This is an informative and interesting article in the tiering of bank credit. This time the tiering is intra firm as holding company bonds cheapen to bonds issued by the operating entity of the same bank.
A daily bond market chronicle
This is an informative and interesting article in the tiering of bank credit. This time the tiering is intra firm as holding company bonds cheapen to bonds issued by the operating entity of the same bank.
OPEC decided to pass on cutting output and the result is dire in several places. Oil is an obvious victim as the price plummets. As I write this WTI is off $5.14 about 7 percent and trades at $68.57. The bigger victim is the Russian Ruble which has fallen off a cliff. Russia is an oil producer masquerading as a country and the currency which I marked Wednesday morning at 46.83 is trading at 49.18. That is about a 5 percent move for that currency.
The 10 year Treasury is approaching 2.20 percent and that level is a Fibonacci retracement of the October 15 Squeeze low at 1.85 back to 2.40 trade. The next key level is 2.125 which is about a 50 percent retrace of the 2.40 to 1.85 range.
The Treasury yield curve is looking at this and saying that the Federal Reserve will be forced to delay its rate hike cycle. I am comparing to Wednesday morning and did not mark closes on Wednesday but 5s 30s has moved to 139.3 from 139.1. The 2s 5s 10s fly is 34.3 versus 35.1 on Wednesday morning. I had marked that spread at 41 as recently as Monday morning.
As we prepare to give thanks here in the States Sovereign bond yields in Europe are plummeting as inflation data is soft and the anticipation of some type of additional stimulus increases. This morning 10 year Germany approached 70 basis points and 10 year Spain has dropped to 1.90. There was very strong foreign demand for the trio of US auctions earlier this week and this price action in Europe will only reinforce the relative value case for Treasuries.
Euro-area government bonds advanced, sending benchmark German 10-year yields to a record low, amid speculation slowing inflation will prompt the European Central Bank to extend its asset-purchase program.
Yields from Austria to Portugal dropped to the least on record. Spanish (GSPG10YR) securities gained as a report showed consumer prices fell more this month than economists forecast, raising concern deflation is taking hold. Separate data showed inflation in the German region of Bavaria stalled in November. Italy’s borrowing costs dropped to new lows as it auctioned five- and 10-year debt. ECB President Mario Draghi said in Helsinki today that discussions on stimulus include all assets.
“There’s low inflation and lots and lots of liquidity in the global system and there’s more coming next year,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Bund yields keep on grinding lower. The periphery has been doing pretty well too.”
German 10-year yields fell three basis points, or 0.03 percentage point, to 0.71 percent at 12:45 p.m. London time, and touched 0.708 percent, the least since Bloomberg began collecting the data in 1989. The 1 percent bund due in August 2024 rose 0.25, or 2.50 euros per 1,000-euro ($1,249) face amount, to 102.72.
Brent crude oil sank as much as 2.9 percent to $75.48 per barrel today in London, the lowest level since Sept. 7, 2010.
“Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate,” Draghi said.
Austria’s 10-year rate reached as low as 0.855 percent and Portugal (GSPT10YR)’s fell to 2.866 percent, also a record. Similar-maturity Spanish yields dropped as much as seven basis points to 1.907 percent, the lowest since Bloomberg began compiling the data in 1993.
Italy’s bonds rose as the nation sold 7 billion euros of debt due between 2019 and 2024. The 10-year yield declined as much as six basis points to an all-time low of 2.103 percent.
The Rome-based Treasury auctioned 2 billion euros of the bonds due in December 2024 at 2.08 percent today, down from 2.44 percent at a previous sale on Oct. 30. It also sold 3.5 billion euros of notes maturing in December 2019 at a record-low auction yield of 0.94 percent and floating-rate securities due in December 2020.
While their euro-area peers climbed, Greek bonds dropped for a third day as Finance Minister Gikas Hardouvelis said a short “technical” extension of the nation’s bailout is likely. Talks with its creditors over the loans in Paris showed progress and there are still issues unresolved, he said.
Greece’s 10-year yield rose 13 basis points today to 8.40 percent, after climbing 36 basis points in the previous two days.
German securities earned 1.5 percent in the past three months through yesterday, Bloomberg World Bond Indexes show. Italy’s returned 1.3 percent and Greece’s lost 17 percent.
The tumbling price of energy has begun to take a toll on banks as loans to energy entities are now decidedly underwater. It is not quite Penn Square Bank but Barclays and Wells Fargo are looking at stiff losses on an $850 million dollar loan made to two energy companies.
Via the FT:
November 26, 2014 6:39 pm
FT – Oil price fall starts to weigh on banks
Tracy Alloway in New York
Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850m loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy.
Details of the loan emerged as delegates of Opec, the oil producers’ cartel, gathered in Vienna to address the growing glut in the supply of oil. Several Opec members have been calling for a production cut to shore up prices, but Saudi Arabia , Opec’s leader and largest producer, signalled that it would not push for a big change in the group’s output targets.
Repercussions from the decline in the price of crude, which has dropped 30 per cent since June, are spreading beyond the energy sector, hitting currencies, national budgets and energy company shares.
The price slide is having a serious impact on oil producers that rely on revenues from crude exports to balance their budgets. The Russian rouble has lost 27 per cent of its value since mid-June, when crude began to fall, while the Norwegian krone is down 12 per cent and on Wednesday the Nigerian naira touched a record low.
Companies are also being hit, with BP’s shares down 17 per cent since mid-June and Chevron’s down 11 per cent. Shares in SeaDrill, one of the world’s biggest drilling rig owners, fell as much as 18 per cent on Wednesday as it suspended dividend payments. The company has suffered from an oversupply of rigs as the majors respond to crude’s slide by cancelling projects.
Now banks are also being affected, with Barclays and Wells said to face potential losses on an energy-related loan. Earlier this year, the two banks led an $850m “bridge loan” to help fund the merger of Sabine Oil & Gas and Forest Oil, US-based oil companies.
Investors, however, balked at buying the loan when it was first offered in June and slumping oil prices combined with volatile credit markets in the months since have scuppered further attempts to sell, or syndicate, the loan, according to market participants. Spokespeople for Barclays and Wells declined to comment.
With underwriting banks unable to offload the loan to investors they are now facing losses on the deal as the value of the two oil companies’ debt erodes.
Sabine’s bonds were trading above their face value at around $105.25 in June, but have since fallen to $94.25 – firmly in “distressed” territory. Their yield – which moves inversely to price – has jumped from around 7.05 per cent to 13.4 per cent.
Rival bankers estimate that if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.
If the banks are not able to sell the loan they may absorb it on their balance sheets, rather than try to sell it into the market.
A separate loan arranged by UBS and Goldman Sachs to help fund private equity group Apollo’s purchase of Express Energy Services was supposed to be sold earlier this week but appears to have been postponed, according to market participants. A spokesperson for Goldman declined to comment, while a spokesperson for UBS did not immediately return a request for comment.
Marty Fridson, chief investment officer at LLF Advisors, says that of the 180 distressed bonds in the Bank of America Merrill Lynch high-yield index, 52, or nearly 29 per cent, were issued by energy companies.
“There has been a loss of favour for the energy sector,” he said.
Details of the loan come amid concerns about the impact that the oil price fall could have on credit markets and as US regulators have discouraged banks from making riskier loans.
Energy companies have come to account for a much larger portion of the outstanding credit universe in recent years as oil and gas companies rode low interest rates and tapped eager credit markets to help fund their expansion.
The energy sector accounts for 4.6 per cent of outstanding leveraged loans, up from 3.1 per cent a decade ago, according to S&P Capital IQ. Energy bonds make up 15.7 per cent of the $1.3tn junk bond market, according to Barclays data – compared with 4.3 per cent a decade ago.
Additional reporting by Neil Hume, Anjli Raval and Emiko Terazono
Via CRT Capital:
We are cautiously optimistic about the prospects for this afternoon’s 7-year supply. The absence of any meaningful concession is a bit troubling; however the broader flight-to-quality that has been supporting Treasuries should stoke demand for the new issue. The early schedule might limit the set-up, as could the winter-storm and unofficial early close, however the experience of yesterday’s 5-year auction suggests that overseas demand is meaningful at these levels. That said, it will likely come down to indirect interest, as yesterday’s 5-year didn’t benefit from any outsized direct interest, so we don’t think it’s likely banks show up today (7s have historically not been an issue they favor). If the auction tails, we suspect it will be more a function of the holiday and weather than a vote of no-confidence for the 7-year sector or Treasury market more broadly and as a result do little to reverse this morning’s bullish price action.
* 7-year auctions have recently met weak receptions with five of the last six offerings tailing an average of 1.1 bp vs. a prior string of four stop-throughs averaging 0.4 bp and August’s 0.1 bp through.
* Indirect bidding has been increasing at 7s, taking 48% at the last four auctions vs. 43% at the prior four. Direct bidding has decreased over the same period, taking 15% of the last four auctions vs. 23% at the prior four.
* Investment fund buying has increased to 44% of the last four auctions vs. 41% of the prior four. In outright terms, that is $12.7 bn vs. $11.9 bn prior.
* Foreign investors as a % of the auction have decreased recently, taking 16% of the last four auctions vs. 17% at the prior four. In outright terms, that’s $4.6 bn over the last four auctions vs. $4.9 bn during the prior four.
* Technicals are bullish as stochastics continue to favor lower yields. Initial resistance will be the 38.2% retracement at 1.882% and then a series of recent closes near 1.85%. Break that and we’ll look the 50% retracement at 1.812%. Initial support is the 40-day moving-average at 2.002% before the high yield-close at 2.089%.
Lower prices for commodities are denting the outlook for farm equipment sales as farmers do not replace machinery as quickly.
The Moline, Ill., company, which reported a 20% decline in earnings for its October quarter, posted lower equipment sales for the two previous quarters as well, as farmers have been reluctant to buy new equipment.
“The slowdown has been most pronounced in the sale of large farm machinery, including many of our most profitable models,” said Chief Executive Samuel R. Allen.
Shares declined about 2% premarket, even as the quarterly results topped Wall Street’s expectations.
Deere, the world’s largest manufacturer of farm equipment by sales, has been hurt by decreased demand due to unfavorable changes in the agriculture industry. When crop prices were high, farmers flush with cash frequently turned over their equipment, with many large operators buying new models every year or two.
But every new tractor sold generates one to three sales of used equipment, as farmers purchasing used late-model machines trade in their machines, which are eventually bought by other farmers, who unload even older equipment into the used market.
As a result, some analysts are warning the equipment market has become clogged with too much late-model, used machinery that could hold down a recovery in new-equipment demand for years.
In the quarter ended Oct. 31, equipment sales fell 6.7% from a year earlier to $8.04 billion, while operating profit dropped 14% to $1.17 billion.
Farm equipment fell 13% to $6.16 million due largely to lower shipment volumes and unfavorable effects of currency translation.
But in the construction and forestry segment, sales rose 23% to $1.88 billion while operating profit soared 93% to $228 million.
In all, the company reported earnings of $649 million, or $1.83 a share, down from $807 million, or $2.11 a share, a year earlier. Sales fell 5.1% to $9 billion.
Analysts had projected earnings of $1.57 a share on revenue of $7.75 billion.
Looking to the recently started, the company expects total equipment sales to drop 15%, with a 21% decline in the first quarter.
The European Central Bank will next quarter consider buying sovereign debt in relation to the size of each euro member’s economy if current stimulus proves insufficient, Vice President Vitor Constancio said.
“We expect that the adopted measures will lead, within the time of the program, the balance sheet to go back to the size it had in early 2012,” Constancio said in a speech in London today. “If not, we will have to consider buying other assets, including sovereign bonds in the secondary market, the bulkier and more liquid market of securities available. It would be a pure monetary policy decision, buying accordingly to our capital key, within our mandate and our legal competence.”
The comments underline the ECB’s desire to be ready to add more stimulus if needed, with President Mario Draghi last week vowing to revive inflation “as fast as possible.” Even so, Constancio reflects a growing consensus on the need to wait to see the impact of existing measures, with Executive Board member Benoit Coeure saying in an interview this week that policy makers “won’t rush” to any decision.
“They think the measures that they’ve put in place are just about good enough — if not, they’ll reassess,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Given that they’ve just now kicked off this asset-backed securities program, it’s perfectly reasonable to see how much it moves the market and how it goes. The idea of delaying quantitative easing until next year makes sense.”
ECB expert committees have been tasked with examining further measures to help boost the region’s near-stagnant economy, even after programs buying up covered bonds and ABS started this year.
Should the ECB buy sovereign debt, using the capital key would mean German bunds would be the top target. The euro area’s largest economy paid in just under 18 percent of the central bank’s capital. France accounts for 14 percent, Italy 12 percent and Spain 9 percent.
Officials have pointed to a second round of long-term, targeted bank loans in December as a key gauge. The results of the so-called TLTRO won’t be known until a week after the ECB’s Dec. 4 monetary-policy meeting. The first round in September saw banks borrow 82.6 billion euros ($103 billion), below economists’ forecasts.
“To explore new channels of transmission of monetary policy that have worked in other countries like the U.K. and the U.S., we are aiming at increasing the size of the monetary base and our balance sheet by directly injecting money also into non-bank economic agents,” Constancio said. The impact of buying sovereign debt would go “well beyond the direct effect on the yields of the purchased securities,” he said.
The ECB’s Governing Council, on which the central-bank governors of the euro region’s 18 nations sit, isn’t united on either the need for further stimulus or the design of purchases. Bundesbank President Jens Weidmann said on Nov. 24 that there are “high legal hurdles” to purchasing government debt.
Constancio sought to dispel some of the arguments against large-scale sovereign bond-buying in the euro area, saying the argument that such intervention is pointless because yields on government debt are already low “is not well founded.”
“Even less valid is the argument that sovereign-bond purchases, should these be deemed necessary, would ease the pressure on governments to do structural reforms,” Constancio said. “It is not the task of a central bank to exert more or less pressure on governments to adopt policies for which they are respons
Via Marc Chandler at Brown Brothers Harriman:
Dollar Firmer and OPEC in Focus
- The odds of a substantial output cut from OPEC have slipped
- The continued fall in oil prices won’t do the ECB any favors in its battle to arrest disinflationary forces
- We continue to be impressed with the legal, political, and operation challenges of a sovereign bond purchase program in the EMU
- With the new economic team for Brazil all but confirmed, the government is preparing for some budget tightening
Price action: The dollar is mostly firmer against the majors. The yen and sterling are outperforming and up on the day, while Aussie and Nokkie are underperforming. The euro is trading near $1.2450, while cable is trading just above the $1.5700 area. Dollar/yen is holding right below the 118 level. AUD is making new lows for this move below .8500, and with Kiwi holding up OK, the AUD/NZD cross made a clean break below the 200-day MA near 1.0915 and is trading at levels not seen since July. EM currencies are mostly softer, with RUB, ZAR, and TRY leading the losers. KRW and BRL are up modestly and outperforming on the day. MSCI Asia Pacific is up 0.3%, the fourth straight gain as gains in China outweighed modest losses in Japan. Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a higher open.
The price of oil plummeted in 1986 as the Saudis opened the spigot and forced the price of a barrel of oil down to $10. The attached Bloomberg story details the price war.
That was a transformative time for the bond market as participants still carried the psychic scar of the inflation of the 1970s and fought lower yields. In November 1985 the coupon on the Long Bond was 9 .875. In February 1986 the coupon on the Long Bond was 9.25 and in May 1986 the coupon had dropped to 7.25. There were other factors at work but one of the principal drivers of the drop in yields was the significant decline in oil prices.
So keep that in mind as the long Bond today sinks again below 3 percent.
Iron ore fell below $70 for the first time in five years as rising low-cost supplies from the world’s top miners deepen a global glut amid concern a slowdown in China will cut demand in the biggest consumer.
Ore with 62 percent content delivered to Qingdao fell 1.2 percent to $69.58 a dry metric ton yesterday, the lowest since June 2009, data from Metal Bulletin Ltd. showed. Prices are heading for a 13 percent loss this month, the most since May.
The raw material slumped 48 percent this year as surging output from Rio Tinto Group (RIO), BHP Billiton Ltd. and Vale SA, the three largest miners, spurred a glut. China’s central bank unexpectedly cut interest rates last week for the first time since 2012 to stimulate the economy forecast to record the weakest annual pace of growth in more than two decades.
“Iron ore certainly seems to have gone down faster than consensus,” Gavin Wendt, founder and senior analyst at Mine Life Pty in Sydney, said by phone today. “The big issue that’s impacted prices is the sheer rate of volume increase. I don’t think we’re going to see a significant price recovery.”
The global seaborne market needs to absorb a surplus of about 110 million tons next year, almost double the 60 million tons expected in 2014, according to Goldman Sachs Group Inc. The bank declared the “end of the Iron Age” in a September report as a Chinese-led demand surge over the past decade that had brought record profits for producers came to an end.
The world’s second-largest economy reduced the one-year deposit and one-year lending rates, the People’s Bank of China said Nov. 21. The economy’s slowdown deepened last month, with factory production growing at the second weakest pace since 2009, and investment in fixed assets such as machinery expanding the least since 2001 from January through October.
It would take three to six months before the effect of the rate cut to feed through the economy, according to Paul Gait, an analyst at Sanford C. Bernstein & Co. The country buys about 67 percent of global seaborne ore cargoes.
“The biggest problem is on the supply side as majors like BHP and Rio are pushing huge volumes into the lackluster demand environment,” Sanford’s Gait in London said this week. “To me $65 feels like a floor.”
Rio’s shares have declined 14 percent in Sydney this year, while BHP retreated 15 percent and Fortescue Metals Group Ltd. (FMG) tumbled 52 percent. In Brazil, Vale lost 37 percent. Iron ore is the biggest contributor to their revenues.
“At these prices, we still have a very decent business,” BHP Chief Executive Officer Andrew Mackenzie said Nov. 20, adding that the time for massive expansions of iron ore are over. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.”
The market has hit bottom and prices may rebound, Standard Chartered Plc said in a Nov. 3 report. Prices will rise again over time, Rio Tinto Chief Executive Officer Sam Walsh told Sky News Television on Nov. 13. In the long term, the market won’t be oversupplied all the time, Vale said Nov. 7.