Treasury Update

September 30th, 2014 1:19 pm

The Treasury market is a hotbed of rather pedestrian activity today as clients close their books on Q3.

The yield curve has manifested a proclivity to steepen with 5s 3s at 142.4 a basis point wider than very early New York AM levels.The 10s 30s curve had flattened between 530AM and 830AM and the subsequent resteepening leaves it a little shy of the 530AM level.Dealers report an average volume day.

I think there are several reasons for the curve steepening. The World Bank deal was a $4billion deal and the machinations associated with the pricing would remove 5 year paper from the street. I think that with the labor report later in the week winning flatteners are probably being prudently unwound. In addition the next dollop of supply from Jack Lew and his acolytes is long end paper and I think some of this is the beginning of that underwriting process.

More on ECB and Junk

September 30th, 2014 11:49 am

This is also from a fully paid up subscriber across the pond. I do not believe he wrote it but he left no identifying marks regarding the source so take with grain of salt.

Via a fully paid up subscriber;

Mario Draghi will push for the European Central Bank to accept bundles of Greek and Cypriot bank loans with “junk” ratings, in an effort to ensure policy makers’ latest attempt to save the eurozone’s economy from economic stagnation is a success.

Mr Draghi, ECB president, will this week unveil details of a plan to buy hundreds of billions of euros’ worth of loans sliced and diced into packages known as asset-backed securities (ABS), along with covered bonds, to revive the region’s ailing recovery and boost lending to credit-starved smaller businesses in the currency bloc’s periphery.

As part of the plan, people familiar with the matter say the ECB’s executive board, headed by Mr Draghi, will propose that existing requirements on the quality of assets accepted by the central bank are relaxed to allow the eurozone’s monetary guardian to buy the safer slices, known as senior tranches, of Greek and Cypriot ABSs.

The move would free up billions of liquidity for banks in two of the eurozone’s weakest economies. A senior Greek banker said: “This would have a significant positive impact for the Greek banking system and the Greek economy.” The ECB’s efforts to ease monetary conditions in the periphery were being hampered by the rules on low credit ratings, the banker argued.

However, a relaxation of the rules is likely to face staunch opposition in Germany, fraying the increasingly strained relations between the ECB and officials in the eurozone’s largest economy.

Bundesbank president Jens Weidmann has objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks. Wolfgang Schäuble, Germany’s finance minister, has also voiced his opposition, saying purchases would strengthen the debate about potential conflicts of interest between the ECB’s role as monetary policymaker and bank supervisor.

As the assets originated in Greece and Cyprus are potentially riskier than those from banks elsewhere in the eurozone, the ECB would compensate by purchasing smaller proportions of these securitisations, according to a Eurosystem official. The move is aimed at making the programme of ABS purchases as inclusive as possible. If supported by the majority of members of the governing council, it would enable the ECB to buy instruments from banks of all 18 eurozone member states.

At present, the ECB only accepts ABSs as collateral in exchange for its cheap loans if they hold a minimum rating of at least triple B, the lowest investment grade rating.

Because the ratings on senior tranches are capped by the sovereign rating of the country where the bank is based, if those rules were to apply to the ECB’s buying plan, the central bank could not accept any securitisations of Greek or Cypriot issuers. Standard & Poor’s rates Greece and Cyprus as single B sovereigns – a sub-investment grade rating. Fitch rates Greece as single B, and Cyprus as single B-minus. Moody’s rates Greece Caa1 and Cyprus as Caa3.

An ECB official declined to comment on Tuesday, saying proposals made to the governing council are confidential.

ECB Purchases

September 30th, 2014 11:40 am

Via a fully paid up subscriber:

ECB to Propose Buying Lower-Rated Greek, Cypriot Assets, FT
Says  11:28
Financial Times cites people familiar with the matter as
saying ECB Executive Board will propose that existing
requirements on the quality of assets accepted are relaxed to
allow purchases of senior tranches of Greek and Cypriot
asset-backed securities in ABS program.
• ECB would buy smaller proportions of ABS from Greece, Cyprus
than from other nations to compensate for greater risk, FT
says, citing Eurosystem official
• NOTE: ECB Governing Council meets to approve monetary-policy
decisions on Oct. 2 in Naples, Italy

Consumer Confidence

September 30th, 2014 10:18 am

Via Gennadiy Goldberg at TDSecurities:

Consumer confidence declined substantially in September according to the Conference Board survey, falling to 86.0 from an upwardly revised 93.4 last month – its lowest level since May. The decline appears to have been broad-based, with the current conditions index declining to 89.4 from 93.9 and future expectations plunging to 83.7 from 93.1. The pullback in confidence from recent cycle highs represents considerable deterioration in consumers’ outlooks, hinting that the recent strong pace of growth could come under some pressure. We will nevertheless continue to watch for confirmation from other indicators, as the survey’s Michigan counterpart continued to show confidence hovering around cycle highs in September.

While purchase plans for homes slipped to 4.9% from 5.3% and auto purchase intentions fell to 12.0% from 13.5% in September, durable goods purchase intentions rebounded considerably, rising to 51.3% from 45.7%. Nevertheless, with consumer outlooks on the decline, the labor differential (the number of respondents saying that jobs are plentiful less those believing that jobs are hard to get) declined to -15.0% from a cycle high of -12.4% last month. While the number of respondents believing jobs are hard to get remained relatively flat, the number of respondents suggesting that jobs are plentiful fell to 15.1% from a cycle high of 17.6% last month.
In sum, while the weaker confidence data certainly runs counter to the more positive tone of US economic reports during recent months, the data does hint at the potential for some moderation in growth momentum later in the year. We will be watching for confirmation of this slowing trend from other indices, as overall growth momentum remains relatively positive.


Chicago PMI

September 30th, 2014 10:15 am

Via Millan Mulraine at TDSecurities:

US manufacturing sector momentum weakened in September, with the Chicago PMI falling at a faster than expected pace to 60.5 from 64.3 the month before. This was a bigger drop than the market consensus for a decline to 62.0. However, despite the drop this indicator is holding close to the 6-month average of 60.7, which suggests that the manufacturing sector activity is continuing to grow at a fairly fast clip. However, the outlook for activity is weakening.

The details of the report were not particularly encouraging, with growth in the forward-looking indicators such as new orders (down from 65.6 to 60.0) and orders backlog (down from 58.3 to 52.5) slowing. The production index also slipped massively, falling to 64.9 from 74.7 the month before. Moreover, with the inventory sub-index rising sharply (up to 70.8 from 61.2), the inventory to new orders spread (a very good proxy for future output) fell to its lowest level since the recession at -10.8 from 4.4. This we believe is a harbinger for further deceleration in production activity over the coming months.

This report points to some weakening in underlying manufacturing sector momentum, and even though activity remains at a fairly decent clip (with the index at a relatively healthy 60.5) the decline in the broad array of forward-looking indicators signals a further deterioration in momentum in the months ahead. Understandably, this particular index is quite volatile and a better reading on the manufacturing sector will come tomorrow with the release of the ISM manufacturing report, however, we believe that the risks to our on-consensus call for a 58.3 print on ISM may be tilted to the downside.

Swap Spreads

September 30th, 2014 10:12 am

Swap spreads are unchanged to 1/4 tighter across the curve. I have heard of algorithmic types receiving in the belly. There is a 5 year World Bank deal and there is expectation that the deal will be swapped.

Corporate Spreads

September 30th, 2014 8:54 am

Long dated bank and finance paper  is opening 2 basis points to 3 basis points tighter this morning. The IG 22 is tighter by 2 1/4 at 64 1/4 64 3/4.

IG issuance

September 30th, 2014 7:44 am

Via Bloomberg:

IG CREDIT: Two to Price; Sept. Highest Monthly Volume YTD
2014-09-30 11:33:30.97 GMT

By Lisa Loray
Sept. 30 (Bloomberg) — No deals priced yesterday, two are
expected to price today.
* Including today’s issuance, Sept. will be the most active
month YTD
* IG calendar; DEXGRP, IBRD to price
* Secondary volume improved; credit indices continue to widen
* Treasuries sold off overnight
* DOW futures +58
* S&P futures +7.00
* DOW close 17071.22; -41.93 (-0.25%)
* S&P close  1977.80;  -5.05 (-0.25%)
* VIX close  15.98; +1.13 (+7.61%)
* Lipper IG Funds week ending 09/24: Inflow $1.68b, highest
inflow in 12 weeks and 15th consecutive week of inflow

JPM Duration Survey

September 30th, 2014 7:09 am

All Clients     Long        Neutral         Short

Sept 29              17             48                35

Sept 22               15              47               38

Sept 15               13               45              42


Sept 29               8               50              42

Sept 22                8              38              54

Sept 15               8                23              69


In the all clients survey, the percent of longs increased by 2, the percent of neutrals increased by 1, and the percent of shorts decreased by 3  The all clients survey shows the fewest net shorts since May 27, 2014  The active clients survey shows the most neutrals since May 27, 2014

Lehman Bankruptcy Revisited

September 30th, 2014 7:02 am

This is a NYTimes article (interesting and very long) which revisits the demise of Lehman Brothers (an investment firm which failed six years ago and nearly brought down the Western financial system) and whether or not the Fed could have arranged some sort of marriage or bailout to save it.