Corporate ETFs and Risk Appetite

January 24th, 2018 7:14 am

Via Bloomberg :

Bond ETFs Awash in Pain May Be Red Flag for Risk Appetite (1)
2018-01-22 14:56:05.415 GMT

By Dani Burger and Sid Verma
(Bloomberg) — U.S. corporate debt exchange-traded funds
have bled a near-historic sum of assets over the past two weeks,
but holders of the underlying securities are paying little heed.
The bonds themselves are enjoying some of the tightest
spreads on record as appetite for new issues remains strong. On
one hand, tax reform, rising oil and global growth may be
fueling demand for yield. Yet the ETFs — in the midst of the
longest outflow streak in at least seven years — point to a
The divergence is stumping Wall Street strategists who use
the ETF market not only as a proxy for investor sentiment in
debt, but also as a gauge of risk appetite for equities and
other assets. Though technical quirks associated with ETF
trading may have caused the dislocation, some analysts point to
a simpler distinction: so-called dumb money versus smart.
“The tax package is probably giving institutional investors
more confidence about the shape of corporate balance sheets,”
said Matt Maley, a strategist at trading firm Miller Tabak + Co.
“Thus they might be making up for the selling that is coming
from these products geared towards individuals, who are worried
about the rise in government yields.”
U.S.-listed corporate bond ETFs are headed for a second
consecutive month of outflows, the first time that’s occurred in
at least seven years. The pain is across ratings. The iShares
iBoxx Investment Grade Corporate Bond ETF, LQD, had the biggest
day of losses last week since 2016, while BlackRock’s high-yield
equivalent, HYG, is in the midst of its biggest two-month
outflows on record.
If the withdrawals are a symptom that retail funds are
losing their taste for fixed-income, the impact could be far-
reaching. A tweet from DoubleLine Capital LP co-founder Jeffrey
Gundlach Thursday — who has previously warned underperformance
may portend a selloff for risk assets — noted the gap between
junk ETF prices and stock gains.
Strategists at JPMorgan Chase & Co. expect individual
investors to be the “wildcard” for bond markets grappling with
diminished central-bank stimulus, while dollar weakness may
curtail foreign inflows to U.S. corporate bonds.
Spreads in junk and investment-grade bonds sit near the
tightest since 2007 even after high-yields premiums rose
slightly. Meanwhile, investors pulled more than $1.9 billion
from U.S.-listed corporate bond ETFs in the week to Jan. 19, the
second consecutive five-day period of outflows.
ETF constituents can differ from benchmarks due to
liquidity and other portfolio constraints, so some technical
factors may be at play. LQD, for example, has greater
sensitivity to interest-rate risk, with a modified duration of
8.7 years, compared with 7.6 years for the broader Bloomberg
Barclays U.S. Investment Grade index.
“It looks like constituents — either maturity, credit or
liquidity differences between the two markets — have played a
role, but there does seem to be a general weakening of ETFs
relative to the market,” said Thomas Tzitzouris, fixed-income
research chief at Strategas Research Partners. “At a high level,
we believe that high-yield is running into resistance.”
What’s more, ETFs typically serve as “placeholder” vehicles
in lieu of strategic allocations. Investors, therefore, may be
putting cash into work in the primary market during the January
deluge at the expense of passive instruments.
It’s much faster to make a short, or bearish, bet on an ETF
than through cash bonds, according to Andrew Brenner, the head
of international fixed-income at Natalliance Securities in New
York. Later when traders cover those shorts the ETFs recover, he
“The actual bonds could take a week to move while the ETF
takes 10 minutes,” he said. “But we have seen this before and
the market has held, and then shorts have to grab the ETF so it
In the short-term, the swelling gap between ETFs and the
underlying market may expose some investors to basis risk, or
the peril of hedging bond exposures through passive investments.
“At the very least ‘credit hedge’ products are
underperforming,” Peter Tchir, the head of macro strategy at
Academy Securities Inc., wrote in a note Friday.  “Whether a
precursor to wider weakness or setting the stage for one gap
tighter back to levels closer to pre-crisis levels is the big
question. With the year off to such a great start, I would err
to the side of caution here. ”

To contact the reporters on this story:
Dani Burger in London at;
Sid Verma in London at
To contact the editors responsible for this story:
Samuel Potter at
Cecile Gutscher, Natasha Doff

Margin Debt

December 28th, 2017 12:41 pm

Via Bloomberg;

Margin Debt Ratio at NYSE Rises To Most Speculative Since 2003
2017-12-28 14:07:01.421 GMT

By Bloomberg Automation
(Bloomberg) — Net debt in New York Stock Exchange customer
margin accounts rose to 1.03 percent of companies’ market
capitalization in November, the most in data going back to 2003
and a signal that traders became more speculative.
* Net margin debt, or debits in the accounts minus cash,
increased to $286.9 billion in November from $269.7 billion in
the prior month.
* October’s total represented 0.99 percent of the companies’
market cap.
* The margin ratio was 0.8 percent in November a year earlier.
* Leverage tends to rise and fall with the market’s value.
Margin borrowing exceeding cash indicates more speculation,
while cash greater than debt suggests greater investor caution.
The last time the accounts held more cash than debt was in
December 2011.

| November | October
Margin account debts|$580.9 B |$561.4 B
Cash account credits|$140.9 B |$140.0 B
Margin account | |
credits |$153.2 B |$151.7 B
Net margin debt |$286.9 B |$269.7 B
NYSE Market Cap |$27.8 T |$27.2 T
Net margin debt to | |
market cap ratio | 1.03%| 0.99%
The NYSE releases margin balances as of the end of the
month. Bloomberg’s market cap ratio is calculated as of that

Nary a Whiff of Inflation Here

October 14th, 2017 11:07 am

Via Bloomberg:

Cleveland Fed Oct. 10Y Inflation Expectations Rose to 1.89%
2017-10-13 18:11:10.646 GMT

By Alex Tanzi
(Bloomberg) — Suggests inflation expectations of less than
2% on average over the next decade, according to the Cleveland
* One year inflation expectation at 1.95% v 1.74% a year ago
* 5Y inflation expectation at 1.81% v 1.59% a year ago
* 10Y inflation expectation at 1.89% v 1.70% a year ago
* 20Y inflation expectation at 2.07% v 1.93% a year ago
* 30Y inflation expectation at 2.20% v 2.09% a year ago
* The Federal Reserve Bank of Cleveland’s inflation expectations
model uses Treasury yields, inflation data, inflation swaps, and
survey-based measures of inflation expectations to calculate the
expected inflation rate (CPI) over the next 30 years.

To contact the reporter on this story:
Alex Tanzi in Washington at

To contact the editors responsible for this story:
Alex Tanzi at
Kristy Scheuble

Credit Alert in Big Bank Earnings

October 12th, 2017 9:42 am

Via Bloomberg:

Bad Omen for Bad Debt in U.S. Bank Earnings
2017-10-12 12:30:38.544 GMT

By Laura J. Keller
(Bloomberg) — Increases for bad-debt provisions could end
up being a theme this earnings season for big U.S. banks.
Citigroup’s provision for credit losses rose 15 percent to $2
billion in the latest quarter, more than expected. Earlier,
JPMorgan reported a disappointing surprise on provisions, too.
It had a 20 percent increase sequentially. This indicates those
who worry about banks’ credit quality have their sign: The
consumer really may be weaker. Perhaps things are turning in
this credit cycle.
For more on Citigroup’s earnings, read our TOPLive blog

To contact the reporter on this story:
Laura J. Keller in New York at
To contact the editors responsible for this story:
Michael J. Moore at
Anny Kuo, Eric Coleman

Crowded Trade in Corporate Bonds

August 9th, 2017 1:03 pm

Via Bloomberg:

Record Set; Clients Hold the Most Corporate Bonds Since 1999
2017-08-09 16:55:35.338 GMT

By Robert Elson
(Bloomberg) — Client allocations to corporate bonds jumped
to 37.1% in the latest week vs 36.9%, according to the SMR Money
Manager Survey Asset Allocation. The previous high of 37.0% was
seen in June 2017 and also in August 2016.
* The survey began at the low of 19.1% in August 1999
* “Corporate allocations have averaged 36.7% this year, ranging
from 36.2% to 37.1%,” according to SMRA’s John Canavan
* “Over the past five years, corporate allocations have averaged
34.9% of assets, ranging from 32.0% to 37.1%”
* Allocations to GSE-agency debt remains at just 7.5%, the all
time low; allocations to GSEs peaked at 24.4% in 2001

To contact the reporter on this story:
Robert Elson in New York at
To contact the editors responsible for this story:
Christopher DeReza at
Rizal Tupaz

Prodigious Corporate Deal

August 8th, 2017 8:58 am

Via Bloomberg:

The Smoking Hot Bond Deal of the Summer Is On Its Way: Gadfly
2017-08-08 10:20:28.782 GMT

By Marcus Ashworth and Mark Gilbert
(Bloomberg Gadfly) — It’s enough to give any treasurer a
smoker’s cough: launching the third-biggest fundraising ever
during the August lull, in an industry that’s been roiled by
regulators, by a company that’s just suffered a two-step rating
Company may raise
$25 billion
Not a problem for British American Tobacco Plc.
It’s in the process of raising $25 billion in what may be
the largest corporate bond offering of the year. The maker of
Lucky Strikes wants to refinance its 42 billion-pound ($55
billion) buyout of Reynolds American — a deal which will give
it No. 1 position in tobacco-related products globally.
The offering should eclipse AT&T Inc.’s $22.5 billion
offering just two weeks ago, which saw investors order as much
as $60 billion of the securities. BAT will want to get orders
for at least as much, if not more.
It shouldn’t be a struggle for a tobacco company. Like
hardened smokers, investors have a craving for yield. So expect
BAT to offer buyers a healthy premium over comparable debt. The
summer slowdown leaves the playing field empty, something that
should play in BAT’s favor.
Deals of this size will feature prominently in the
corporate bond indexes so investors are almost obliged to buy
them — though ethical bond funds will sit this one out. The
extra spread on offer from the new issue also offers tantalizing
out-performance potential in an otherwise moribund credit
With corporate spreads edging ever closer to record lows,
investors are starved of product. Moreover, the European Central
Bank is still buying. It now holds more than 103 billion euros
in corporate debt. The effect on BAT is indirect — the ECB
can’t hold its bonds — but the relative scarcity of equivalent
BBB debt has the effect of tightening spreads on BAT’s bonds.
One fly in the ointment was the two-notch downgrade from
Fitch Ratings on Friday to BBB from A-. This was largely due to
the increased leverage from assuming Reynolds’s debt, but with
free cash flow of more than 2 billion pounds each year, the
ratings company doesn’t have wider concerns on the debt.
Furthermore, the move just brings Fitch into line with S+P’s
BBB+ and Moody’s Baa2 ratings.
Last month, shares of tobacco companies slumped after the
U.S. Food and Drug Administration committed to reducing the
level of nicotine in cigarettes to non-addictive levels. BAT was
down almost 11 percent at one point, its biggest one-day drop
for 17 years, before rallying to end July 28 with a 7 percent
The FDA move, though, may work in BAT’s favor by driving
more Americans to alternative technology such as vaping and
heat-not-burn devices. The global vaping market is worth $12.3
billion, according to data compiled by Euromonitor. North
America accounts for 36 percent of global sales, and Reynolds
has almost as much of the U.S. market for electronic smoking
devices as its next three biggest rivals put together, according
to data compiled by Bloomberg Intelligence analyst Duncan Fox.
With such demand from yield-starved credit investors, BAT
should be able to pull off the deal of the summer.
This column does not necessarily reflect the opinion of
Bloomberg LP and its owners.

To contact the authors of this story:
Marcus Ashworth inLondon at
Mark Gilbert inLondon at
To contact the editor responsible for this story:
Edward Evans at

CMBS Stumble

August 3rd, 2017 9:41 am

Via Bloomberg:

Grocery CMBS Stumble Suggests Repricing After Amazon-Whole Foods
2017-08-03 11:56:49.192 GMT

By Adam Tempkin
(Bloomberg) — Investors gained concessions on the first
commercial mortgage bond backed by grocery-anchored centers
since Amazon announced it was buying Whole Foods Market,
suggesting a repricing of CMBS risk after that transformational
* Spreads on the bond, sold by Madison International Realty and
the REIT DDR Corp., widened considerably from initial guidance
* “Amazon buying Whole Foods has certainly brought grocery-
anchored centers into focus from a longer-term viability
standpoint,” Principal Global investors wrote in a 2Q CMBS
market review
** In addition to pressure on the sector from Amazon, foreign
entrants Aldi and Lidl are making a push to increase their
footprints in the U.S., adding more competition to the grocery

The bond was comprised of several pools, and some may have
fared better than others based on the strength of the loans
backing them. The A and B pools, for example, had significant
spread widening at pricing versus initial guidance, while pool C
* Pool C was comprised of centers anchored by Publix Super
Markets that are performing very well and hold little rollover
risk on the leases, according to presale reports from
Morningstar and S&P
* Some of the stores in Pools A and B were slightly weaker,
according to Morningstar presale, and therefore more likely to
face renewal risk in a normal scenario
** Pool A roster included Publix, Kohl’s, Ross Dress for Less,
and Bealls; some of the centers are in secondary or tertiary
*** Scheduled Publix rollover was a big concern of Morningstar;
even more concerning, sales for three Publix stores were below
the company’s national chain average of $637 per square foot
*** “The Publix Supermarket at Skyview Plaza in Orlando,
Florida, is considered to be in a primary market, but sales are
$310 per square foot, which is low for a grocery anchor”
** In Pool B (comprised mostly of power centers, large outdoor
shopping malls with “big box” stores), both junior-anchor and
in-line sales for certain properties have “decreased since
2013,” Morningstar says, which may mean decreased foot traffic
*** Properties in Pool B include Kohl’s and Bed Bath and Beyond,
which both face challenging traffic patterns
* Loans across the three pools underlying the bond weren’t
cross-collateralized or cross-defaulted, meaning they are all
separate and have distinct collateral, although there may be
some common management of properties
* Citigroup and Morgan Stanley were co-leads on the deal, CGCMT
2017-MDRC. A spokesman for Citigroup had no comment. Morgan
Stanley did not respond to requests for comment
* NOTE: Grocery stocks stumbled after the purchase was announced
on June 16

To contact the reporter on this story:
Adam Tempkin in New York at
To contact the editors responsible for this story:
Christopher DeReza at
Adam Tempkin

Only Perfect Hedge Is In a Japanese Garden

July 18th, 2017 10:24 am

This is an interesting piece from Robert Sinche at Amherst Pierpont on the changing relationship between US 10 year and Eurpean govies on a hedged basis. The US is looking less attractive.


Via Robert Sinche at Amherst Pierpont Securities:

One of the persistent sources of support for US Treasury debt, particularly at the longer end of the yield curve, was its relative “high yield “ status. Throughout 2015 and 1H2016 the yield of the 10-year Treasury exceeded the hedged yield (using a conventional 3-month hedge) of 10-year bonds in other developed countries. The dynamics of the hedged-yield analysis is driven by yield curve shapes, with a flattening yield curve in the US making the effective hedged yields in foreign markets more attractive.  As a result of the steepening yield curves across the EZ and UK, the hedged yields on benchmark 10-year bonds in France (2.82%), Germany (2.55%) and the UK (2.45%) now exceed the 2.29% yield on the 10-year Treasury. While hedged yield analysis is not the key driver of bond yield movements across markets, the shifting yield curve shapes and yield back-ups across Europe does remove one source of support for US debt compared to alternative global bonds. The flatter yield curves in Canada and, particularly, Japan, continue to leave their benchmark bonds relative unattractive based on a hedged-yield comparison.

Delinquent CMBS Creeping Higher

July 17th, 2017 12:28 pm

Via Bloomberg:

CMBS Monthly Late-Pays Spike Most in Six Years, Still Low: Fitch
2017-07-17 15:49:57.920 GMT

By Adam Tempkin
(Bloomberg) — U.S. CMBS loan delinquencies increased 22bps
to 3.72% in June from 3.50% a month earlier, the largest month-
over-month spike in six years, Fitch said in a statement.
* This represented largest monthly increase in delinquencies
since the 9.01% peak in July 2011
* Silver lining is that halfway through 2017, loan delinquencies
so far remain considerably below Fitch’s estimate of between
5.25% and 5.75%
* Primary reasons are strong repayment activity of maturing
loans during the first six months of the year, many of which
were previously identified as highly leveraged and would face
difficulty refinancing
* Remainder of the year looks promising with only $20b left to
refinance in 2017 and new issuance still healthy
* Fitch lowering its year-end forecast to between 4.25% and

Some Fed Policy Analysis

June 12th, 2017 8:06 am

Excellent piece via Chris Low at FTN Financial:

AM Economic Comments

by Chief Economist Chris Low

Monday, June 12, 2017

Stocks are lower in Asia and Europe overnight and NASDAQ futures are down enough this morning to suggests Friday’s tech selloff will continue today. US 10-yr note yields were higher overnight but have fallen back to 2.209%, likely in part thanks to the weakness in equities.

The front page Fed-vs-the-financial markets article in today’s WSJ dives into what ought to be the most controversial reason the Fed is raising rates this year: They have decided stocks are overvalued and they can’t stand when long-term interest rates fall when they raise short rates. The paper notes the Goldman Sachs Financial Conditions Index, which has fallen considerably since December, suggesting markets have eased more than the Fed has tightened. The GSFCI is just exactly the sort of thing the Fed loves to watch while tightening because it allows FOMC participants to ignore the economic damage they are doing to real world economic activity.

There is so much wrong with the contention that financial conditions are easier than they were before the last two rate hikes it is hard to know where to begin, but let’s start with the fact that the Fed appears entirely in agreement with the WSJ. As far as predicting what the Fed will do, the drop in the GSFCI significantly raises the odds of more aggressive behavior. After all, NY Fed President Bill Dudley cited the GSFCI two weeks ago, right before the Fed’s communications blackout, saying there is no reason to think the Fed has tightened too much if financial conditions are easing. Dudley is the Fed’s go-to financial-markets guy.

Next, Mohamed El-Erian and others have been popping up on TV lately citing financial stability as the reason the Fed is tightening. Last week, El-Erian said long-term rates are falling because too much income is going to rich people, and rich people are too prone to invest rather than spend. It rings true because 1. We all know about the income gap and 2. It is fun to think rich people are stupid. Be careful, though. El-Erian’s logic smacks of the same reality-defying thinking as the global savings glut baloney Greenspan popularized in the late Nineties and Bernanke clung to in 2006 as excuses for ignoring a flattening yield curve. People who extended maturity back then knew exactly what they were doing and they likely know what they are doing now, too.

In the meantime, even as the Fed thinks financial conditions have eased despite three rate hikes, business loan growth has slowed significantly. Commercial and industrial loans, which are made at floating rates above fed funds, are lower than they were in October. Mortgage activity has slowed and home equity lending is declining. Delinquencies are rising and lending standards are tightening in response. When the Fed raises interest rates they tend to kill floating rate borrowing first, which makes sense since they raise short-term rates. Money moves into the long end because investors are confident the Fed will check any inflationary tendencies in the economy and because long-yields are the place to be when the Fed (inevitably) tightens too much.

The GSFCI falls when the Fed tightens because it fails to recognize a flat yield curve as a sign of tight financial conditions. In the index, the drop in long yields offsets the rise in short rates. The GSFCI was very low in 2007, for instance, a year in which millions of borrowers were driven into default. And the Fed, watching things like the GSFCI instead of real-life activity in the financial sector – you know, like lending and borrowing activity – failed to recognize how tight financial conditions were in 2006-07. In fact, they did not just fail to recognize it at the time, FOMC participants failed to admit excessive tightening even three years later, in the aftermath of the worst credit crunch since the Great Depression.

The Fed will raise rates on Wednesday, and again in September and/or December, despite a sharp slowdown in credit activity because FOMC participants have a weak spot for indicators like the GSFCI and because they are all-too eager to believe in global savings gluts and the stupidity of rich investors as an alternative to the possibility the fed funds target they arbitrarily chose when they started tightening is too high.

Today, the May Treasury budget. This week, PPI, CPI and May retail sales.

Chris Low