Merrill Lynch on Credit Markets

April 15th, 2014 7:45 pm

Via Merrill Lynch Research:


  • Geopolitical risks weigh on credit. As our economists discuss in more details below, the Ukraine/Russia tensions intensified today. CDX IG widened about 2.5bps following the news headlines around 10 a.m., before trading tighter in the second half of the day and closing about 1bps wider relative to Monday. Stocks, on the other hand, completely recovered from the initial sell-off and ended the day up 0.7% on the S&P 500, led by Utilities (+1.33%) and Energy (+1.25%). We thinkthis performance divergence today highlights high grade credit’s higher sensitivity to systemic risks and is helping close the recent performance gap between credit relative to equities (see Credit Market Strategist: Growth belongs to stocks 11 April 2014). Treasury valuations reacted more in line with credit, with 10-year Treasury yield falling 2bps today. Being closer to the conflict geographically, Europe underperformed, with Western European stocks down 2.5% and iTraxx Main 2bps wider today. Russian stocks closed 2.5% lower while Russian Ruble depreciated. - Yuriy Shchuchinov (Page 4)
  • Russia and Ukraine Economic Watch: Worst case getting closer. Military operation in place. Ukrainian authorities have started a military operation against pro-Russian insurgents in Eastern Ukraine earlier today. Armed forces have apparently re-captured an airfield and blockaded several cities held by the protesters. An increasing number of casualties has already been reported from both sides. - Vladimir Osakovskiy, Vadim Khramov (Page 10)
  • Significant decline in CDX IG longs. Non-dealer investor’s net long-risk positioning in CDX IG declined significantly last week (as of April 11th) to $17.7bn from $26.6bn in the prior week, corresponding to a 28% decline, according to DTCC data. Thus, the net positioning in CDX IG is now $20.9bn lower than the peak of $38.5bn recorded on November 1st. The net long positioning for CDX HY declined modestly to $4.1bn last week from $4.2bn in the prior week. Assuming that the CDX HY is around four times more volatile than CDX IG in terms of returns, the $4.1bn net long in HY corresponds to about $16.4bn CDX IG net long in terms of risk, which is roughly on par with the current $17.7bn reading for CDX IG. This convergence between CDX IG and CDX HY longs has not been as pronounced as this since September last year, which is clearly illustrated in the chart below. - Jon Lieberkind (Page 6)
  • Foreigners increased their net selling of corporates in February. Foreign investors sold a net $8.7bn of corporate bonds (excluding ABS) in February. This translates into an 84% increase in outflow from the -$4.7bn recorded in January, according to TIC data. Overall foreigners were net buyers of $84.8bn in US long-term securities in February, representing a reversal from the $14.8bn of net selling in January. The reversal from net selling to net buying can predominantly be attributed to a significant increase in Treasury purchases that amounted to $92.5bn in February vs. -$0.6bn in January. Moreover, net purchases of non-Agency MBS turned positive and amounted to $0.09bn in February from -$1.8bn in January. Meanwhile, foreign investors were net selling $0.08bn in US Agencies, $6.9bn in Agency bonds, $0.9bn in US Corporate Stocks. Furthermore, foreigners were net sellers of $2.1bn in Agency MBS. -

Late Day Flows

April 15th, 2014 4:55 pm

Via RBS Securities:

Our Treasury flows were 2-way in 10’s by real money while there was other real money selling of 2’s, 7’s, and 30’s. Fast money was also buying 10’s. In swaps, we had fast money receiving 2y1y while we heard of MBS-linked paying 7yr away. In TIPS, we had fast money buying the front end and real money buying 5yr and 10yr breakevens. Treasury inter-dealer broker volume was 118% of the 10-day average.

Mortgages: Mortgage activity picked up today but a large part of it was in butterflies rather than outright trades. The 30yr 3.5′s outperformed the rest of the stack today with that basis trading as wide as 1.5 ticks wider while closing a + wider late day. We had hedge funds active in 2 way trades, reacting to the shifting contour of the MBS coupon stack. We also had light money manager selling, Fed buying and origination was a bit heavier again today at ~$825mln.

An Overnight Preview

April 15th, 2014 4:52 pm

China GDP the most important data point but alot  of other data to reflect upon.

Via Pierpont Securities:

AUSTRALIA: Leading Economic Indicator reading for March. Slight downward tilt to the index over the last 6 months, but little sign of a major deterioration.

CHINA: Tremendous data flow…and quite important as March was first full month after the New Year holiday. 1Q2014 data will be released for GDP and the Business Climate index, with the latter having fallen steadily since its recovery high in 4Q2010. BBerg consensus for real GDP growth at 7.3% YOY in 1Q, with the risks being to the downside for growth. Also get March data for Retail Sales and Industrial Production, with BBerg consensus expectations of 11.9% YOY for sales and 9.0% YOY for production, both quite sluggish by Chinese standards; risks appear tilted to the downside.

JAPAN: Final Industrial Production data for February, with the preliminary reading a -2.3% MOM and up 6.9% YOY.

EURO ZONE: Final March CPI data…expected to be confirmed at 0.5% YOY, with core at 0.8% YOY.

ITALY: Trade/Current Account data for February, with Trade in surplus (weak imports) while CA remains in deficit (large external debt payments).

UK: Important monthly data on the Employment Situation. Key data likely to be the change in the Claimant count for March (BBerg consensus -30K) and the February data for the 3-month change in Employment (BBerg consensus +90K) and Unemployment Rate (down to 7.1%). But with inflation quit restrained (out today), not much concern that strong data will push the BoE towards tightening any time soon.


Treasury Market Update

April 15th, 2014 1:40 pm

One dealer reporting very heavy flows in cash in belly of the curve. He has observed sellers of off the run 10s in favor of 2041 and 2042 paper. ( I believe that the actuaries have me dead out that far.) The same dealer notes that TY has outperformed 5s and  10s by 3 basis points since release of labor report. That does not sound like much but he also notes that spread has traded  in a six basis point range for nine months.

Market Miscellany

April 15th, 2014 12:05 pm

Greed and fear dominate markets and it appears that greed is morphing into fear today. The Long Bond has enjoyed a significant rally and trades at its lowest level since July 2013 when we were in the midst of the oh my God they are going to taper soon swoon. A confluence of factors has forced buyers into the market today. The situation in the Ukraine is heating up and that has sparked a flight to quality. The ruble last time I looked had traded above 36 and I have not recorded it there since March 24. The Bund is screaming lower and trades at 1.475 percent for 10 years. Other emerging market currencies while not in free fall are weakening today,too. The Nasdaq fuel on the fire as it has made a new low for this move and a new low for the year today. I worry that at some point there will be a collective there but for the grace of God go I epiphany and happy holders in other sectors may decide that the equity bull is long in the tooth and some reduction in equity exposure is necessary and appropriate. If you are an equity holder the reign of Barack Obama has been a virtual financial Nirvana or maybe a Periclean Golden Age. On the glorious day in November  2012 when the vox populi clamored for  four more years the S and P was trading around 1430. The index dropped to about 1350 over the next week or so and then has hardly ever looked back and indeed every dip was a buying opportunity. Sister Mary Consolata taught me quite well and a very quick reckoning demonstrates that is a gain of about 35 percent in that time period. At some time the Nasdaq will cease to decline by itself and other indices will join the fray as other equity holders get risk religion. Finally, the JPMorgan weekly survey was very short this morning. The active portion of that survey had no longs this morning and the largest net short position since May 2013. That is a flammable mix which can only feed the fire in the market place.

I have heard of chunky buying at the 5 year point by hedge funds and macro based traders. I have heard of long term portfolio types selling off the run 3 year through 5 yer paper and fast money sellers of bonds.

In swaps the 2 year spread is 1/4 basis point wider and 5 7s and 5s 10s and 30s are unchanged. I have heard of fast money paying in the 2 year sector.


Walmart Guidance

April 15th, 2014 11:44 am

Via Bloomberg.

Wal-Mart 3 paert
guidance  3 yr +20 +/- 3 bps
10 yr +75 +/- 2 bps
30 yr +92 +/- 2 bps
split TBD


Corporates Thus Far

April 15th, 2014 11:10 am

Via Bloomberg:

Wal-Mart Stores 2 bln  Aa2/AA  3,10 & 30 yr
ipt  3 yr +25-30
10 yr +85 area
30 yr +Mid/High-90s
Plains All American Pipeline 500mm Baa2/BBB    30 yr
ipt +Low-140s
BioMed Realty 350mm Baa3/BBB    5 yr
ipt  +137.5 area
And “in the works”
Bank Nederlandse Bank Nederlandse Gemeenten B’Mark Aaa/AA+  7 yr
ipt ms+low 40′s
Office Cherifien de Phosphate/ OCP SA TBDna/BBB-    10 yr 144A Reg S
ipt 6% area

I added the link because I wanted to know what the hell that is! It is a Moroccan phosphate company. I guess there is a lot of money sloshing around if they can sell that to someone.

JPM Duration Survey

April 15th, 2014 7:33 am

Via the Good Folks at Bloomberg:
By Robert Elson
April 15 (Bloomberg) — The JPMorgan Treasury Client Survey
for the week ended April 14 vs week ended April 7.
* Longs 11 vs 25
* Neutrals 57 vs 55
* Shorts 32 vs 20
* Net longs -21 vs 5
* “The all clients survey shows the most net shorts since
June 3, 2013’’
* Active client survey:
* Longs 0 vs 24
* Neutrals 54 vs 38
* Shorts 46 vs 31
* “The active clients survey shows no outright longs, and
the most net shorts since May 28, 2013’’

Some Overnight Flow Info

April 15th, 2014 7:28 am

Via David Ader at CRT:

OVERNIGHT FLOWS:  Treasuries were modestly lower overnight with the declining UK inflation and German ZEW as the most relevant releases – although offering little trading direction.  We also saw a pullback in Chinese M2 that brought into question the trajectory of GDP.   Overnight volumes were light with caash trading at 84% of the 10-day moving-average, while TY came in at 80% of norms.  5s were by far the most active issue, taking a 42% marketshare, while 10s managed to get just 23%.  2s and 7s were tied – each taking 11% marketshares, while 3s got just 9%.  We’ve heard of Asian real money selling in the 30-year sector and Japanese buying in 7s.

Today’s Earnings Calendar

April 15th, 2014 7:02 am

US EARNINGS: Some of biggest names to report Q1 earnings near-term include:
Date Company Estimate/share
Apr 15 Coca Cola Co $0.44
Apr 15 Johnson & Johnson $1.48
Apr 15 Intel Corp $0.37
Apr 15 Yahoo! Inc $0.37
Apr 15 Charles Schwab Corp $0.22