Very Long Bonds

December 5th, 2016 2:51 pm

Via Blomberg:

Treasury May Extend Maturity Before Ultra Bond Debut: Wrightson
2016-12-05 19:30:14.718 GMT

By Alexandra Harris
(Bloomberg) — Treasury can increase 10Y, 30Y auctions
while it works out the specifics of 50Y or 70Y offerings to get
a head start on extending the average maturity of its debt,
Wrightson ICAP economist Lou Crandall says in note.

* Would also allow the market to adjust gradually to increase
in longer-duration supply
* More concrete discussions about tenor, size, timing of
ultra-long offerings “will take several months at least”
* Would be surprising if Treasury were ready to offer details
before 2Q; may decide to delay launch until 3Q to give
institutional investors time to update asset allocation
* Considerations for ultra-long bond issue:
* Auction vs syndicated offerings: Other countries have
used syndication; may be more appropriate for U.S.;
Treasury may need to go through public review process to
reestablish syndication system
* Original-issue zero-coupon bonds: STRIPS investors may
be among “major sources” of demand for ultra-long
bond; would be more efficient way to meet supply
* Calendar considerations: Expect no more than 2 CUSIPs
per year, possibly just one.

No Wheelbarrows Needed Here

December 5th, 2016 7:33 am

An excerpt from the morning note of Chris Low at FTN Financial:

Venezuela, whose bold experiment with Bolivaran Socialism has resulted in terrible shortages and such rampant inflation that people have ditched wallets in favor of bags of cash and storekeepers—when they have anything to sell—have taken to weighing notes rather than counting them, will issue new currency with denominations of 500, 1,000, 2,000, 5,000, 10,000, and 20,000. They probably should add another couple of zeroes, but President Nicolas Maduro, is confident new reforms will bring the economy back from the brink next year. We certainly hope they work out better than his last reforms.

Big Dip Down for Atlanta Fed 4th GDP Forecast

November 30th, 2016 7:50 pm

Via FRBAtlanta:

Latest forecast: 2.4 percent — November 30, 2016

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2016 is 2.4 percent on November 30, down from 3.6 percent on November 23. The forecast of the combined contributions of real net exports and real inventory investment to fourth-quarter growth fell from 0.61 percentage points to 0.18 percentage points after last Friday’s advance economic indicators report from the U.S. Census Bureau. The forecast of fourth-quarter real consumer spending growth fell from 3.0 percent to 2.2 percent after this morning’s personal income and outlays release from the U.S. Bureau of Economic Analysis.

GSEs and Incoming Trump Administration

November 30th, 2016 6:45 pm

As an aside in another life circa 1990 I worked with Tim Bitsberger. He traded Long Bonds when I traded short coupon Treasuries. I guess I should have kept his name active in the rolex. (No smart phone as I am a modern Luddite!)


Via TDSecurities:

§  The GSEs have been in the news recently. Their stock prices have spiked since the election and rose some more today on speculation of ending the conservatorships. However, we believe that government involvement is likely in any new GSE model to prevent mortgage rates from rising too much and to fulfil affordable housing goals. We would therefore look to buy any widening in debt spreads due to these headlines.
§  Today Trump’s pick for Treasury secretary (Steven Mnuchin) expressed a desire to end government ownership of Fannie and Freddie “reasonably fast.” The FHFA landing team is headed by Timothy Bitsberger and the FTC/FSOC landing team is headed by Alex Pollock. Both have a GSE background, hinting at increased focus on reform efforts. Nevertheless, the potential appointment of Congressman Jeb Hensarling to head FHFA could trigger investor nervousness as he has previously been a vocal opponent of the GSEs.
§  While the odds of wholesale GSE reform in 2017 remain slim as Congressional focus remains on tax cuts and infrastructure spending, we see incremental steps toward reform. We see the possibility that Fannie and Freddie are allowed to gradually increase their capital buffers (which are set to shrink to just $600mn in 2017 and zero by 2018) by retaining some earnings.
§  A number of factors could help drive reform ahead of the rapidly approaching wind-down end date, including declining GSE capital buffers and the CBO’s release of an estimate on the cost of a potential recapitalization. Similarly, there is reason to believe that the private securitization market could begin to thaw if the Dodd Frank rules around risk retention could change in the new administration. 

Ross and Mnuchin Comments

November 30th, 2016 1:43 pm

Via Stephen Stanley at Amherst Pierpont Securities:

The Treasury market reacted this morning to a very cursory comment by Treasury Secretary nominee Steven Mnuchin that the average maturity of the debt should be extended since interest rates are likely to be low for a few more years.  This comment seems like more of an excuse than a reason for the market’s move to me, but I thought it might be helpful to summarize and unpack some of the comments that Mnuchin and the Commerce Secretary nominee Wilbur Ross made on their morning TV circuit, as they constitute the most detailed remarks we have on a number of economic issues from the incoming Administration since the election.

First, Mnuchin made clear that the Trump Administration’s top two priorities will be tax reform and regulatory relief.  He gave a few key points on Trump’s tax plan.  It will include a “big” middle class tax cut, but high-income households would come out roughly neutral, trading lower marginal rates for fewer deductions.  The broad concept is to simplify the code by collapsing from 7 brackets to 3 and broadening the tax base (i.e. fewer deductions).  Mnuchin was actually more enthusiastic about reforming the corporate tax code.  He was pretty firm on a 15% top marginal rate (down from 35% now), and insisted that corporate tax reform would lead to a significant boost to jobs and growth.  The goal, as reported elsewhere, is to put out an overall tax plan that is close to revenue-neutral after accounting for the positive impact of higher growth on tax receipts (i.e. “dynamic scoring”).  Democrats will certainly reprise the old “giveaways for the rich/trickle-down Economics” critique, but it sounds like the tax plan will be sold as follows: the individual tax code reform will mostly benefit the middle class directly while boosting growth by lowering marginal rates and simplifying the code (which would reduce the time and resources wasted on tax compliance – do not underestimate the grass-roots political appeal of simplification if it is sold properly), while reforming the corporate tax code will be portrayed as a massive stimulus for the economy (while Democrats will portray it as a giveaway to robber barons).

There is no doubt that the incoming Administration will take a starkly different tone with how it interacts with business.  We can generally expect a much friendlier and collaborative approach.  Mnuchin said that the Administration will not always agree with business, but it will always listen.  On Dodd-Frank, Mnuchin emphasized, falling back on his banking experience, that some of the new framework might be kept, but the key theme will be getting rid of anything that is preventing banks from lending.  Again, Mnuchin and Ross may be viewed as Wall Street financiers, but the tone I heard was much more of a Main Street vibe.  Mnuchin also specifically talked about making financial regulation simpler, citing the Volcker Rule as an example of a policy that is far too complicated.  I could envision a regime where capital standards are set quite high and then regulators are told to leave the banks alone as long as they are holding sufficient capital.

On trade, Ross took the lead.  He emphasized that the Administration is not going to be protectionist.  He noted that there is “smart trade” and “stupid trade” and the U.S. has been doing too much of the latter.  He noted that big regional trade deals are bad, because each counterparty “picks you apart” in turn and by the end of the process, you have given away too much.  He and the Administration will instead try to rely more on bilateral trade deals.  He also specifically mentioned, in the context of the Carrier announcement, that the most important reason that U.S. firms move production to Mexico is that it has better trade deals with many of our trading partners than we do and thus it is cheaper to ship goods into, say, Europe from Mexico than it is from the U.S.   He aims to change this.  More generally, a Trump Administration intends to use the immense leverage of the biggest economy in the world to pry open foreign markets.  There may be threats of tariffs, etc., as there were during the campaign, but Ross claimed that tariffs would be a last resort and more of a negotiating tool.

Mnuchin was asked on CNBC about the Fed.  He gave what I viewed as a polite “good job” assessment of Chair Yellen, but not a hearty endorsement.  Ross seemed polite but even more tepid in his support for Yellen.  Mnuchin said that filling the two open Fed Board spots will be a high priority.  Sounds like Trump intends to leave Yellen alone until her term ends but replace her at that point.

On Treasury debt, as noted above, Mnuchin suggested that the Treasury may try to borrow more in the long end.  He was asked whether the Treasury would consider a 50-year and/or 100-year bond, and he said something to the effect that he would look at everything.  For the Treasury market to respond to this was in my view an overreaction.  This issue is a much more micro question.  Mnuchin (and Trump and Ross and the rest of Trump’s policy team) have probably largely made up their minds about where they want to go with taxes, regulation, trade, etc.  But an issue like Treasury debt management, with all of its technicalities, will be largely decided down the chain of command from Mnuchin.  My guess is that Mnuchin has not had a detailed briefing from the current debt management team and thus has only a cursory knowledge of the pros and cons of issuing, say, a 50-year Treasury bond.  To date, Treasury officials have shown no appetite to bring such an instrument, mainly because demand would be limited, which means a) that it would be another esoteric, illiquid, non-benchmark product (the Treasury already has 2 of those in TIPS and FRNs) and thus b) that it would not be large enough to move the needle in terms of borrowing costs, average maturity, etc.  That is not to say that Treasury may not shift course once the undersecretaries and assistant undersecretaries are in place and have had an opportunity to properly study the question, but Mnuchin’s comments today should not be viewed as a signal of an imminent change.

I want to end on a topic that, in contrast, has gotten far less attention than it deserves.  Mnuchin noted on Fox Business this morning that Fannie Mae and Freddie Mac should leave government control and that the incoming Administration “will get it done reasonably fast.”  He noted that government ownership of Fannie and Freddie displaces private mortgage lending.  He suggested that the GSEs should be restructured and privatized, not eliminated (as some Republicans in Congress have proposed).  In any case, I believe that there is a very real chance that the structure of the residential mortgage market will change noticeably over the next few years.  Mnuchin is uniquely knowledgeable to have a say in this discussion, as he headed a consortium that bought IndyMac from the government, restructured it, and sold it off as a profitable enterprise.  So he knows a little something about the mortgage market.

I have a much larger and more comprehensive piece in mind going through the major elements of the Administration’s policy proposals and how they would change the economic (and perhaps Fed policy) outlook.  If all goes well, I hope to be able to pull that together over the next few weeks.

Convexity Crowd Crazed

November 30th, 2016 10:04 am

Via TDSecurites:

§  Given the 50bp move higher in rates over the last few weeks, we analyze MBS convexity risks. Even though the structure of the mortgage market has changed significantly from the pre-crisis period due to Fed ownership and GSE conservatorship, we think that there are still some holders of MBS convexity risk that would need to hedge the duration extension of their portfolios due to the sharp move higher in rates.

§  We estimate paying needs of $46bn 10yr equivalents due to the 50bp rise in rates since the election. The peak of MBS convexity is about 50bp higher from here, and we see paying needs of $10bn in 10yr equivalents for every 10bp rise in rates until the primary mortgage rate gets to 4.5%. Any further increase in rates above 4.5% should result in less convexity selling.

§  Convexity paying should argue for higher rates led by the belly of the curve, wider 5-10yr swap spreads, higher levels of implied vol and richening of the payer skew. We suspect some of this flow has gone through, even though the move in swap spreads looks counterintuitive. Even though convexity paying should have move spreads wider, the flow was more than offset by fears of higher deficits (which should tighten spreads).


November 29th, 2016 6:42 am

Via Marc Chandler at Brown Brothers Harriman:

Dollar Comes Back Mostly Firmer, but Focus is Elsewhere

  • The dollar is firmer but confined to yesterday’s ranges
  • The focus today is on OPEC, which is struggling to reach an agreement and South Korea, where the President is offering to resign to avoid impeachment
  • Despite fear of the consequences of this weekend’s Italian referendum, Italian stocks, including banks, and bonds are outperforming today

The dollar is mostly firmer, but the major currencies are within yesterday’s ranges.  What had looked like a possible deeper dollar correction is turning into a consolidative phase that may be sufficient to alleviate the over-extended technical condition. Equities are lower. Of note, the Topix  12-day advance was snapped with a minor loss of less than 0.1%.   The MSCI Asia-Pacific Index is off 0.25% to snap a three-day advance.  The Dow Jones Stoxx 600 is off fractionally to extend yesterday’s decline.    The MSCI Emerging Market equity index is lower by 0.25%, after initially building on yesterday’s advance to reach a two-week high.   The South African rand is the weakest of majors, while the Chinese yuan, which was fixed higher by the PBOC for the second session, is the strongest of the emerging market currencies, gaining almost 0.3%.   European bonds firmer, led by a 6 bp decline in Italy’s 10-year yield.  French bonds are also outperforming German bunds, narrowing the premium from a two-year peak.  The US 10-year yield is firm near 2.33%.  

The US dollar correctly lowered yesterday, but most of the selling was over by the end of the Asian session, and the greenback steadied in Europe and North America.  The dollar is firm against the euro and yen but within yesterday’s broad trading ranges.  The Australian and Canadian dollar’s gains from yesterday are being pared.  

Sterling is an exception.  It is firmer, following news that mortgage approvals rose more than expected in October to stand at the highest since March, while household credit increased GBP1.6 bln.   The Bank of England noted that the effective interest rate on new mortgages fell 11 bp in October to 2.16%, the lowest since at least 2004.  However, even with the upticks sterling has been confined to yesterday’s ranges.  

German states have reported preliminary November CPI figures, and national estimate will be reported shortly.  The EU-harmonized measure is expected to rise 0.1% to lift the year-over-year rate to 0.8%.  It would match the strongest pace since June 2014.  It finished last year at 0.2%.  France reported Q3 GDP rose 0.2%, in line with Q2.  However, Q4 began on a firmer note, with October consumer spending jumping 0.9%, threefold more than the Bloomberg median, tainted a little by the downward revision to the September series to -0.4% from -0.2%.    

Sweden also reported Q3 GDP.  The 0.5% expansion matched expectations, though the year-over-year rate slowed to 2.8% from a revised 3.6%.  Exports rose 1.3%, and domestic consumption rose 0.4%.  Investment was flat.  A surge of refugees last year helped boost spending, while the Riksbank is pursuing aggressive, unorthodox monetary policy.  

Japan reported strong employment and consumption figures, suggest Q4 is also off to a firm start.  Although the unemployment rate remained unchanged at 3.0%, the details were encouraging.  The job-to-applicant ratio ticked up 1.40, which is a new high since 1991.  The number of unemployed slipped below two million for the first time since February 1995.  Separately, Japan reported that retail sales jumped 2.5% in October, which lifted the year-over-year rate from -1.9% in September to -0.1%.   Overall household spending improved from -2.1% in September from a year ago to -0.4% in October.   This matches the smallest contraction since April.  

However, the markets’ focus is elsewhere.  Investors are finding it difficult to get a read on OPEC.  Although a deal may be elusive, as Russia now says it won’t attend the Wednesday meeting in Vienna, Iran and Saudi Arabia do not look that far apart.  The latest reports suggest Saudi’s wanted it to freeze output at a little more than 3.7 mln barrels a day, and the Iranians wanted 3.975 mln.  A compromise has been suggested at 3.795 mln barrels.  Iran and Iraq are also disputing the methodology to determine how the cuts should be distributed.  The front-month Brent contract is off 1.5% near $47.50, while the front-month light sweet contract is off a little more at $46.25.  

The other development drawing attention today is in South Korea, where the beleaguered President Park Geun-hye has offered to resign apparently in an effort to derail impeachment efforts.   Part of the constitutional challenge of the succession is that Park dismissed her prime minister and finance ministers earlier this month to stem the influence-peddling scandal.  The prospect of a resolution helped steady the Korean won and local stocks.  The Kospi posted the smallest of gains, while MSCI Asia-Pacific Index snapped a three-day advance.  

On the other hand, news that South African President Zuma managed to fend off critics within the executive committee of his own party who seek his resignation, coupled with some profit-taking in the metals has seen the rand give back yesterday’s gains in full.  The rand is the weakest of the emerging market currencies, off a little more than 1.5%.  

The concern that was evident yesterday over this weekend’s Italian referendum appears to have eased.  Italian bonds are the best performing in Europe today, with 10-year yields off five bp, and Italian shares are leading the major bourses higher with a 0.75% gain, helped by a 2% rally in bank shares.  Yesterday Italian banks shares were off nearly 4% to extend their downdraft to four sessions and 10 of 11 sessions.  Increasing, it seems, that investors recognize that even if the referendum loses, as the polls universally point to, does not mean that Italy leaves the EU or the EMU.  There are many intervening steps.  

The US economic calendar picks up today following yesterday’s news of a much stronger than expected Dallas manufacturing survey (to 10.2 from -1.5), which was the strongest in more than two years as oil sector investment is thought to have bottomed out.  The US reports its second look at Q3 GDP.  It is expected to tick up to 3% from 2.9% mostly on the back of stronger consumption.  S&P CoreLogic will report house prices, and the Conference Board’s measure of November consumer confidence is expected to jump from 98.6 in October back above 100.  NY Fed President Dudley talks about the Puerto Rico economy early in the North American session, while Governor Powell speaks early afternoon.  The ADP report, October consumption and income figures, and Chicago PMI will be released tomorrow, and the Beige Book will be released ahead of the mid-December FOMC meeting.

Some Corporate Bond Stuff

November 29th, 2016 6:38 am

Via Bloomberg:

IG CREDIT: 3rd Highest Monday Volume on Record
2016-11-29 11:12:33.741 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $16.9b vs $1.6b Friday, $16.5b last Monday. It was the
3rd highest Monday session volume since record keeping began in

* 10-DMA $15.6b; 10-Monday moving avg $15b
* 144a trading added $2b of IG volume vs $177m Friday, $2.7b
last Monday

* Trace most active issues:
* 5 of the 6 top issues were 2017 maturities from GD, CAT,
* MS 2.625% 2021 was 3rd with client buying 2.3x selling
* DELL 6.02% 2026 was the most active 144a issue; client
trades took 84% of volume

* Bloomberg Barclays US IG Corporate Bond Index OAS unchanged
at 130; 128, a new low for the year and the lowest level
since May 2015, was seen Nov. 15
* 2016 wide/tight: 215 (a new wide since Jan. 2012)/128
* 2015 wide/tight: 171/122
* 2014 wide/tight: 137/97
* All time wide/tight back to 1989: 555 (Dec. 2008)/54
(March 1997)

* Current markets vs early Monday:
* 2Y 1.111% vs 1.155%
* 10Y 2.330% vs 2.366%
* DOW futures +23 vs +44
* Oil $46.10 vs $47.45
* ¥en 112.53 vs 112.83

* IG issuance totaled $3.5b Monday
* November totals $69.3b; YTD $1.55T

Credit Pipeline

November 29th, 2016 6:36 am

Via Bloomberg:

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

* BPCE SA (BPCEGP) A2/A, to price $benchmark 2-part deal, via
managers GS/HSBC/MS/Natix/RBC
* 5Y, IPT +115 area
* 10Y, IPT +140 area
* Rentenbank (RENTEN) Aaa/AAA, to price $benchmark Global 5Y,
via Barc/HSBC/RBC/Sco; guidance MS +32 area

* In the 2 weeks following Thanksgiving 2015, $65b was priced.
In 2014, in the week following Thanksgiving, a whopping $54b
was priced.


* Allstate (ALL) A3/A-, to buy SquareTrade for $1.4b using
cash and debt issuance; ALL has not issued since 2013
* Analog Devices (ADI) A3/BBB, to hold investor calls today,
via BAML/CS/JPM/MUFG; last seen in December, it has just 3
issues outstanding
* Johnson & Johnson (JNJ) Aaa/AAA
* Actelion Weighs Combination With Parts of J&J: FT
* Constellation Brands (STZ) Ba1/BBB-, scheduled investor
calls for Nov. 21-22, via BAML; deal may follow
* $1b share repurchase authorized Nov. 21
* Fitch expects Constellation to refi $700m of upcoming
* Dr. Pepper Snapple (DPS) Baa1/BBB+, to buy Bai Brands for
$1.7b; deal to be financed through new unsecured notes and
short term commercial paper.
* ACWA Power, hires banks for investor meetings from Nov. 23;
a 144a/Reg-S offering with IG ratings may follow
* Scentre Group (SCGAU) A1/A, to hold investor meetings Dec.
5-8, via BAML/JPM
* Avnet (AVT) Baa3/BBB-, hired BAML/JPM for investor calls to
take place today; reported acquisition of majority stake in
Hackster Nov. 14
* Adani Ports (ADSEZ) Baa3/BBB-, holding investor meetings
from Nov. 13, via BAML/Barc/C/SCB; 144a/Reg-S deal may
* Puget Sound Energy (PSD) A2/A-, filed an $800m debt shelf;
utilities often follow the close of the big industry
* General Electric Co (GE) A1/AA-, to combine oil and gas
business with Baker Hughes (BHI) Baa1/A; GE to borrow $7.4b
of incremental leverage to fund the deal, co. said in
conference call
* Dow Chemical (DOW) Baa2/BBB, filed debt shelf; last issued
in Sept. 2014
* Qualcomm (QCOM) A1/A+; ~$47b NXP Semiconductor (NXPI)
Ba2/BBB-, acq
* Sees funding deal with cash, $11b new debt (Oct. 27)
* Rockwell Collins (COL) A3/A-, to buy B/E Aerospace (BEAV)
Ba2/BB+, for $8.3b in cash, stock, assumption of debt
* COL sees financing cash portion of deal with debt
financing; plans to pay down $1.5b of new debt by end of
its FY19
* Moody’s and S&P said COL’s rating may be cut to the mid-
BBB range following completion of the BEAV acquisition
* AT&T (T) Baa1/BBB+ to buy Time Warner (TWX) Baa2/BBB for
$85b in cash, stock deal; cash portion will be financed with
new debt, cash on hand
* $40b bridge loan in place
* T may be cut by Moody’s; any potential downgrade would
be limited to one notch
* European Stability Mechanism (ESM) Aa1/na/AAA, mandates
Barc/C/DB/JPM to advise on its USD issuance program
* First ESM USD transaction scheduled for 2H 2017, subject
to market conditions
* ConAgra (CAG) Baa2/BBB-, could borrow up to $2.5b for
* Province of Nova Scotia (NS Gov) Aa2/A+ , filed Friday a
$1.25b debt shelf; last issued in USD in 2010, has $500m
maturing January
* Korea Hydro & Nuclear Power (KOHNPW) Aa2/AA, mandates BNP/C
for investor meetings Oct. 18-20
* Hyundai Capital Services (HYUCAP) Baa1/A-, to hold investor
meetings from Oct.17, via C/HSBC/Nom
* Darden Restaurants (DRI) Baa3/BBB, filed debt shelf, last
seen in 2012
* Darden announced a new $500m share buyback program in
its 1Q earnings release
* Yes Bank (YESIN) Baa3/na, plans to raise $500m by year’s end
* Republic of Namibia (REPNAM) Baa3/BBB-, to hold non-deal
investor meetings Oct. 7-13, via Barc/JPM/StanBk
* Asciano (AIOAU) Baa3/BBB-, names ANZ/BNP/Miz for investor
meetings Oct. 10-28; it is a non-deal roadshow; last priced
a USD deal in 2011
* Western Union (WU) Baa2/BBB, filed debt shelf; last issued
Nov. 2013 following Oct. 2013 filing
* Nafin (NAFIN) A3/BBB+; mandates BofAML, HSBC for investor
meetings Sept. 27-28; USD-denominated deal may follow
* Analog Devices (ADI) A3/BBB; ~$13.1b Linear Technology acq
* $5b loan received after $11.6b bridge (Sept. 26)


* Banco Inbursa (BINBUR) –/BBB+/BBB+; mtgs Sept. 7-12
* Woolworths (WOWAU) Baa2/BBB; investor call Sept. 7
* Sydney Airport (SYDAU) Baa2/BBB; investor calls Sept. 6-7


* Bayer (BAYNGR) A3/A-; ~$66b Monsanto acq
* Hybrid bond sales, approx. EU5b convertible bond
planned; part of $57b bridge (Sept. 14)
* Danaher (DHR) A2/A; ~$4b Cepheid acq
* Sees financing deal via cash, debt issuance (Sept. 6)
* Couche-Tard (ATDBCN) Baa2/BBB; ~$4.4b CST Brands acq
* Expects to sell USD bonds (Aug. 22)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)


* Starbucks (SBUX) A2/A-; debt shelf; has $400m maturing Dec.
5 (Sept. 15)
* Brunswick (BC) Baa3/BBB-; automatic mixed shelf; last issued
in 2013 (Sept. 6)


* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q (Aug. 8)
* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)

Just Don’t Enforce It (and Best Acronym RENT-D)

November 28th, 2016 7:19 am

Via WSJ:

How to Kill the Volcker Rule? Don’t Enforce It

Big banks hoping a Trump administration will defang one of Dodd-Frank’s most-controversial pieces


Big banks spent years railing against the so-called Volcker rule, which bars them from making wagers with their own money. Now, with the imminent arrival of the Trump administration, some banks and lawyers are eyeing a new way to defang the rule: Simply stop enforcing it.

The rule, named for former Federal Reserve chairman Paul Volcker, was one of the most controversial pieces of the 2010 Dodd-Frank financial-overhaul law, passed in the wake of the financial crisis. The provision was intended to rein in reckless risk-taking by big banks, but critics complain that it is unduly burdensome to comply with and deprives them of a lucrative money-making opportunity.

The election of Donald Trump as president poses a threat to the rule, as his campaign promised to dismantle the Dodd-Frank law.

Getting rid of the Volcker rule would require an act of Congress. House Financial Services Committee Chairman Jeb Hensarling (R., Tex.) proposed to repeal the rule this year as part of a package of changes to Dodd-Frank. But repealing the rule could be difficult, likely encountering a roadblock in the Senate, where the support of some Democrats would be necessary to ensure passage.

But neutering the Volcker rule, which took effect in July 2015, would be comparatively easy.

While the rule is enshrined in the Dodd-Frank law, the provision instructed regulators to write the rule’s fine print. That process required several years of negotiations among five independent regulatory agencies.

Even so, enforcing the rule remains subject to considerable interpretation. Financial firms are allowed to trade in stocks and bonds so long as their holdings do not exceed the “reasonably expected near-term demand” of their customers. But just how so-called RENT-D is calculated is subjective; there isn’t one single formula.

That subjectivity has some industry officials optimistic that regulators appointed by the new Trump administration will change their agencies’ interpretations of the rule or tell the officials charged with enforcing it to hold back.


“Once you have the heads of the executive agencies in place, at that point they can change enforcement priorities and guidance,” said David Freeman, the head of the financial services practice at law firm Arnold & Porter. “A lot can be undone or rethought once you have fresh eyes looking at the issue.”

Further complicating matters—and empowering regulators to soften their approaches—a hodgepodge of federal agencies are responsible for overseeing different trading desks within the same banks.

For example, the Office of the Comptroller of the Currency, which is part of the Treasury Department, oversees trading within national banks. The Securities and Exchange Commission looks after broker-dealers. And the Commodity Futures Trading Commission monitors swaps dealers. A single bank holding company—say, J.P. Morgan Chase & Co. or Citigroup Inc.—could have all three of those financial entities as subsidiaries.

Regulators have only begun to examine how banks are complying with the rule. Supporters and critics of the rule alike question whether, in practice, the agencies will agree about issues such as whether a particular trade violated the rule. The diffuse responsibility for enforcing the rule creates an opening for the Trump administration to hit the “pause” button.

“I would think that the administration might rein in the staff while they go in and kick the tires and decide what parts of Volcker need to be changed,” said a person who has consulted with the Trump transition team.

A representative of the transition team didn’t respond to a request for comment.

Even under the Obama administration, “we have our doubts about what’s going on behind the scenes,” said Marcus Stanley, policy director for Americans for Financial Reform, a coalition of progressive groups that supports the rule and has pushed regulators to disclose more about how they enforce it. “If you appoint people who don’t believe in the Volcker rule, it would be pretty easy for them to turn it into a kind of rubber stamp.”

There is already evidence that the election result is affecting the debate around the Volcker rule. Some supporters of the rule in Washington, including within the Treasury Department, have questioned whether Goldman Sachs Group Inc.’s recent $100 million-plus profit on a distressed debt trade complied with the trading ban, according to people familiar with the matter. Now there is little time before Mr. Trump’s inauguration to probe the issue, and it is not clear whether Mr. Trump’s Treasury Department appointees would make it a priority.

A Goldman spokesman didn’t respond to a request for comment. The bank previously said the firm is focused on meeting the needs of its clients.

Big banks’ Washington trade groups initially lobbied against the rule, arguing in part that it would be difficult to enforce. J.P. Morgan Chief Executive James Dimon once quipped that in order to enforce the rule, regulators would need a lawyer and a psychiatrist assessing every trader’s intent.

Banks have since given up trying to change the law and instead focused on trying to shape the rule’s fine print. Earlier this year they successfully pushed regulators for extra time to divest certain investment funds.

It is possible, of course, that Mr. Trump will nominate regulators who favor the Volcker rule, such as Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig. Mr. Trump himself has endorsed a modern version of the Depression-era Glass-Steagall law, which is similar to the Volcker rule in that it is designed to keep traditional banks from engaging in risky trading.

Many big banks have also shed proprietary trading businesses since 2008, which could make it difficult for them to get back into the business. “Once it’s gone into effect, it’s hard to turn back the clock,” said Oliver Ireland, partner at Morrison & Foerster LLP.