Secondary market IG Trading Yesterday

September 19th, 2014 6:09 am

Via Bloomberg:

By Robert Elson
Sept. 19 (Bloomberg) — The final Trace count for secondary
trading was $14.3b vs $14.5b Wednesday and $13.3b the previous
Thursday. 10-DMA unchanged at $13.1b vs $13.2b, the highest
count since late May; 10-DMA of only Thursday sessions $12.5b.
* 144a trading added another $2.4b of IG volume
* GS 3.85% 2024 topped the most active list with evenly-
weighted two-way client flows accounting for 34% of volume
* LO 8.125% 2019 was next with 2-way client flows at 66%; LO
has issued at least annually going back to 2009, has yet to
issue this year
* JPM 3.875% 2024 was 3rd; trades between dealers at 69%
* FOXA 4.75% 2044 was most active 144a issue; client selling
4x buying
* BofAML IG Master Index at +114, unchanged; +106, its low for
2014 and the tightest spread since July 2007 was seen June
24; year wide +132
* Standard & Poor’s Global Fixed Income Research IG Index at
+148 vs +149; +140, a new 2014 low and new post-crisis low
was seen July 30; +164, the wide for 2014 was seen 4x in Feb
* Markit CDX.IG.22 5Y Index closed at 57.1 vs 58.7; 55 was
seen July 3, the low for 2014 and the lowest level since Oct
2007; 2014 high of 74.5 was seen Feb 3; 2013 range 97.6 to
* IG issuance was $7.2b Thursday, brings week to $27.2b
* IG issuance YTD now $1.051t
* Pipeline remains heavy with Yankee names, including SMI,

September 19 2014 Opening

September 19th, 2014 6:07 am

Prices of Treasury coupon securities continue to be under assault as the markets declined once more overnight in a session dominated by the defeat of the proposal to split Scotland from the United Kingdom. The defeat of that measure permits participants to refocus on economic fundamentals and monetary policy and to shift focus from an exogenous factor which might have generated a flight to quality bid. So for now the FOMCs graphic dots presentation remains ascendant and market participants will adjust yields to levels consistent with a Federal Reserve Board seemingly more hawkish than participants has believed and anticipated. I know the old adage in which the market is always right and maybe I am in a very stubborn place but I have a difficult time believing that this Federal Reserve with this very dovish Chairman will do anything but wait until it sees the  whites of inflation’s eyes before reacting. They will be reactionary rather than proactive.

Yields on benchmark Treasuries have shifted modestly higher when viewed against levels which prevailed in New York at 830PM last evening. The yield on the 5 year note has edged higher to 1.858 from 1.849. Recall that there should be huge support in this 1.85 to 1.87 area as this is the level that attracted buyers in September 2013 at the end of the taper tantrum. One can observe the flattening of the curve which has occurred as at that time 3 percent was the yield on the 10 year which brought in buyers. The yield on the benchmark 10 year note climbed to 2.636 from 2.629. The yield on the Long Bond edged higher to 3.365 from 3.358. The yield curve has exhibited very little movement overnight. The 5s 10s spread is slightly flatter at 77.8 versus 78 . The 5s 30s spread has narrowed a touch to 150.7 fromm 150.9. The recent low on that spread is 144ish. The 10s 30s spread is unchanged at 72.9. the 5 year note remains very cheap versus 2s and 10s as + 49.5. It traded yesterday at 50.4.

Japanese clients bought the 5s to 7s portion of the curve and other end users were better sellers of 3year through 7 year spread product.

The dollar remains strong versus other currencies and printed above 109 yen in the overnight session. One analyst I read thought that the Euro would continue to fade as the dismal debut of the TLTRO facility would force the ECB into some other action. That thought has peripherals on a tear with 10 year Spain now trading 41 basis points through the US 10 year.

There has been talk all week that Moody’s  will downgrade France by a notch and that is supposed to take place today.

There is no meaningful economic data in the US today.

Fixed income securities are an asset class consigned to monetary purgatory at the moment. Cash is flowing to equity markets and participants believe rates are heading higher. It does not feel as though that process is complete and there is supply in the US in 2s 5s and 7s next week. I think rates drift higher in the belly and the curves continues to flatten until we reach levels which gives end users comfort. I suggested yesterday that 70 basis point 2 year notes and 2 percent 5 year notes would probably do the trick. If that is the case then the 10 year note would be close to 2.80 where it found huge support back in May.


Next Stage of Abenomics

September 19th, 2014 5:30 am

The Japanese Prime Minister Abe pens an Op Ed piece for the WSJ on the next stage of his eponymously named program. He speaks of lower corporate taxes and deregulation as well as programs to assist women.

Via the WSJ:


The Next Stage of Abenomics Is Coming

Make no mistake, Japan will emerge from economic contraction and carry out needed structural reforms.

Sept. 18, 2014 6:55 p.m. ET
My administration has now begun its second chapter, with a newly appointed cabinet. My highest priority as Japan’s prime minister remains the economy. Spurring strong economic growth and ending deflation and its damaging effects remain my administration’s key aims, and my new cabinet choices were made with these goals in mind.

We have already seen improvements in the employment rate and wages. Make no mistake, Japan will emerge from economic contraction and advance into new fields and engage in fresh challenges.

Some have said that Japan’s structural reforms—what I call the “third arrow” of Abenomics, alongside the first two “arrows” of monetary and fiscal policy—are at a standstill and that wage increases aren’t keeping up with price increases. But there is no reason for alarm. We remain on the path toward a revitalized Japan we began in December 2012.

To help companies—the engine driving economic growth—increase their profits, we reduced Japan’s effective corporate tax rate by 2.4 percentage points this fiscal year, and will cut the rate further next year. We aim to reduce the effective tax rate to the 20s over several years. We are also strengthening corporate governance. For example, among companies listed in the first section of the Tokyo Stock Exchange, 74% have appointed outside directors, a 12% increase over the past year.

In industrial fields that have had few new entrants over the past few decades in Japan—namely the electricity business and health and medical services—bills to encourage new entrants will be passed in the Diet, our parliament, while laws already enacted are now being implemented. The arrival of new participants in the electricity market is particularly encouraging. In just over a year the market has grown 1.6 times—from 38 companies to 59.

Relaxation of visa requirements contributed to the number of foreigners visiting Japan last year, surpassing 10 million for the first time. And so far this year we’ve already seen a 25% increase over 2013’s impressive gains.

Bills were also passed in the last two Diet sessions to turn agriculture into a growth sector. One key change has been the establishment of regional “farmland banks” to promote farmland consolidation and large-scale farming. We also intend to reform our traditional agricultural associations to strengthen the competitiveness of Japan’s farmers.

Deregulation is also proceeding. Within our National Strategic Special Zones, we are expanding the geographical areas in which regulatory reforms will be implemented. Since mid-July, there have been more than 200 proposals for regulatory reform, and several deregulation bills will go before the Diet in the next six months. These special zones will support new businesses, including non-Japanese startups, to create a welcoming environment for talented entrepreneurs, their employees, and home-support workers from overseas.

My administration’s growth strategy is paying off. The unemployment rate is now below 4% and the labor market is tightening. Big corporations and nearly two-thirds of small- and medium-size enterprises have raised wages. With the growth in the number of employed persons, total payroll has been trending up since April 2013. In July total payroll increased by more than 3% year on year. During the second quarter of 2014, even though it was a period of negative growth, the number of irregular employees without the security of salaried positions declined while the number of regular salaried employees rose. Over the past three years, roughly one million workers have moved from irregular employment to regular employment. Capital investment by companies has increased on a year-on-year basis for five consecutive quarters.

Meanwhile, revenues from the increase in the consumption tax rate, which in April rose to 8% from 5%, are allocated exclusively to social security. This eliminates concerns about the future and leads to expanded future consumption.

As for structural issues, specifically with regard to Japan’s dwindling birthrate and aging population, we are doing the following:

• Creating environments in which it is easier for women to play active roles in the public and private sectors. I have put my own pledges into action, increasing the number of female ministers in my cabinet from two to five. Japan’s corporate leaders should follow my lead.

• Creating more child-care facilities in urban areas and more high-wage jobs in rural areas. I am proud to say that in the year and a half since the start of the Abe administration, the number of women in the Japanese workforce has increased by 820,000. The female labor force participation rate between 25- and 44-years-old has increased by around 4% since the beginning of my administration—to a record-high 74.2% at the end of July.

• Reviewing the use of pension assets to fortify the people’s confidence. The total investment income of the Government Pension Investment Fund (GPIF) within the past two years amounted to around 25.2 trillion yen. Reform of the GPIF is currently under way. My new minister of health, labor and welfare, who has been a leading advocate of pension reform within the Liberal Democratic Party that I lead, is the right person to advance these reforms.

The Trans-Pacific Partnership (TPP) Agreement is also an important pillar of our growth strategy. Japan will benefit from increased trade and economic growth in the region. With regard to TPP negotiations, I have appointed as minister of agriculture, forestry and fisheries the person who has been responsible for TPP within the Liberal Democratic Party. Our aim is to conclude the TPP talks as soon as possible and usher in a new era of trade.

My cabinet and I will do all we can to implement our growth strategy and economic reforms and press forward with the second stage of Abenomics.

Goldman Sachs on the UK

September 19th, 2014 5:19 am

Via a fully paid up subscriber:

UK VIEW: Goldman Sachs has left its central economic forecast for the UK economy unchanged following Scotland rejecting independence, but it has “removed a downside risk to UK economic growth. “Our outlook is relatively positive: we continue to forecast GDP growth of 3.4% in 2014, 3.0% in 2015 and 3.0% in 2016, but that inflation will nevertheless remain below target until 2017,” Goldman Sachs say. GS still expect Bank of England will raise Rates for the first time in Q1 2015, and then to 1.75% by end-2016.

FX Very Early

September 19th, 2014 5:15 am

Via Marc Chandler of Brown Brothers Harriman:

Kingdom Remains United; Stealing Rally Extended but Stalls

- Scotland voted to remain part of the United Kingdom in a vote that was not as close as the opinion polls suggested

- The sterling opportunity may reside more on the crosses than against the greenback, given the strong dollar environment

- The yen continues to weaken, helping Japanese stocks outperform

- As we had expected, participation in yesterday’s launch of the TLTRO, but are hesitant about reading too much into it

- Brazil reports mid-September IPCA while Banco de Mexico releases minutes from its last meeting

Price action: The dollar is stronger against most major currencies except for sterling. The pound rose above $1.65 following the results of the referendum but failed to hold that level, now trading at $1.6460. The euro is trading just below the $1.29 level. The dollar rose above the 109 level for the first time since late 2008, and is holding just above that level now. In the EM space, HUF and PLN are outperforming and PHP underperforming, but moves have been modest. The MSCI Asia Pacific index is up 0.4% with the Shanghai Comp gaining 0.6% and the Nikkei up 1.6%. In fixed income markets, 2-year UK gilt yields are 4 bps higher, US Treasury yields are 2 bp higher across the curve and EU periphery debt yields are lower by as much as 8 bp for the 10-year in Spain.

  • The results are not final or official yet, but it is clear that Scotland voted to remain part of the United Kingdom in a vote that was not as close as the opinion polls suggested.  The “wisdom of crowd” type of information from the formal and informal markets had anticipated this outcome.   Sterling poking through $1.6400 in North America yesterday, sterling advanced to $1.6525 in Asia before pulling back a cent.    Recall sterling bottomed on September 10 near $1.6050.  The cap we identified between $1.6500 and $1.6600 remains intact.
  • In a firm US dollar environment, the sterling opportunity may reside more on the crosses than against the greenback.  With the referendum out of the way, there is no reason not to expect the BOE to raise rates early next year, still likely before the Federal Reserve.  The political uncertainty shrouding the referendum overshadowed, to some extent, the favorable macroeconomic considerations.  The divergence theme, with the US and UK beginning to normalize monetary policy while the ECB and Bank of Japan are still with a heavy foot on monetary accommodation, is a key feature of the investment climate.  
  • Sterling has exploded over the few sessions against the yen, for example.  On Sept 8, it has broken down to JPY169.35.  Today, it moved above JPY180 for the first time since 2008.    The next target is near JPY184.   The euro is heading for the July 2012 low near GBP0.7755.  Recall, the euro briefly poked through GBP0.8000 on Sept 16, and today neared GBP0.7800.  
  • There had been some concerns that a small victory for the unionists would spur concerns that this will be a recurring issue as some drew parallels with the Quebec experience.  While we recognize this as a possibility, we suggest this is not an immediate issue.  The victory appears to be solid, and the terms of the referendum were as favorable for the nationalists as could be imagined (16-year old voters, non-residents can’t vote and a simple majority was needed).    The main political issue now is not whether Scotland stays in the UK, but whether the UK stays part of the EU.  Cameron faces a backbencher revolt over the issue and a UKIP that enjoys some momentum.  
  • The other main story of the day is the continued yen weakness.   It is off about 0.3% today, with the dollar moving above JPY109.  It is now off 1.6% on the week, the poorest performing of the majors. Although yesterday the junior member of the governing coalition expressed some concern about addition yen weakness, BOJ Governor Kuroda was clear today at the G20 meeting that he did not see major problems with the current move.  Of course, he was quick to add the politically correct disclaimer that he was not in a position to discuss specifics.  
  • The decline in the yen is helping to lift Japanese stocks.  The Nikkei rose 1.6% to near seven year highs.  Exporters generally did well.  The weakest equity sectors were the domestic industries like energy and utilities.   With today’s gains, the Nikkei has turned positive on the year.     The weakness of the yen is also expected to revive price pressures, which stabilized in recent months.   Separately, the Japanese government cut its overall economic assessment for the first time in five months.  Its claim that “private consumption appears to be pausing” is a thinly veiled recognition that the sales tax increase is having a longer lasting impact than expected.  The increase in the assessment in July seems like cheerleading.  
  • While Kuroda has been clear, as all central bankers say, it is prepared to do more if needed, we do not see any sense of urgency.  In fact, the yen’s depreciation seems to reduce the need for additional formal monetary stimulus.  Instead, the economic assessment is signal of the need for a supplemental budget, and may intensify the debate over the next leg of the sales tax increase for October 2015.  
  • Meanwhile, the market continues to digest the implication of the small take down at yesterday’s inaugural TLTRO.  Generally speaking, while many are saying the program is a failure, others, including ourselves, want to reserve judgment until the December offering.    Still, the peripheral bond market rally has resumed.  The focus today will be on the repayment of the LTRO funds.  The issue is whether the new TLTRO funds will expedite the repayment of those older and somewhat more expensive funds.  Separately, Moody’s is set to announce its review of France’s credit rating.    There is some risk for a downgrade, which while making for poor headlines, would be a catch-up move as S&P has already put the sovereign rating at AA.  
  • In the US session, perhaps the main event will be the IPO of the Chinese e-commerce giant Alibaba. The company will be listed in the New York Stock Exchange under the symbol BABA. The initial price was set for $68 bln, and it could be the world’s largest IPO (beating Agricultural Bank of China, which raised $22.1 bln). In terms of economic data, markets will receive the August leading indicator index, expected to fall to 0.4% from 0.9% last month. Also, Canada reports August CPI, expected to remain unchanged at 2.1% y/y.
  • Brazil reports mid-September IPCA and second September preview of IGP-M inflation.   The former is seen accelerating to 6.57% y/y, while the latter is seen decelerating to 3.7% y/y.  Lower global commodity prices should at the margin help lower Brazil price pressures at the consumer level, but not by enough to warrant any BCB easing anytime soon.  For USD/BRL, support seen near 2.35 and then 2.30, resistance seen near 2.40 and then 2.45,
  • Banco de Mexico releases minutes from its last meeting.  With the data starting to pick up and inflation above target, we think Banxico will continue to send the message of no more rate cuts ahead.  Yet, tightening is still a ways off and probably won’t be seen until well after the Fed starts hiking rates next year.  For USD/MXN, support seen near 13.20 and then 13.10, resistance seen near 13.30 and t

Mutual Fund and Other Flows

September 18th, 2014 8:10 pm

Via Merrill Lynch Research:


  • Out of Treasuries, into equities. With intensifying rate hiking speculation over the past week (ended Wednesday), not surprisingly the fund category “All fixed income”, which includes Treasury funds that we do not break out separately, turned to a modest outflow of $2.86bn, from an inflow of $0.81bn the prior week. At the same time there was a big $10.05bn shift into equity funds, following a small $0.81bn outflow the prior week. However, flows to/from credit funds this week did not change materially from the prior week – with the exception of the interest rate sensitive Muni fund category that reported a small $0.03bn outflow after a $0.63bn inflow the prior week.
  • Despite recent significant total return losses high grade continued to enjoy inflows in the most recent week ($1.38bn, or $1.53bn ex. short term funds, compared with $1.81bn and $1.33bn the previous week, respectively). Down the credit spectrum high yield and leveraged loan funds reported outflows of $0.90bn and $0.65bn, roughly similar to the outflows of $0.85bn and $0.45bn seen the prior week, respectively. Finally EM bond funds saw a small $0.13bn inflow last week, up from $0.04bn the prior week, while money market funds reported outflows of $13.78bn – most likely due to mid-month corporate tax payments. – Hans Mikkelsen (Page 4)
  • Mutual funds buy more corporates in 2Q. The Federal Reserve Flow of Funds flow of funds data released today shows that mutual funds, households and pension funds bought more corporate bonds in 2Q relative to 1Q, while foreigners bought less. Hence, mutual funds and ETFs acquired $105bn of corporate bonds in 2Q, up from $77bn in 1Q (Figure 1). Households, a residual sector that includes hedge funds, purchased a net $29bn in Q2 relative to net selling of $38bn in 1Q. Net buying by life insurance companies remained relatively unchanged at $17bn (relative to $19bn in 1Q). For the Treasury market the data confirms what our rates strategists conjectured, that an increase in foreign buying offset the QE tapering by the Fed in 2Q.Yuriy Shchuchinov, Jon Lieberkind (Page 6)


Household Wealth Hits Record

September 18th, 2014 1:53 pm

Via the WSJ and free lifetime subscription to if you  find the Piketty Moment:


U.S. Household Wealth Hits Fresh Record

Consumer Borrowing Climbs at Fastest Pace Since the First Quarter of 2008

Sept. 18, 2014 12:00 p.m. ET

Americans’ wealth hit the highest level ever in the second quarter amid a rise in stock and home prices, prompting consumers to ramp up their borrowing—a development that could boost the economic recovery.

The net worth of U.S. households and nonprofit organizations—the value of homes, stocks and other assets minus debts and other liabilities—rose 1.7%, or about $1.4 trillion, between April and June to $81.5 trillion, the highest on record, according to a report by the Federal Reserve released Thursday.

The figures aren’t adjusted for inflation or population growth. Much of the nation’s rising wealth also goes disproportionately to the wealthy, who tend to own stocks and save their money, reducing the benefits to the overall economy.

Some of the Fed’s recent figures for net worth were revised downward due to new data on corporate bond values.

Still, the latest report showed a significant uptick in consumer borrowing that could fuel spending and turbo-charge economic growth.

Overall household borrowing rose at an annualized 3.6% pace in the second quarter, the fastest rate since the first quarter of 2008. Mortgage debt grew 0.4%, after two straight quarters of shrinking. Other types of consumer credit, including student loans, grew 8.1%, stronger than the previous quarter’s 6.5% pace.

The U.S. stock market rose in the second quarter, with the broad Standard & Poor’s 500-stock index rising about 5%. Real-estate values are also gradually improving, allowing more Americans to benefit from the economic recovery.

The value of stocks and mutual funds owned by households rose $1 trillion last quarter, while the value of residential real estate grew $230 billion, according to the Fed.

TIPS Post the Auction

September 18th, 2014 1:22 pm

Via Richard Gilhooly TDSecurities:

A game of whackamole has now commenced in the TIPs market, whereby Dealers who bought paper they did not anticipate buying are looking to offset risk in 5s and 30s, with the first trade in 10yr breaks at 202.3bp shortly after the auction result. The tail of 4.5bp, to 61bp of real yield, placed breaks around 201bp and we would imagine that a trade under 200bp could see some liquidation flows. Real money will probably attempt to defend this level, having purchased some 52.7% of the auction. Directs took only 5.7%, leaving Dealers with 41.7% of the $13bn auction.

5yr Breaks are now 4bp lower and 30yr Breaks have seen a large move for that sector, -3.5bp. The level of 5yr Breaks is below the December low of 171bp and the 160bp close from last June (150bp low intra-day) is now in play in coming days. Real yields on 5yrs are now at +12bp, having just broken 0bp yesterday, and while TIPs had out-performed the nominal sell-off earlier, they are now under-performing by 2bp.

TIPS : Treasury Gave Auction and Nobody Came

September 18th, 2014 1:08 pm

Via CRT Capital :

*** The 10-year TIPS auction was weak with non-dealer bidding at 58.3% vs. 62% norm and a 4.7 bp tail. Largest tail since Sept 2012. ***
* 10-year TIPS auction stops at 0.610% vs. a 0.563% 1-pm bid WI.
* Dealers were awarded 41.7% vs. 38% average of last six 10-TIPS auctions.
* Indirects get 41.7% vs. 53% norm.
* Directs take 5.7% vs. 9% average.
* Bid/Cover was 2.20 vs. 2.53 average of last six new 10s.
* Dealer Hit-Ratio: Dealers takes 27% of what they bid for vs. 22% norm.
* Indirect Hit-Ratio: Customers take 99.9% of what they bid for vs. 81% norm.
* Nominal Treasuries were trading slightly better on the day ahead of the auction despite stocks’ rebound and improved claims, and since the results, Treasuries have traded lower.
* Nominal Treasury volumes have been above average, with cash trading at 132% of the 10-day moving-average. 5s have been the most active issue, taking a 40% marketshare while 10s took 12% and 2s and 3s each got 12%.

Thoughts on Euro and the TLTRO

September 18th, 2014 12:41 pm

Via Richard Gilhooly at TDSecurities:
The 5y5y inflation forward in Europe is further below 2.00% this morning and with the TLTRO coming in well short of the consensus range of €100-300bn, at €82.6bn, questions will start to arise as to how Draghi adds credible details to his suggestion that the ECB’s balance sheet will revisit the 2012 highs. The October 2nd meeting is still weeks away, but markets are awaiting a number on ABS purchases and expectations have been raised that a €500bn ABS package is possible, in addition to QE making up the difference to take the balance sheet to the 2012 highs, some €1tr above current levels.

The weak TLTRO uptake may owe to a number of factors, such as ongoing weak demand for loans and a deposit rate now at -20bp, which means that funds borrowed at 15bp would have a final cost of 35bp if the banks have no final demand for loans at this stage. The next TLTRO on December 11th will be hoped to see a larger uptake, with the €400bn max offered by the ECB seeing less than a quarter of that total utilised today.

The Euro is pushing higher this morning and the USD is generally weaker, with the exception of JPY, which looks set to complete the first target of 110 fairly soon and possibly extend sights to the $/Yen 120 area with the Yen pretty much a one-way bet at this point. The Euro is a different story and Draghi has not received much support from other ECB members in recent weeks, who have argued that QE is not a done deal and should not be anticipated just because of the ABS package.  Should details on October 2nd be seen as under-whelming and TLTRO also seen as a dis-appointment, the possibility of a bigger squeeze on the Euro is high into and after the October 2nd meeting.

While Blackrock is still working with the ECB on details of the ABS purchase plan, Draghi has suggested that details on size will be offered at the next ECB meeting. Conversations we have had with ABS investors lead us to conclude that the originally suggested size of €50-100bn remain more realistic than the more fantastic suggestions of a €500bn ABS purchase plan, augmented with €500bn of QE to arrive at the €1tr number that Draghi casually hinted at at the last meeting.