK reported a smaller than expected trade deficit for January.  The overall balance was -GBP616 mln vs. -GBP2.3 bln consensus, and was driven by a strong showing in services.
  • During the North America session, attention will be focused on US retail sales for February.  Headline sales are expected to rise 0.3% m/m vs. -0.8% in January, while ex-auto sales are expected to rise 0.5% vs. -0.9% in January.  The measure used for GDP calculations is expected to rise 0.4% vs. 0.1% in January.  Weekly jobless claims will also be reported, as well as January business inventories and the February budget statement.
  • Australia reported February jobs data overnight.  Employment rose 15.6k vs. 15k consensus and a revised -14.6k (was -12.2k) in January.  The breakdown saw 10.3k full-time jobs and 5.3k part-time jobs added.  The unemployment rate fell to 6.3% vs. consensus of a steady reading at 6.4%.  The RBA next meets April 7, with consensus of steady rates at 2.25%.  However, a minority are looking for a cut.  Of the 27 analysts polled by Bloomberg, 6 see a 25 bp cut to 2.0% while 21 see no change.  If not in April, the RBA is seen as likely to cut in Q2.  Meetings from the March meeting will be released March 17.
  • RBNZ left rates steady at 3.5% late yesterday, as expected.  RBNZ kept a neutral bias, saying rates could go up or down, depending on the economic data.  However, the central bank noted that it sees a period of interest rate stability and that the 3-month bank bill yield should remain steady at 3.7% until 2017.  On the kiwi, RBNZ again called the exchange rate “unjustified” and “unsustainable.”  Kiwi bounced after the decision, as perhaps some were looking for a more dovish statement.  Governor Wheeler also said that policymakers are thinking about new macroprudential measures.  This suggests a reluctance to cut rates and could be seen as another reason for the kiwi bounce.
  • China money and loan data came in on the strong side.  New yuan loans were CNY1.02 trln in February vs. consensus CNY750 bln.  M2 growth picked up to 12.5% y/y from 10.8% in January, and compares to the consensus 11.0%.  The pickup in both series is to be expected after the PBOC’s easing measures already taken.  However, with real sector activity still slowing, further easing is likely in the coming quarter. Fiscal stimulus has also been flagged, with a larger budget deficit forecast in 2015.  
  • Bank of Korea delivered a dovish surprise and cut rates 25 bp to 1.75%.  Only 2 of the 17 analysts polled by Bloomberg saw a 25 bp cut to 1.75%.  However, with inflation well below the 2.5-3.5% target range in February (at 0.5% y/y), we highlighted the chance of a dovish surprise.  The last move by the BOK was a 25 bp cut in October.  After this cut, we think another one is likely in Q2.
  • India reports February CPI and January IP.  The former is expected to rise 5.23% y/y vs. 5.11% in January, while the latter is expected to rise 0.7% y/y vs. 1.7% in December.  After the surprise rate cut by the RBI last week, it’s clear the easing cycle will continue.  However, the pace and timing will be unpredictable.  We think India is one the better-positioned countries to withstand current selling pressures in EM.
  • Central bank of Peru meets and is expected to keep rates steady at 3.25%.  Note that 5 of the 19 analysts polled by Bloomberg see a 25 bp cut to 3.0%.  With inflation moving back into the 1-3% target range in February (at 2.8% y/y), we think there is a decent chance of a dovish surprise.  Last move was a 25 bp cut in January.  If no cut is seen today, then we think one is very likely in Q2.

10 Year Note Result and the Bond Auction

March 12th, 2015 6:09 am

This is a piece my friend Steve Liddy penned yesterday. He wonders if thye 10 year note result presages any particular outcome in the subsequent sale of Long Bonds.

Via Stephen Liddy:

Probably not much. Today’s ½ bp stop through, and 3rd highest indirect bid since 2003, might fuel the argument of foreign demand for higher US yields. However, looking back to 7/2012, 10s have stopped through 11/32 times. The next day LBs have tailed 7/11 times.


7/2012: 10s stop    -4.10/1.459   LBs stop    -0.4/2.58

10/2012: 10s stop  -1.5/1.70        LBs  tail     +1.2/2.844
12/2012: 10s stop   -1.9/1.652     LBs tail      +3.4/2.917
3/2013: 10s stop      -2.1/2.029     LBs tail      +1.9/3.248

9/2013: 10s stop      -2.2/2.946     LBs stop    -0.7/3.82

10/2013 10s stop     -0.6/2.657     LBs stop    -2.0/3.758

11/2013 10s stop     -0.4/2.75       LBs tail       +1.60/3.81

2/2014 10s stop        -0.4/2.795    LBs stop     -0.9/3.69

3/2014 10s stop         -0.8/2.729    LBs tail       +1.6/3.63

5/2014 10s stop         -0.4/2.612    LBs tail      +3.6/3.44

2/2015 10s stop         -1.0/2.00      LBs tail       +0.6/2.56

LBs are liquidity event, more than auctions. The folks who buy, buy duration, more than price, IMO. Setting up for, and then bidding, in auctions is a lot lying flying blind. As I said last month, if you want to know how the auction is going to go, you need to find out which of your customers, who get razor thin bid/offer, is bidding/buying directly and not telling you.

In the last 12 auctions, LBs stopped through 5x. In 4 of the 5, the direct bid was over 20% (with the one exception being a very short tail):

12/2014  LBs stop -2.2/Direct Bid 25.9%

10/2014  LBs tail +0.2/Direct Bid 21.5%
9/2014   LB stop -2.1/Direct Bid 21.8%

8/2014   LB stop -2.4/Direct Bid 24.4%

6/2014   LB stop -2.4/Direct Bid 26.5%

Enjoy your evening…

The Mighty Greenback and Fed Policy

March 12th, 2015 6:03 am

Via the FT:

Dollar surge poses policy dilemma for Fed

The euro fell closer to parity with the dollar on Wednesday, as the US currency’s strength heightened the policy conundrum facing the US Federal Reserve as it prepares for its first interest-rate increase in nearly a decade.

The euro dipped under $1.06 as Mario Draghi, the European Central Bank president, credited the cheap single currency with helping the reversal in the eurozone’s slowdown and said euro area developments were “pointing in the right direction”.

The moves come as the Fed prepares for a policy meeting next week at which it is expected to lay the groundwork for a rate rise as soon as June by dropping a pledge to be “patient” before lifting rates.

The US currency is rising in part because of the prospect of higher US interest rates and stronger growth. This is squeezing earnings of exporters and US companies with international operations, and could limit inflation as import prices fall.

Some policy makers acknowledge that the value of the greenback has triggered concern among big companies. James Bullard, president of the St Louis Fed, told the Financial Times on Monday that he could understand some of the “consternation” he was hearing, but that such companies could hedge their currency exposure. The bulk of the dollar gains may already have happened, he added.

“We are trying to run the best monetary policy for the United States that we can,” he said, warning that a Fed interest rate rise was overdue. “We are going to let the exchange rate go where it needs to go to equilibrate international markets,” he said.

Gary Cohn, Goldman Sachs president and operating chief, said the foreign exchange moves were putting the Fed in “a very tough position”.

He told Bloomberg Business: “The Fed is going to be continuously in this tough dilemma where they are going to want to raise interest rates — and I fundamentally understand why they want to raise interest rates — but they are going to be constrained by circumstances and be concerned by the strength of the dollar, and other countries around the world are going to continue to devalue.”

Chris Williamson, chief economist at Markit, who forecast in December that the euro would reach parity against the dollar this year, said: “The Fed looking like it was going to raise rates in 2015 was always going to hit the exchange rate. The clear divergence between the US central bank and the ECB is the big market play in 2015.”

The single currency’s depreciation, alongside lower oil prices and the bank’s quantitative easing programme, had led ECB economists to upgrade their economic forecasts, Mr Draghi said at a conference in Frankfurt.

The European single currency fell a further 1 per cent in Wednesday trading to a 12-year low of $1.0556, and has now dropped 12 per cent since the start of the year.

The dollar index, measuring the currency against a basket of its peers, rose nearly 0.9 per cent to a 12-year high of 99.649.

Analysts at Commerzbank said in the absence of hard data, the differential in European and US bond yields was driving the downward movement in the euro-dollar currency pair.

“The yields for German government bonds with a maturity of 10 years eased to a record low of 0.23 per cent,” said Esther Reichelt.

“As the yields for US government bonds are rising at the same time, there is much to suggest that the downtrend in EUR-USD will continue.”

Danske Bank, which last week lowered its target for the euro-dollar pair to $1.05, revised it lower still to $1.00.

“The ‘hot-potato’ effect of ECB QE, with the combination of rising excess liquidity and negative deposit rates driving investors towards riskier assets, will weaken the euro further,” said the Nordic wholesale bank.

The ECB now expects growth of 1.5 per cent this year, up from December estimates of 1 per cent. The central bank also believes the region’s lacklustre recovery will begin to broaden and strengthen in the coming quarters.

“These upward revisions are mainly driven by the favourable impact of lower oil prices, the weaker effective exchange rate of the euro — and the impact of our recent monetary policy measures,” Mr Draghi said.

The ECB on Monday began its landmark QE programme, which will see the central bank make monthly purchases of up to €60bn of eurozone government debt, alongside private sector assets and the debt of eurozone institutions.

Currency strategists hastily revised their predictions about euro-dollar parity, caught out by the speed and pace of the decline. In December, just one of 32 respondents to a Financial Times poll of eurozone economists said the euro would be worth the same as a dollar during 2015.

This has changed in recent days, however. Many economists now expect the euro to continue to fall against the dollar as the US recovery gathers pace and the Federal Reserve prepares to raise interest rates for the first time in nearly a decade.

Secondary Market Corporate Bond Trading Yesterday

March 12th, 2015 5:46 am

Via Bloomberg:

IG CREDIT: Lowest Volume Wed. Since Jan.; 3 Set to Price
2015-03-12 09:43:34.666 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $16.6b vs $17.8b Tuesday, $17.4b last Wednesday.
* Secondary IG trading lowest of any Wednesday since $16.3b on
Jan. 14
* Feb. 4, 11 and Jan. 28, all Wednesday sessions, are among
the largest volume days on record
* 10-DMA $16.2b
* 144a trading added $3.1b of IG volume vs $3.5b on Tuesday,
$2.1b last Wednesday
* Most active issues:
* AZN 4.00% 2042 was 1st with 2-way client flows
accounting for 100% of volume
* JPM 2.25% 2020 was next; client flows at 46%, selling
twice buying
* T 3.875% 2021 was 3rd with client flows at 77%
* T 3.875% 2021 was 3rd with client flows at 77%</li></ul>
* TD 1.50% 2017 was most active 144a issue; client flows took
100% of volume
* BofAML IG Master Index at +132, unchanged; +129, the tight
for 2015 was seen Mar. 6; 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
unchanged at +171; +170, the tightest level for 2015 was
seen Mar. 6, 9; +183 was the wide for 2015; +182, the wide
for 2014, was seen Jan. 16; +140, the 2014 low and post-
crisis low was seen July 30, 2014
* Markit CDX.IG.22 5Y Index at 65.3 vs 65.1; 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 totaled $12b, week at $45.1b, MTD $107.9b
* Last week’s IG issuance was $62.8b, highest of 2015; link to
* YTD IG issuance $375.1b
* Pipeline: ASIA, NIB, HPHT Finance set to price today; SJM
investor calls have concluded

Ten Year Auction Result

March 11th, 2015 1:07 pm

Via CRT Capital :

*** The auction was strong with a 0.5 bp stop-through and non-dealer bidding at 68.8% vs. 59% norm ***
* 10-year auction stops at 2.139% vs. 2.144% 1-pm bid WI.
* Dealers were awarded 31.2% vs. 41% average of last four 10-year Reopenings.
* Indirects get 58.6% vs. 50% norm.
* Directs take 10.2% vs. 9% average.
* Bid/Cover was 2.65 vs. 2.70 average of last four.
* Dealer Hit-Ratio: Dealers take 18% of what they bid for vs. 21% norm.
* Indirect Hit-Ratio: Customers take 80% of what they bid for vs. 89% norm.
* Treasuries were trading slightly lower ahead of the auction, building in a modest pre-auction concession. Since the results, Treasuries have traded sideways.
* Overall Treasury volumes have been below average, with cash trading at 87% of the 10-day moving-average. 10s have been near the norm at 99% of the auction-day norms in cash terms, but with a 27% marketshare vs. 29% average. 5s have been active, taking a 28% marketshare, while 7s took 9%, 3s 12%, and 30s 5%.

Declining Volumes and Volatility

March 11th, 2015 12:59 pm

Via Bloomberg:

Bond Trading Just Keeps Getting Worse as Treasury Prices Swing
2015-03-11 16:16:15.474 GMT

(For more Market Line insights, see NI MKTLINE.)

By Lisa Abramowicz
(Bloomberg) — It’s taking less and less these days to make
the $12.5 trillion U.S. Treasuries market jump.
And it’s been jumping a lot lately: The bonds gained 2.9
percent in January, then plunged 1.7 percent the following
month, according to Bank of America Merrill Lynch’s U.S.
Treasury index. That 4.6 percentage-point swing in returns was
the biggest to start any year since at least 1978.
All of this has happened as trading declined. In the first
two months of the year, activity at primary dealers dropped to
an average $511 billion a day, down 1 percent from the same period
in 2014 and 7 percent from a year before that. Those declines mean
fewer trades are moving the needle on government rates that
serve as benchmarks for auto loans, corporate debt and
On March 6, for example, 10-year Treasury yields rose the
most in a month after a jobs report that was better than
analysts expected. Trading volumes, though, were about 20
percent lower that day, “amplifying volatility,” Jim Vogel, an
interest-rate strategist at FTN Financial wrote in a note last
week. “For a big payroll day, volume was oddly subdued.”
This has potentially big consequences when that bear market
in bonds finally arrives. When investors do start shifting
around their holdings more, prices will probably be even more
volatile, according to Boris Rjavinski, a strategist at UBS
Group AG .
“In a situation where the market is moving quickly and
someone is looking to get out, there will be a real price for
liquidity,” Rjavinski said in a telephone call.
The Treasury market, often thought of as the most liquid
market in the world, has slowed down even as the amount of U.S.
government debt has almost tripled since 2007. Trading has
fallen 11 percent in that period as the world’s biggest banks
reduce their inventories to comply with new risk-curbing
When the Federal Reserve pulls the plug on its record
stimulus, the volatility that we’re seeing now may look
relatively calm.