Some Corporate Bond Stuff

June 30th, 2016 5:57 am

Via Bloomberg:

IG CREDIT: Trading Volume Grows Higher Still, Spreads Tighter
2016-06-30 09:49:18.52 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $17.7b vs $16.7b Tuesday, $13.9b last Wednesday. 10-DMA
$13.2b; 10-Wednesday moving avg $17.2b.

* 144a trading added $2.6b of IG volume vs $2.7b on Tuesday,
$2.3b last Wednesday

* Most active issues (Trace has yet to pick up trading in new
ORCL, TAP issues for this report):
* AET 3.20% 2026 was 1st with client selling 3.4x buying
* APC 8.70% 2019 was next with client flows taking 100% of
* ABIBB 3.65% 2026 was 3rd; client and affiliate flows
took 90% of volume
* DELL 6.02% 2026 was most active 144a issue with client
selling 8:5 over buying

* Bloomberg US IG Corporate Bond Index OAS at 161.9 vs 164.1
* 2016 high/low: 220.8, a new wide since Jan. 2012/150.8
* 2015 high/low: 182.1/129.6
* 2014 high/low: 144.7/102.3

* BofAML IG Master Index at +162 vs +163
* 2016 high/low: +221, the widest level since June
* 2015 high/low: +180/+129
* 2014 high/low: +151/+106, tightest spread since July

* Standard & Poor’s Global Fixed Income Research IG Index at
+210 vs +212
* +262, the new wide going back to 2013, was seen
* The widest spread recorded was +578 in Dec. 2008

* S&P HY spread at +686 vs +692; +947 seen Feb. 11 was the
widest spread since Oct. 2011
* All time wide was +1,754 in Dec. 2008

* Markit CDX.IG.26 5Y Index at 81.1 vs 84.7
* 73.0, its lowest level since August, was seen April 20
* 124.7, a new wide since June 2012 was seen Feb. 11
* 2014 high/low was 76.1/55.0, the low for 2014 and the
lowest level since Oct 2007

* Current market levels vs early Wednesday levels:
* 2Y 0.637% vs 0.621%
* 10Y 1.527% vs 1.461%
* Dow futures +47 vs +73
* Oil $49.45 vs $48.48
* ¥en 102.76 vs 102.60

* IG issuance totaled $20.4b Wednesday vs Tuesday’s $5.4b
* June now stands at $88.68b
* YTD IG issuance now $891.6b; YTD sans SAS $749b

Credit Pipeline

June 30th, 2016 5:41 am

Via Bloomberg:

2016-06-30 09:27:22.384 GMT

By Robert Elson
(Bloomberg) — Expected to price today:

* Turkiye Halk Bankasi AS (HALKBK) Baa3/na/BBB-, to price
$bench 144a-Reg-S 5Y, via managers Bank ABC/C/Emirates
NBD/GS/ HSBC/UniCredit; IPT 5.30% area


* Potash Corp Of Saskatchewan (POT) A3/BBB+, files automatic
debt shelf; last issued March 2015
* Transelec S.A. (TSELEC) Baa1/BBB/BBB, has mandated
C/JPM/Sco/Santan to arrange investor meetings June 30-July
6; potential 144a/Reg-S transaction may follow
* Monsanto (MON) A3/BBB+, still in talks with Bayer (BAYNGR)
* Microsoft (MSFT) Aaa/AAA, added to list of possible issuers,
says Morningstar; also notes PG, DOV as potentials
* Sumitomo Life (SUMILF) A3/BBB+, to hold an investor meeting
July 19, via BofAML; focus to be on hybrid capital
* It last priced a USD deal in 2013
* Korea Gas (KORGAS) Aa2/A+, has mandated C/CS/HSBC/JPM/SG/UBS
to arrange investor meetings June 27-30; 144a/Reg-S
transaction may follow
* KT Corp (KOREAT) Baa1/A-, schedules investor meetings June
16-24, via BNP/BAML/C/Nom, for possible USD 144a/Reg-S
* Dubai’s Emaar Properties (EMAAR) Ba1/BBB-, plans potential
USD bond sale
* USAID Ukraine (AID) heard to be in the works with possible
full faith & credit deal
* Kingdom of Saudi Arabia (SAUDI), weighing sale of $10b-$15b
after end of Ramadan in July
* May replicate Qatar’s $9b sale by issuing 5y, 10y, 30y
bonds, sources say
* Merck & Co (MRK) A1/AA; has not priced a new issue since
Feb. 2015, $1.5b matured May 18
* General Electric Company (GE) A3/AA-, has yet to issue YTD;
parent GE Co has $11.1b maturing this year, $2.3b matured in
* GE may be among high grade industrials to add leverage
in 2016, BI says in note


* Kookmin Bank (CITNAT) A1/A, mandated BAML/CA/HSBC/Miz to
arrange investor meetings June 13-17
* SMBC Aviation Capital (SMBCAC) mandated C/CA/JPM/RBC/SMBC
for investor calls June 8-9; a potential US$ 144a/Reg-S
offering may follow
* Raymond James (RJF) Baa2/BBB, had BAML/JPM/RayJ arrange
investor meetings June 13-15; last priced a new deal in 2012
* Omega Healthcare Investors (OHI) Baa3/BBB-, held investor
meeting, via BAML/JPM, June 14
* National Grid (NGGLN) Baa1/na, hired JPM to hold investor
meetings that ran June 1-3


* Shire (SHPLN) Baa3/BBB-, closed $18b Baxalta acquisition
loan; facilities to be refinanced through capital market
debt issuance
* Zimmer Biomet (ZBH) Baa3/BBB, to acquire LDR for ~$1b; co.
said it plans to issue $750m of sr unsecured notes after
deal completion
* Air Liquide (AIFP) A3/A-, held calls regarding Airgas
refinancing; planned to refinance the $12b loan backing the
deal via a combination of USD, EUR long-term bonds
* Bayer (BAYNGR) A3/A-, said to secure $63b financing, via
BAML/CS/GS/HSBC/JPM, for Monsanto (MON) A3/BBB+ bid; co.
likely will issue $20-$30b bonds to refinance part of the
bridge loan
* Great Plains Energy (GXP) Baa2/BBB+ to issue long-term
financing including equity, equity-linked securities and
debt prior to closing of Westar Energy (WR) A2/A deal; says
financing mix will allow it to maintain investment-grade
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Teva (TEVA) Baa1/BBB+; ~$40.5b Allergan generics buy
* $22b bridge; $5b TL commitment (Nov 18)
* Duke Energy (DUK) A3/A-; $4.9b Piedmont Natural buy
* $4.9b bridge (Nov 4)
* Anthem (ANTM) Baa2/A-; ~$50.4b Cigna buy
* $26.5b bridge (July 27)


* Tesla Motors (TSLA); automatic debt, common stk shelf (May
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+, files debt shelf; last issued USD
Nov. 2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)


* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* Ford Motor Credit (F) Baa2/BBB; may have ~$7b issuance this
yr (May 10)
* Wal-Mart (WMT) Aa2/AA; 2 maturities in April (April 1)

If You Know How Many You Own, Then You Don’t own Enough

June 30th, 2016 5:32 am

This WSJ article notes the outsized returns this quarter of the government bonds if many developed country. The article also points out the inverse relationship between price and yields if you happen to be reading about bonds for the first time.

Via WSJ:
By Mike Bird and
Christopher Whittall
June 29, 2016 7:33 p.m. ET

A corner of the market once sought after for steady returns has been this year’s jackpot investment: the government debt of advanced economies.

Sovereign debt rallied in the market turmoil that followed Britain’s vote to exit the European Union on Thursday, amid a rush for havens and expectations that central banks will ramp up stimulus measures.

Prices of Japanese, German, U.K. and other sovereign bonds have been surging for most of the year as interest rates turned negative and global economic uncertainty pushed investors to buy haven assets.

Then came Brexit, which roiled markets and added roughly an extra $1 trillion to the global total of negative-yielding debt, taking the total to nearly $11 trillion, according to strategists at Bank of America Merrill Lynch.

As yields fall, prices move higher, boosting returns.

For an investor in sterling, Japanese 40-year government bonds soared in price by 24.7% in the three trading days after Britain’s referendum vote, giving these securities a gain of 95.8% since the beginning of this year. In dollar terms, the price of these bonds has increased 77% this year. After the U.K vote, the yen soared against the pound and moved higher against the dollar, increasing the return in those currencies.

In the same period, the S&P 500 is up 1.3% and Europe’s Stoxx 600 is down 10.75%. Gold, one of the other main haven assets, is up a less impressive 25%.

Last December, Jim Leaviss bought long-dated Japanese government debt in what became a very lucrative investment.

Mr. Leaviss, head of retail fixed income at U.K. fund manager M&G Investments, said he should have invested “the whole fund in 30-year JGBs, with the benefit of hindsight—I didn’t have enough of them.”

In December, the 30-year securities offered a yield of about 1.25%. But that had fallen to roughly 0.3% by the time Mr. Leaviss sold the bonds last month.

The average yield on global 10-year government debt has nearly halved this year to 0.58%, pushing returns higher, according to the Barclays Global Treasury bond index.

Over the last two weeks, those returns have accelerated, with government bonds breaking records across the world’s advanced economies. For the first time ever, yields on the U.K.’s 10-year gilts fell below 1%, Germany’s 10-year bund yields dropped into negative territory and the yields on Swiss government bonds are negative all the way out to 30 years. Typically, the longer the maturity, the more an issuer must pay an investor for taking a bigger risk.

Meanwhile, U.S. 10-year Treasury yields fell to 1.461% Monday, the lowest level since July 2012. Yields have moved up in recent days but are still down 0.796 percentage point this year.

Long government bond funds have had stellar performance so far this year, according to data from Morningstar, with returns of 14.37%. In comparison, U.S. midcap value equity funds—the best-performing category of U.S. stock funds in 2016—have booked returns of 1.24%.

Much of the recent fall in yields came after the U.K. referendum. Investors fear that Britain’s departure from the EU not only removes Europe’s second-largest economy from the bloc, but that the precedent could lead to further fragmentation and a period of investment-sapping uncertainty around the world.

So investors are moving into these securities for safety and as they anticipate further central-bank action, in the form of interest-rate cuts and asset purchases, or quantitative easing. Interest-rate cuts will typically boost the price of outstanding securities because it means future issuance will likely offer a lower yield.

“The economy is likely to go through a slowdown,” said Mitul Patel, head of rates at Henderson Global Investors. “The potential for rate cuts and QE is likely to keep government bonds well supported,” Mr. Patel bought gilts on Friday after being wrong-footed by the Brexit vote.

With yields now so low, some investors are looking beyond the most popular haven government bonds like Japan’s to the debt of other countries.

“In most of our portfolios we were overweight Japan, for a long time, we liked Japanese 20-year,” said Bob Michele, head of global fixed income at J.P. Morgan Asset Management. Like their 40-year peers, yields on 20-year bonds have fallen to practically nothing, moving from 1% at the end of 2015 to as low as 0.04% this week.

Now, J.P. Morgan Asset Management has rotated into higher-yielding sovereigns, like Australia’s 10-year notes.

But some investors believe that not only has the rally in government bonds run its course, there are reasons to be cautious about holding them.

Today, with global interest rates so low and borrowers issuing ultralong debt, duration risk is shooting up. This means investors must wait longer until they get back the money they initially invested, and a small rise in interest rates could easily wipe out years of returns.

“The potential returns against the mark-to-market risk are not favorable,” said Andrew Bosomworth, managing director at Pacific Investment Management Co., one of the world’s biggest bond-fund managers.

Still, last week’s Brexit vote has other investors betting that yields in this market may continue to fall.

Potential fallout from Britain’s exit from the EU adds to a long list of concerns that had already hobbled returns in other markets, from corporate profitability to worries over Chinese economic growth.

“Lower bond yields are a logical response to the structural imbalances in the global economy,” including demographics, the distribution of wealth and heavy debt loads, said Steven Major, global head of fixed-income research at HSBC Holdings PLC. “In a way, the Brexit vote is a symptom of all of the above.”

Write to Mike Bird at and Christopher Whittall at

Headwinds for Auto Companies

June 30th, 2016 5:26 am

Via Bloomberg:
June 30, 2016 — 5:00 AM EDT

Prospects for another record year in U.S. auto sales are diminishing as car buyers already concerned about job and income growth get something new to worry about: Brexit-spooked financial markets.

“There certainly is a higher probability of having a slightly down year than there was a month ago,” Jeff Schuster, an analyst with research firm LMC Automotive, said in an interview. “It’s no longer just a leveling off — it’s a potential contraction in the second half of the year.”

Even before last week’s decision by U.K. voters to leave the European Union, RBC Capital Markets flipped from predicting 2016 would top last year’s record 17.5 million vehicles to expecting a 1 percent drop, while Bank of America Merrill Lynch lopped its estimate by a half-million vehicles. After the vote triggered a two-day global stock market rout — the kind of event that make car buyers less confident about their finances — LMC and consultant AlixPartners said they’re also rethinking forecasts.

“Confidence and wealth effect are immediate impacts,” said Mark Wakefield, a managing director at AlixPartners, which helped guide General Motors through its 2009 bankruptcy. “It’s a downside scenario.”

While analysts estimate that sales rose in June after a decline in May, the real question is whether growth has peaked. The year was already at a critical pivot point as prospects dim for a repeat of 2015, when a slow first half gave way to an ebullient final six months starting in July in which the annual sales rate often exceeded 18 million. One reason for the nervousness: U.S. employers added the fewest jobs in almost six years in May.

“If we don’t see that bump up in July” sales, LMC’s Schuster said, “that’s going to start us down that path of fairly regular misses on a monthly basis.”

Analysts surveyed by Bloomberg on average predict all major automakers except General Motors Co. will show year-over-year gains for June when they report monthly sales on Friday. The projected seasonally adjusted annual selling rate of 17.2 million would exceed the 17 million of June 2015 but trail May’s 17.5 million pace.

Honda Motor Co. is expected to report the biggest sales gain, at 9.4 percent. Kia Motors Corp. and its affiliate Hyundai Motor Co., which scored well in the J.D. Power new-car quality study released this month, are forecast to rise 8.7 percent. Also predicted are increases of 8.9 percent at Fiat Chrysler Automobiles NV and 4.9 percent at Ford Motor Co. GM’s sales may fall 0.7 percent, according to the average of eight analysts.

Alan Batey, GM’s president for North America, said the company is purposely pulling back on low-profit sales to rental fleets and that sales to individuals should rise in the second half as new models like the Chevrolet Malibu and Cadillac XT5 are introduced.
Automaker Shares

To be sure, an annual sales rate above 17 million still represents a robust auto market, which is why GM and Ford have each posted record earnings over the past 18 months. Yet investors have turned away from auto stocks on the possibility that U.S. vehicle sales are at a plateau, profits at a peak and the best times are in the rearview mirror.

Following Brexit, automakers and parts suppliers experienced the biggest intraday declines since last summer amid concern on European production and exposure. GM shares fell 17 percent this year through yesterday, while Ford was down 11 percent. Each dropped more than than 5 percent since the Brexit vote, exceeding the Standard & Poor’s 500’s 2 percent drop.

“Investors were already concerned about U.S. peak demand,” RBC Capital analyst Joseph Spak wrote on June 29, lowering 2016 earnings forecasts for Ford, GM and most major suppliers. “Europe, which had been stronger than expected, is now a leg that has been kicked off the stool.”

Consumers may stay on the sidelines until the highly charged and unpredictable U.S. presidential election plays out. Stump-speech rhetoric — specifically presumptive Republican nominee Donald Trump’s plan to wall off North American free-trade partner Mexico — is already having a chilling effect on consumer confidence, said Kyle Handley, assistant professor of business economics and public policy at the University of Michigan.

“You don’t actually have to change trade policies to have some real effect on economic activity right now,” Handley said. “If Trump is actually elected and these things seem even more likely, they could slow down economic activity and investment quite a lot – whether or not they come to pass.”

There may be one silver lining from Brexit for U.S. auto sales: It decreased the likelihood of the Fed raising interest rates in the near future. Schuster said while the momentary reprieve might be a short-term benefit, there was “nothing really compelling out there to bring a buyer in who wasn’t looking for a vehicle” as automakers show restraint in offering big discounts.

Those who do come into the showroom might end up driving home in a used model. Used-car prices are dropping as 800,000 more models are coming back to market this year than last. Those late-model, lower-priced cars flooding dealer lots are likely to siphon off some new-car sales, Wakefield said.

That’s another big reason he’s beginning to wonder whether U.S. automotive sales actually peaked last year.

“It can’t get that much better than it is now,” Wakefield said. “But a whole bunch of things can get worse.”

Soros on Brexit

June 30th, 2016 5:23 am

Via Bloomberg:

Britain’s decision to leave the European Union has “unleashed” a crisis in financial markets similar to the global financial crisis of 2007 and 2008, George Soros told the European Parliament in Brussels on Thursday.

“This has been unfolding in slow motion, but Brexit will accelerate it. It is likely to reinforce the deflationary trends that were already prevalent,” the billionaire investor said.

Soros rose to fame as the money manager who broke the Bank of England in 1992, netting a profit of $1 billion with a wager that the U.K. would be forced to devalue the pound and pull it from the European Exchange Rate Mechanism. Soros has warned that a hard landing in China is “practically unavoidable,” arguing that its debt-fueled economy resembles the U.S. at the onset of the financial crisis.

Continental Europe’s banking system hasn’t recovered from the financial crisis and will now be “severely tested.,” Soros said. “We know what needs to be done. Unfortunately, political and ideological disagreements within the euro zone have stood in the way” of using the European Stability Mechanism as a backstop, he said.

The investor warned before the U.K. referendum that the pound may slump more than 20 percent against the dollar if Britain voted to leave. Britain’s currency plunged to the lowest in 31 years after the result.

The decision meant “the hypothetical became very real,” Soros said. “Sterling plunged, Scotland threatened to break away, and some of the working people who supported the ‘Leave’ campaign have started to realize the bleak future that both the country and they personally face. Even the champions of Leave are retracting their dishonest pre-referendum claims about Brexit.”

The euro region has lagged behind other regions in the global recovery, following the last financial crisis, “because of restrictive fiscal policies; now it has to contend with an impending slowdown,” Soros said. “The orthodoxy of German policy makers stands in the way of the only effective response: having a euro-zone budget that could adopt counter-cyclical policies.”

China to Tolerate Cheaper Yuan

June 30th, 2016 5:20 am

Via Reuters:

Markets | Thu Jun 30, 2016 4:45am EDT

Exclusive: China to tolerate weaker yuan, wary of trade partners’ reaction – sources

China’s central bank is willing to let the yuan fall to 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5 percent, policy sources said.

The yuan is already trading at its lowest level in more than five years, so the central bank will aim to ensure a gradual decline for fear of triggering the sort of capital outflows that shook the economy earlier this year and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions.

Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would direct his treasury secretary to label China a currency manipulator if elected in November.

A surprise devaluation of the yuan last August sent global markets into a spin on worries the world’s second-biggest economy was in worst shape than Beijing had let on, prompting massive capital outflows as investors sought safe havens overseas.

“The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” said a government economist, who requested anonymity due to the sensitivity of the matter.

“The Brexit vote was a big shock. The market volatility may last for some time.”

The yuan has dropped to the new lows following Britain’s vote to leave the European Union and so far the central bank has stood aside from intervening, suggesting it is happy with the currency’s depreciation.

Other emerging market currencies have also fallen, but the yuan is the weakest major Asian currency against the dollar this year.

The yuan CNY=CFXS hovered near 6.64 per dollar on Thursday, just off the 5-1/2-year intraday lows and bringing its fall so far this year to about 2.3 percent.

The PBOC did not respond to a request for comment.


Currency dealers said the strength of the dollar and the weakness in economic growth, which hit a 25-year low in 2015, justified a decline in the yuan.

But investors and trading partners will be wary of any significant decline after August’s devaluation and a sharp decline in the currency over a matter of days in January that analysts said was engineered by the central bank.

In the past decade, China has also faced criticism from Western lawmakers who say it held back the appreciation of the yuan.

Earlier this month, U.S. Treasury Secretary Jack Lew said it would be “problematic” if the yuan only went down over time and Trump has said he would take a hard line on trade disputes with China if elected.

Labelling China a currency manipulator “should’ve been done a long time ago,” he said on Wednesday.

China’s premier, Li Keqiang, has repeatedly said China has no intention to stimulate exports via a competitive currency devaluation. The Foreign Ministry said on Wednesday the exchange rate was not the reason for unbalanced trade with the United States, which runs a goods and services trade deficit with China.

However, the sources acknowledged the diplomatic risks of a steep fall in the yuan.

“The pressure from the United States could rise if China allows sharp depreciation,” said a government source.

China has the biggest global exports market share of any country since the United States in 1968, so the yuan’s exchange rate acts as a bellwether for other exporting countries and is a cause of concern for some.

“We are concerned at how quickly the yuan is falling and in turn how the won seems to be tracking its movements,” said a finance ministry official in South Korea, a major exporter that competes with China in textiles, electronics and petrochemicals among other sectors.

However, a person familiar with Japan’s currency diplomacy, was less concerned, saying the yuan’s decline didn’t seem out of line considering the dollar’s strength.

“I don’t think Japan has much to complain about,” this official said. Although Japan rivals China in exports including electronics and heavy machinery Tokyo is struggling with its own currency dilemma of how to contain a sharp rise in the yen following the Brexit vote last week.


“We should gradually let market forces play a bigger role. The market believes that the yuan is under pressure, so our foreign exchange policy should follow this trend,” said a researcher with the Commerce Ministry.

“China needs to safeguard its economic growth and trade but also make sure we don’t create competitive devaluation.”

Julian Evans-Pritchard, China economist at Capital Economics, said in a note that a sharp fall “could set off a renewed bout of fears over renminbi depreciation and a pick-up in capital outflows.” The yuan is also known as the renminbi.

But he said the central bank would want to avoid “panic” so was likely to intervene to stabilize the currency if need be.

The PBOC has been trying to reform the way it manages the yuan by making it more market-driven and transparent, apparently having leant lessons from policy missteps in the past, including the criticism of its August devaluation.

The PBOC sets the yuan’s daily mid-point versus the dollar based on the previous day’s closing price, taking into account changes in major currencies, analysts and officials said.

This year, the PBOC has been guiding the yuan lower by pegging the yuan to the dollar when the U.S. currency weakens and pegging the yuan to a basket of currencies when the dollar rises, they said.

The currency regime gives the central bank more room to allow two-way swings in the yuan versus the dollar, deterring one-way bets on the currency.

The CFETS RMB Index, a trade-weighted exchange rate index that was unveiled by the central bank in December, fell 5.6 pct between the end of 2015 and June 24 of this year, although the central bank has pledged to keep the yuan basically stable against the basket.

(Reporting by Kevin Yao in BEIJING; Nate Taplin and Lu Jianxin in SHANGHAI; Leika Kihara in TOKYO and Christine Kim in SEOUL; Editing by Neil Fullick.)

Consumer Spending

June 29th, 2016 9:19 am

Via TDSecurities:

US: Consumer Spending Back on Track – For Now

·         Personal spending rose at a very respectable 0.4% m/m pace in May, coming on the heels of the upwardly revised 1.1% m/m surge the month before.

·         The inflation picture, however, remained relatively benign with core inflation unchanged at 1.6% y/y.

·         The strong spending performance puts the current tracking for Q2 GDP north of 3.0%, though the eruption of global anxiety could act as a brake on spending going forward.

·         This will have no implication for Fed policy.

Personal consumption expenditures rose at a very robust 0.4% m/m pace in May, which was broadly in line with the consensus expectation. The increase in spending activity, however, comes on the heels of the upwardly revised 1.1% m/m surge the month before, suggesting a strong rebound in spending momentum. Real spending was also quite strong, gaining a further 0.3% m/m following an upwardly revised 0.8% m/m advance the month before, signaling a fairly buoyant 5.0% performance in personal consumption expenditures this quarter. From a GDP accounting perspective, this spending report suggests a fairly strong rebound in economic growth momentum, with GDP growth expected to surge to 3.0% or better.

With income rising at a relatively modest pace (as personal disposable income rose 0.2% m/m), the rise in spending was underpinned by a further drawdown in savings, pushing the saving rate down to 5.3% m/m from 5.4%. Real disposable income advanced at a slightly more modest 0.1% m/m pace, marking the slowest pace of advanced in this indicator since March last year. On the inflation front, the story was somewhat less encouraging, with the core PCE index rising at a fairly subdued 0.2% m/m pace (up 0.162% at 3 decimal places), keeping the annual pace of core inflation unchanged at 1.6% y/y. The headline PCE index also rose at a 0.2% m/m pace, though the annual pace of headline PCE inflation decelerated to 0.9% y/y from 1.1% y/y.

The overall tone of this report was unambiguously positive, and the upbeat spending performance suggests that personal consumption activity might be back on track following the missteps earlier this year, and it points to a very strong GDP growth rebound this quarter. Nevertheless, with the confidence-sapping eruption in global financial market activity continuing to play out, we expect spending momentum to slow markedly in the coming months adding a layer of uncertainty to the US economic outlook going forward. In that regard, this report will be seen by the Fed as offering a very encouraging rear-view look on US economic performance, but providing no guidance on what to expect going forward. We continue to expect the Fed to remain on hold until mid-2017.

Near Term Course of FOMC Policy

June 29th, 2016 7:01 am

Via Bloomberg:

Forget December. Forget Next Year. Fed Done Hiking Until 2018
Liz McCormick
Matthew Boesler
June 28, 2016 — 7:00 PM EDT
Updated on June 29, 2016 — 12:42 AM EDT


Circle Jan. 31, 2018, on the calendar. That’s the soonest the Federal Reserve hikes next.


At least if money market derivatives are to be believed.

Traders, who have consistently been better at projecting the path of interest rates than the Fed itself, are now pricing in a greater probability that policy makers will cut rates in upcoming meetings than raise them. They don’t assign more than a 50 percent chance of an increase until the beginning of 2018, and don’t price in a full rate hike until the final quarter of the year.

The sea change in outlook for central bank policy comes after global equities and commodities plunged while government bonds and the dollar surged following Britain’s vote to quit the European Union. That’s tightened financial conditions in the world’s largest economy, driven down inflation expectations and dimmed the outlook for global growth.

“The market is pricing in a non-trivial probability of a Fed rate cut over the next couple of months,” said Aaron Kohli, a fixed-income strategist in New York at BMO Capital Markets, one of 23 primary dealers that trade with the central bank. “The Fed is really boxed in now, so the market doesn’t even begin to price in any real chance of hikes until mid-2017.”

For more on the outlook for central bank interest rate changes, click here.

The market’s view on the path of Fed policy is hardly set in stone. Rate hike expectations were upended in August and February amid similar bouts of market volatility.

Yet implied yields on federal funds futures, which settle upon expiration at the average effective fed-funds rate during the contract month, are now pricing in a real possibility of a rate cut by year end. The effective rate was 0.41 percent Monday, and is foreseen by traders averaging 0.35 percent in December.

Options on eurodollar futures, the world’s most actively traded money-market derivative, imply a 25 percent chance of a rate cut by September. That’s a reversal from just two months ago, when prices signaled that a rate increase by year end was a virtual certainty.
1998 Redux

If the market’s dour outlook were to pan out, it would be reminiscent of 1998, when an Alan Greenspan-led Fed began cutting rates in September in response to market turmoil, before resuming hikes in June.

“The idea that they are more likely to cut than tighten in the next month or two I think makes sense given the backdrop, but I think as you go out, it starts shifting back the other way,” said Jim O’Sullivan, the Valhalla, New York-based chief U.S. economist at High Frequency Economics Ltd. “Obviously there is uncertainty about how much fallout there is from Brexit — are we out of the woods on that yet, or do the markets continue to tumble?”


Fed Chair Janet Yellen canceled plans to attend the European Central Bank’s forum on central banking in Sintra, Portugal, this week to return to Washington, a sign U.S. policy makers are on high alert amid financial market turmoil following the U.K.’s decision to leave the EU. The Fed said June 24 that it was prepared to provide dollar liquidity through its existing swap lines with central banks to avert undue stress on global funding markets.

Treasury yields have fallen in part due to safe-haven demand for U.S. assets. Benchmark 10-year Treasuries pay just 1.47 percent, near the all-time low of 1.379 percent reached in July 2012.

“You are not going to get any activity out of the Fed right now,” said James Camp, director of fixed-income at Eagle Asset Management, with about $30 billion in St. Petersburg, Florida. “They do not want financial conditions to tighten any further and they certainly don’t want to continue this dollar stampede.”

Don’t Sweat Higher Rates

June 29th, 2016 6:57 am

Via Barron’s:

Why Bond Investors Don’t Have to Fear Higher Rates

Generally, the greater yield earned in a rising-rate environment offsets the fall in bond prices those rates cause.

June 29, 2016 6:12 a.m. ET


Are you avoiding bonds because of the near certainty that interest rates will be higher in the future?

Welcome to the club. Since higher rates inevitably lead to lower bond prices, fear of what higher rates would do to our bond holdings is nearly universal.

Believe it or not, however, that fear may be misplaced. That’s not because higher rates don’t lead to lower bond prices; they inevitably do. Instead, the reason not to be overly afraid of higher rates is because of the way in which most of us invest in bonds.

Most individual investors have their fixed-income allocations invested in baskets of bonds that maintain more or less constant maturities. Such baskets are remarkably resilient in the face of higher rates.

Let’s start by reviewing the period from 1966 through 1981, arguably the worst period in U.S. history in which to own bonds. Over those 16 years, the yield on the 5-year U.S. Treasury Note nearly tripled, from 4.7% to 13.6%. Nevertheless, according to Ibbotson Associates, a division of Morningstar, a U.S. Treasury portfolio that maintained a constant maturity of 5 years produced a 5.8% annualized gain over this period.

Better yet, this portfolio of 5-year Treasuries incurred minimal risk along the way. In only one of the 16 calendar years did it produce a loss, for example. And its volatility, as measured by the standard deviation of its yearly returns, was half that of the S&P 500’s (ticker: SPY ) —and 66% lower than that of small cap stocks.

Why wasn’t this bond portfolio decimated by the dramatically higher rates over this period? The answer lies in the higher yields the portfolio was able to earn when it reinvested the proceeds of maturing bonds. Those higher yields in large part offset the loss of principal.

Nor was this result a fluke, according to a study last year in the Financial Analysts Journal that analyzed the performance of constant-maturity bond portfolios when rates rise. The authors—Martin Leibowitz and Anthony Bova, managing director and executive director at Morgan Stanley, respectively, and Stanley Kogelman, a principal at New York-based investment-advisory firm Advanced Portfolio Management—found that, as a general rule, the greater yield earned during a rising-rate environment offsets the declining bond prices those rates cause.

They therefore concluded that investors in constant-maturity bond portfolios “need not be unduly worried about the impact of higher rates on their multiyear returns.”

The implication of this finding: The total return of a constant-maturity bond portfolio will be equal to, or very close to, its initial yield. That is a sobering prospect in today’s low-interest-rate environment, of course. The 5-year Treasury currently yields just 1.25%, for example. Regardless of whether rates go up, down or stay the same, therefore, that is the best guess of what your return will be by investing in 5-year Treasuries over the coming years.

That may very well be a good reason to avoid them, of course. As judged by the breakeven inflation rate, the bond market is collectively betting that inflation will average 1.36% annually over the next 5 years. If that turns out to be the case, a bond portfolio with a constant maturity of 5 years will lose purchasing power at an annual rate of 0.11%.

Note carefully, however, that this reason to avoid bonds has nothing to do with the probability of higher interest rates in the future. If low current yields are your reason to avoid bonds, you should just as much be avoiding them if you were convinced that rates would to stay the same in coming years—or even decline.

In any case, you should not conclude that the stock market is a particularly good bet just because nominal interest rates are so low and inflation-adjusted rates are even lower. Over the last 50 years, for example, there has been just a 2.7 percentage point annual spread between the S&P 500’s annual total return and that of intermediate-term bonds. If we were to extrapolate that equity premium into the future, that would mean that the stock market in coming years would produce a 4% annualized total return.

You may very well believe that isn’t high enough to compensate for the significantly greater volatility and risk that equities produce.

Would gold be a better alternative if you are turned off by bonds’ low yields and worried that equities won’t perform well enough to justify their greater risk? Claude Erb, a former fixed-income and commodities manager at mutual-fund firm TCW Group, thinks not. In an interview, he pointed out that gold over the past five decades has been far more volatile than the S&P 500—and far, far more volatile than a constant-maturity portfolio of 5-year Treasuries.

The Ibbotson data paint the same picture. Since 1970, when gold began to trade freely, it’s been 62% more volatile than the S&P 500—and more than three times more volatile than 5-year Treasuries. Furthermore, there has not been a big difference in the extent to which intermediate-term bonds and gold have been correlated with the stock market—which means they have largely similar diversification potentials.

As Erb argues, therefore, the net effect of substituting gold for bonds as a diversifier for your equity portfolio will be to increase its volatility.

The bottom line? The unfortunate reality of our low-interest-rate world is that expected returns going forward are low. But a wholesale dumping of bonds is probably not a good response to that reality.

Could Sterling Lose Reserve Currency Status?

June 29th, 2016 6:53 am

Via WSJ:
By Mike Bird
Updated June 28, 2016 8:09 p.m. ET

Britain’s vote to leave the European Union knocked sterling to the lowest in decades and could now erase a distinction that is centuries-old: its status as a reserve currency.

In the two sessions after last Thursday’s Brexit vote, the pound fell 11% against the U.S. dollar, its steepest two-day decline in nearly 50 years.

On Tuesday, the pound snapped its two-session losing streak, rising 0.9% against the dollar to $1.3343 in late New York trading. But investors expect the U.K. currency to continue its decline given the political and economic uncertainty in the U.K.

Some analysts ask whether the long-term fallout for the pound could be more severe than its latest tumble, threatening its long-held position as a reserve currency. Whether sterling can hold that status is one of the many unanswered questions posed by the U.K.’s historic referendum.

The dollar, euro, yen, yuan and pound are the usual constituents of the International Monetary Fund’s reserve-currency basket. Central banks and governments buy assets denominated in reserve currencies to give them a pool of liquid securities that, in an emergency, can be sold to prop up the value of their own foreign exchange.

The designation is also a stamp of stability, making reserve currencies more attractive across the investment world.

So if the pound loses that status, it isn’t just about Britain’s international prestige. It could end up raising the cost of capital for local businesses as investors chose to hold fewer U.K. assets.

“As any particular economy’s importance in international trade wanes, so does the willingness of the rest of the world to hold their currencies as a store of value,” said Frank Gill, Standard & Poor’s senior director for sovereign ratings.

On Monday, the ratings company removed the U.K.’s triple-A credit rating, the highest available, cutting it two notches to double-A after warning that demand for the currency among international governments and central banks could dwindle.

“What people look for is something that’s an insurance policy, an asset that holds its value in times of trouble,” said Avinash Persaud, senior fellow at the Peterson Institute for International Economics. “You don’t want uncertain reserve assets.”

If fewer global investors want to buy British debt, that could push up the cost of financing by 0.25 percentage point in the country, according to S&P analysis. For a country such as the U.K., with extremely high debt levels, such a change in the cost of capital would be equivalent to 1% of annual gross domestic product, the company said.

With bonds maturing and being bought back by companies, the universe of sterling corporate bonds already has started to contract.

The pound is a much smaller part of the global system of foreign reserves than it once was. It made up just less than 5% of reserves at the end of 2015, according to the IMF. That is well behind the dollar at 64.1% and the euro at 19.9%, but ahead of the Japanese yen.

Sterling ceased to be the world’s pre-eminent trading and financial currency in the first half of the 20th century. The dollar became dominant by the 1950s. In the 1960s, sterling still made up 30% of global reserves. Then, in 1967, the British government devalued its currency by 14% against the dollar and sterling slid.

Given the pound’s diminished importance, some analysts say the reserve-currency designation doesn’t matter as much. “At the margin, the number of gilts held by foreign central banks will decline,” said Kit Juckes, global head of foreign-exchange strategy at Société Générale SA . “But sterling isn’t much of a reserve currency.”

But others say the pound’s attractiveness abroad is particularly important for the U.K. because of its record current-account deficit. The U.K. imports more goods and services than it exports, and sends more investment income overseas than it receives from abroad. That means the economy relies on the willingness of investors in the rest of the world to finance the gap, requiring constant demand for sterling-denominated assets. The attractiveness of such assets already has soured in the eyes of some investors.

Our safe-havens status is being diminished,” said Mark Dowding, senior portfolio manager at BlueBay Asset Management. “Any international investor is going to be looking at the U.K. and seeing a place with a very uncertain future. That’s going to deter investment.”

—Georgi Kantchev and Christopher Whittall contributed to this article.

Write to Mike Bird at