Across the Curve

David Challenges Goliath (Bloomberg)

Via NYTimes DealBook:

A start-up looking to take on the financial information behemoth Bloomberg L.P. is hiring a former Bloomberg executive to begin a new financial news service.

Norman Pearlstine, a former top editor at Bloomberg, The Wall Street Journal and Time, is joining Money.net, which has been building a low-cost alternative to the data terminals that sit at the core of Michael R. Bloomberg’s business empire.

Mr. Pearlstine is tasked with building a news feed for Money.net that will be based on machine-generated news bulletins and stories. He will be hiring journalists to help guide the computers and potentially supplement them with reporting — part of a broader move toward the automation of journalism.

“I think I know what the customer is looking for, and I think I know where smart developers and journalists working together can add value,” Mr. Pearlstine said in an interview. “My bias is toward not spending a lot of time duplicating things that everybody else is doing — trying to think about what timely, usable information is for a professional investor.”

Mr. Pearlstine was the chief content officer at Bloomberg until 2013, shortly before Mr. Bloomberg ended his final term as New York City’s mayor and rejoined the company he founded in the 1980s. Mr. Pearlstine is currently the vice chairman of Time Inc. and will remain in that role.

Money.net was founded by another former top executive at Bloomberg, Morgan Downey, who got to know Mr. Pearlstine when they were both at the company.

Mr. Downey has been outspoken about his belief that Money.net can win over Bloomberg customers who are unhappy with the high price of the terminals, which generally cost around $21,000 a year. A Money.net subscription costs about $1,500 annually.

Mr. Downey said that Money.net now had about 50,000 paying subscribers, up from fewer than 10,000 a year ago. Over the same time period, the number of Bloomberg subscribers has remained steady at around 325,000.

Mr. Downey has been trying to capitalize on the fact that revenue is down in the financial industry, leading many banks and asset managers to look for lower-cost service providers.

“The industry is at this inflection point,” he said. “They know that the ecosystem of Bloomberg and Thomson Reuters can’t continue.”

A Bloomberg spokesman said the company had no comment on Mr. Pearlstine’s hiring.

Money.net began as a platform for basic financial data, but Mr. Downey has been trying to add tools that can compete with other parts of the Bloomberg terminal.

Recently, Money.net announced a partnership with the Wall Street messaging service Symphony, which is mostly owned by a consortium of banks. Symphony has been described as an effort by the banks to create an alternative to Bloomberg’s messaging system, which is often cited as a main reason to have the terminals.

Professional investors also choose Bloomberg because of the huge journalistic operation it has built, focusing in particular on market-moving news.

But Mr. Downey sees another opportunity to take on Bloomberg at a lower cost.

He contends that much of the information that investors need is freely available in news releases, government statements and social media.

Mr. Downey already has a team of developers working on software that can scan the web for news releases and stories from other publications to generate headlines for Money.net customers.

Last week, for instance, Money.net generated a headline from a Department of Transportation release. It read: “D.O.T. issues emergency order banning all Samsung Galaxy 7 phones from air transportation in the U.S.”

High-powered computers are crucial to processing more news and doing so faster than Bloomberg’s human-based system, Mr. Downey said.

Bloomberg does provide its customers with a stream of headlines from other major publications and social media. Earlier this year, Bloomberg’s editor in chief, John Micklethwait, announced that the company was creating a team to use more automation in its editorial offerings and that it already had a news tool called Project Cyborg.

Several other technology companies are already working to automate journalism, using software that can take raw data and turn it into proper sentences. But this strategy has run into obstacles. When Facebook recently moved to make its trending stories feature more automated, fake news stories crept in unnoticed.

Mr. Downey is hoping that Mr. Pearlstine can bring in a team of journalists to help guide the machines toward accuracy. Mr. Downey says that he wants Mr. Pearlstine to hire about 25 journalists to work with around 75 programmers.

Mr. Pearlstine is more measured than Mr. Downey in his ambitions to immediately take on Bloomberg. He says that for now the data giant still has a big lead in many areas.

But Mr. Pearlstine says there is an opportunity to do things in a smarter way given the current state of technology. He said that Bloomberg News began more than three decades ago as a small team of people aggregating news from other publications.

“Technology has given you the opportunity to revisit that model in ways that could be better, faster and smarter,” he said.

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Bond Market Angst

Via WSJ:

Markets Heard on the Street
By Justin Lahart
Updated Oct. 17, 2016 3:41 p.m. ET

There is a little bit of fear creeping into government bond markets. It is about time, even if investors are still underestimating how much long-term Treasury rates could rise from here.

Government bonds are no longer the can’t-lose market, as a steady drop in prices sends rates higher. The 10-year Treasury carries a yield of 1.79% versus the 1.36% it plumbed in early July in the aftermath of the Brexit shock. With global worries easing and central banks rethinking tactics and inflation picking up, yields could go higher still.

Get financial insights and commentary on global investing from The Wall Street Journal’s Heard on the Street team. Subscribe to the podcast.

Fears that the world risked slipping into a deflationary spiral have eased. Higher oil prices have taken pressure off many energy-producing countries, and China’s efforts to stabilize its economy have had positive effects on other emerging markets.

One sign of this is the increase in term premiums—the extra compensation investors ask for holding a longer-term bond to maturity versus what they estimate they could earn on a series of short-term securities over the same time frame. Historically, term premiums have been positive, since investors have worried they were underestimating how high rates would go in the future. But this year they went deeply negative across developed-world bond markets.

Investors are still worried about lower rates, but not as much. The Federal Reserve Bank of New York’s measure of the term premium on the 10-year Treasury, for example, has gone from a low of minus-0.76 percentage point to minus-0.38 percentage point.

Changes in central-bank policy also are playing a role. The Bank of Japan ’s move last month to target the yield on 10-year bonds at 0%, with an aim to keep even longer-term rates in positive territory, reduced the relative attractiveness of Treasurys for Japanese investors. Expectations that the European Central Bank will alter its rules so it can buy more short-term, and fewer long-term, bonds are having a similar effect. Federal Reserve Bank of Boston President Eric Rosengren suggested over the weekend that the Federal Reserve replace long-term securities in its portfolio with short-term ones. The goal would be to tighten monetary policy by driving up long-term rates.

But perhaps biggest reason investors should worry about higher Treasury yields is an old one: inflation. The inflation expectations embedded in Treasury inflation-protected securities imply that inflation will average 1.52% over the next five years—more than 1.24% implied at the start of September, but still very low.

And probably too low. With oil no longer pulling prices lower, Barclays calculates that the inflation measure TIPS are priced off of will be running 2.4% by the end of the year. Seeing that sort of figure would force a lot of investors to rethink their view on rates.

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Skirting the Dodd Frank Rules on Risk Retention

Via WSJ:

A major postcrisis rule taking effect in December will force Blackstone Group LP and other creators of complex securities to eat some of their own cooking. Many of them are already engineering ways to keep it to a nibble.

Starting Christmas Eve, the 2010 Dodd-Frank regulatory overhaul will require companies that package most types of loans into bonds to keep at least 5% of the securities they create. The intent is to prevent a repeat of crisis-era behavior, in which loan quality fell dramatically as lenders passed all of the risk along to investors.

But in the market for so-called collateralized loan obligations, which are backed by junk-rated corporate loans, many issuers don’t plan to use their own money to retain the whole 5%. Firms including J.P. Morgan Chase & Co. spinoff HPS Investment Partners LLC have moved instead to set up affiliated companies that would buy the stakes. HPS and some others would own roughly 51% of the new firms, and outside investors would own the rest, according to market participants. That means their effective exposure would be halved.

The move is allowed by the rules, which say issuers can hold the securities via majority-owned affiliates. Blackstone is one company weighing whether to push that boundary further by setting up an affiliate in which it holds as little as 20%, people familiar with the matter said.

The private-equity firm thinks that could work, because the rules don’t define “majority-owned” in purely mathematical terms, the people said. They include affiliates in which issuers have a “controlling financial interest” under U.S. accounting standards. As long as companies are in charge of the operations of their affiliates, they arguably could meet that test with stakes as small as 10%, accounting experts said—leaving them exposed to just 0.5% of the securities they create.

Regulators have remained largely silent on the question of what exactly it will take for an affiliate to qualify as majority-owned and on the penalty for noncompliance, adding to the uncertainty that debt-market participants continue to face more than six years after the regulatory overhaul was passed.

“Simpler is always better,” said Brian Juliano, co-head of Prudential Fixed Income’s CLO business, explaining his view on how to manage the new regulations. The money manager, a unit of insurance company Prudential Financial Inc., decided not to use an affiliate and instead took a 5% stake directly in one of its offerings last year.

Pushing the envelope is “potentially dangerous,” Mr. Juliano said.

Asset-backed securities are arcane, but they play a crucial role in the financial system, underpinning everything from credit-card debt to auto loans. CLOs in particular are a major source of credit for indebted companies with limited alternatives. Some $270 billion worth have been issued in the U.S. since 2014, according to LCD, a unit of S&P Global Market Intelligence, pooling together loans made to junk-rated companies like Valeant Pharmaceuticals, Charter Communications and American Airlines.

Issuers buy loans arranged by banks and package them into bonds with varying degrees of risk and return.

Issuance of U.S. CLOs is down 40% from this point last year at $48.3 billion in 2016, according to data from LCD. Market turmoil earlier this year was a big factor, but so is the risk-retention rule. Money managers that oversee CLOs earn fees around 0.5% of the size of the deal. Many of them say retaining a 5% stake would make managing the CLOs far less profitable.

“We got out of the business, because it didn’t make sense to stay in it,” said Brett Jefferson, the founder and president of hedge-fund firm Hildene Capital Management LLC. A Hildene affiliate issued $1.4 billion in CLOs between 2013 and 2015. It sold its rights to manage the CLOs to an affiliate of Fortress Investment Group LLC earlier this year.

Former Rep. Barney Frank, an architect of Dodd-Frank, has called the risk-retention section the most important part of the legislation. Securitization was widely viewed as one of the culprits of the 2008-2009 financial crisis, after scores of bonds backed by subprime mortgages soured. During the housing boom, many mortgage lenders and banks that bundled loans into securities passed all the risk on to others, a practice critics believe limited their incentives to ensure the loans would hold up.

The risk-retention rule isn’t having a major impact on nonprime residential mortgages because private lenders largely abandoned the market after the crisis.

From the start, many CLO originators argued that they shouldn’t be subject to risk-retention rules. They point out that the securities held up relatively well during the chaos of the financial crisis and that the fee structure already typically includes incentives for good performance over time.

An option being pursued by some managers as an alternative to setting up an affiliate is to spin off their CLO businesses entirely. Those new companies are funded by outside investors and do everything the original firms used to do—including buying loans and issuing CLO securities—while also holding 5% of the structures they create.

Dallas-based Triumph Capital Advisors LLC recently spun off its CLO-management business into a new company called Trinitas Capital Management LLC. The firms share several employees, including Triumph Chief Investment Officer Gibran Mahmud, and Trinitas plans to send 60% to 80% of the management fees it earns back to Triumph as compensation for its staff and services, a person familiar with the matter said. Trinitas also has a three-person board of directors that includes Mr. Mahmud and two people unaffiliated with Triumph.

Legal experts said regulators will have to decide whether such companies are truly independent or simply a workaround.

Write to Sam Goldfarb at [email protected] and Serena Ng at [email protected]

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China Credit Surge

Via Bloomberg:
October 18, 2016 — 3:09 AM EDT
Updated on October 18, 2016 — 4:03 AM EDT

China’s broadest measure of new credit exceeded estimates in September to fuel the economy’s continued stabilization and at the same time underscore escalating concerns over a property binge and the pace of debt expansion.

Aggregate financing was 1.72 trillion yuan ($255 billion) last month, compared with median estimate of 1.39 trillion yuan in a Bloomberg survey
New yuan loans stood at 1.22 trillion yuan
Broad M2 money supply rose 11.5 percent from a year earlier

Big Picture

With a credit-binge having succeeded in stabilizing the economy, policy makers are switching focus to reining in soaring home price gains that cheap borrowing costs have spurred. China urgently needs a plan to address a build up of corporate debt that’s manageable but with a window to address it “closing quickly,” according to an International Monetary Fund working paper.
Economist Takeaways

“The government is in a dilemma: if they tighten the real estate sector too much, the economy could turn down sharply; but if they don’t control it, they’ll allow the bubble to expand,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. He expects a sharp slowdown in credit expansion in October.

“It’s more of the same: more yuan lending, more debt, no real increase in M2 growth and a much larger rise in M1 growth,” said Michael Every, head of financial markets research at Rabobank in Hong Kong. “It screams ’Liquidity trap!”

“The property frenzy will certainly limit the PBOC’s appetite for further easing,” said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “While it is too early to call for tightening, deleveraging is certainly an ongoing theme” in the fourth quarter.

“While credit growth remains rapid relative to a couple of years ago, it has been slowing in recent months,” Julian Evans-Pritchard, economist at Capital Economics in Singapore, wrote in an e-mail. “Broader worries about credit risks means further monetary easing is unlikely. It will take time for this more cautious policy stance to impact economic growth.”

“Beijing talks about controlling credit but allows the banks to increase loans,” said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA. “The official message is not the same as the reality. Pressure from the banks for profits, from corporates for loans, and from local governments for revenue from the property sector is driving the Chinese economic bus more than the policy makers in Beijing.”
The Details

Gross domestic product data due tomorrow is likely to show the economy expanded 6.7 percent in the three months through September, the third straight quarter at that pace, according to economists surveyed by Bloomberg
Entrusted loans, trust loans and undiscounted bankers’ acceptance bills — which collectively give a glimpse of shadow financing — remained subdued
Foreign currency loans growth declined 9 percent from year earlier, with 26.3 billion in new foreign currency loans

— With assistance by Yinan Zhao, and Kevin Hamlin

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Early FX

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h118c5df5,18a7de3b,18a7de3c&p1=136122&p2=28b416cf9c64768ca4b4f5d760196c1d>

Working out how important central bank indepdence has been in building the economic prosperity major economies ahve enjoyed since the end of the 1970s wouldn’t be easy, but getting rid of independence and seeing what happens next seems to be on the minds of some politicians, on both sides of the Atlantic. personally, I find this desire to go back to the 70s a really bizarre form of nostalgia. But it’s something to watch…
The rise in bond yields has paused, the dollar rally has paused, Asian equities and currencies are stronger. A stronger dollar as well as higher US yields are a drag on global asset prices and on global growth but today we have cheerful markets, with the dollar and the yen at the bottom of the FX pile while the won, rand, New Zealand and Australian dollars bask in the sun. Even the pound is up! None of this fits the market’s central narrative. I’m watching to see if the US data and the brighter equity mood put a spark under Treasury yields again and if/when that happens, I expect the dollar rally to resume.

Yesterday’s pause in the bond bear market was helped by a soft Empire State Manufacturing survey, which is a reminder that this economic recovery can’t get out of third gear, rather than a reason to look for it to stop altogether. I’m not sure bond dip-buyers are going to get any help from today’s data. The ECB’s bank lending survey will probably show continued, albeit modest improvement. The UK inflation rate is likely to edge up from 0.6% to 0.8% (with more rises to come in the months ahead, of course) and the US CPI data is likely to show headline inflation edging up to 1.5% from 1.1% with the core steady at 2.3%.None of that’s too scary but nor is it designed to derail the gradual rise in yields that have taken 10year Treasuries up by 41bp since early July (the 2016 low), in turn dragging gilt yields up by 39bp, Bunds by 24bp and JGBs by 22bp. Upward yield trundle is likely to continue. If nothing else, William Hague’s article in the Telegraph this morning (Central bankers have collectively lost the plot. They must raise interest rates or face their doom) reflects the mood change that sees more and more critics of low rates and QE, even outside hard money bastions like Germany.

A pause but not an end to the rise in yields

[http://email.sgresearch.com/Content/PublicationPicture/234350/2]

Most of today then, will be spent watching bond yields. Oil and commodity prices are trundling higher too however. Brent needs to get above USD 54/bbl to get chart drawers properly excited, but NOK, and CAD are both benefitting, the latter (along with the Mexican Peso) also helped by Hilary Clinton’s widening opinion poll lead in the US election.

Commodity price uptrend – slow but steady

[http://email.sgresearch.com/Content/PublicationPicture/234350/3]

There’s no real new news in the UK. With positioning and sentiment so extreme, corrections can feed on themselves as sterling bears lighten up. I’d rather be short gilts than short pounds in the next few days. But our medium-term bearish GBP stance is unchanged.

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Duration Time Bomb

I have long thought the next market calamity would be in the corporate bond world. This Bloomberg  story reports on a Goldman Sachs research piece which posits that a 1 percent increase in yields would lead to more than $1 trillion in losses in corporate bond portfolios. The more interesting angle is in a world of sparse balance sheets and risk aversion at dealers what will happen when clients ask for bids and find them light years from what they expected.

Via Bloomberg:
October 17, 2016 — 11:30 AM EDT
Updated on October 17, 2016 — 11:51 AM EDT
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First they came for the yield, then they came for the duration.

A Goldman Sachs Group Inc analysis says investors could be mired in a world of pain if yields on long-dated assets snap higher. Just a modest backup in rates could inflict outsized losses on bond portfolios — a sobering prospect in light of the recent jump in longer-dated bond yields that’s already eating into bondholders’ capital returns.

A 1 percent increase in interest rates could inflict a $1.1 trillion loss to the Bloomberg Barclays U.S. Aggregate Index, analysts at Goldman calculate, representing a larger loss for bondholders than at any other point in history. With the bank predicting the selloff in bonds has further to run, that remains “far from a tail scenario,” its analysts write.

Bets on longer-maturity obligations had paid off handsomely for most of the year amid a global bond rally triggered by expectations that weak economic activity will persuade central banks in advanced economies to postpone tightening monetary policy. Asset purchases by the Bank of Japan, Bank of England and the European Central Bank helped the average maturity of new U.S. corporate bonds climb to a peak of 11.3 years in August.

With average bond maturities worldwide now more than double the inflation-adjusted level of 2009, and three times that of 1994, Goldman says there’s an elevated risk of losses if rates spike higher.

“We see potential for the rates market to continue to sell off, and the notional amount of duration dollars at risk is unprecedentedly large,” Goldman fixed-income analysts, led by Marty Young, wrote in the report on Monday.

The effective average duration of the global bond market, as measured by the Bloomberg Barclays Global Aggregate Index, has risen to 6.98 years, as of mid-October, compared with 6.60 years in January. Goldman’s $1 trillion estimate reflects potential losses on dollar-denominated investment-grade cash bonds, and therefore may form a conservative estimate of the risks facing money markets. It excludes a whole gamut of duration risks facing the U.S. interest-rate swap market; from junk obligations, to the trillion-dollar pile of fixed-rate mortgages, and corporate loans held on bank balance sheets.

A tug-of-war between valuation concerns and dovish central banks will drive the near-term outlook for yields on long-dated securities. Bond guru Bill Gross — who’s also warned that minor interest-rate moves have the potential to wipe out capital gains on bond portfolios — said last month the timing for any “bond bear market” had been “delayed” thanks to dovish central-bank pronouncements which provide a fillip for longer-dated debt. Goldman last month, however, downgraded bonds to underweight on a three-month time horizon, while maintaining its overweight position for cash, partly due to selloff pressure it said valuation and monetary-policy concerns pose to U.S. sovereign debt.

In their Monday note, Young and team restate their view that U.S. long-dated notes could snap higher in the coming months, noting that 10-year U.S. Treasury yields appear expensive relative to fundamentals to the tune of 1.5 standard deviations.

Fed-tightening cycles in the 1990s and in 2006 caused longer-dated bond prices to fall more relative to shorter-dated obligations. Investors typically demand greater compensation for longer-duration bonds, since there’s a greater probability interest rates will change over their lifetime.

Still, the ownership of long-dated debt provides a modicum of solace. “Duration risk is more widely owned today, especially by global central banks and sovereign wealth funds which can more readily absorb such a shock,” the analysts conclude. Foreign central banks and sovereign wealth funds — who this year have shunned new U.S. government debt purchases — face the biggest mark-to-market losses in the event of an interest-rate shock, the Goldman analysts conclude, since they are large buyers of such securities. Meanwhile, pension funds, the natural buyers of bond obligations with longer maturities, would see a corresponding reduction in their liabilities, offsetting, to some extent, the impact of rising rates.

So while Goldman doesn’t necessarily foresee a systematic shock if interest rates snap higher, price-sensitive long-duration investors are swimming in uncharted waters.

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IP

Via Stephen Stanley at Amherst Pierpont Securities:

Industrial production crept up by 0.1% in September, somewhat better than I had expected but a tenth below consensus.  Overall production in September was depressed by a weather-related fall in utility usage (though the 1.0% decline was smaller than I had projected).  There were also downward revisions to July and August that added up to two tenths of a percentage point.

Manufacturing output advanced by 0.2% last month, a tepid bounceback after August’s 0.5% drop (which in turn had followed a solid 0.4% gain in July).  For the quarter, manufacturing production rose at a 0.9% annualized clip.  For the past 12 months, factory output is dead flat.  In fact, since late 2014, when the impact of the massive dollar appreciation that began in the fall of that year began, manufacturing production has been essentially unchanged.  We may see a little improvement in the factory sector going forward, but the consumer is going to have to continue to carry a heavy load in supporting this expansion.

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Equity Market Divergence

Via Bloomberg and hat tip to Steve Feiss at Government Perspectives who you can find on Twitter at @stevefeiss:

At first glance, the stock market in 2016 is nothing like it was last year, when winners kept winning and gains seemed to be concentrated in a handful of stocks.

Nowadays leadership bounces around. Since January, the S&P 500 Index’s strongest group has shifted among utilities, energy producers and technology companies, as investors swapped defensive shares for those that respond to economic growth.

At the same time, not all is well in the breadth department. One ominous signal that marked trading in 2015 has begun to reassert itself, a pattern in which the benchmark index hovers near a 52-week high while the proportion of stocks that are similarly elevated dwindles.

Such divergences, measured by comparing the S&P 500 and the number of constituents trading above their 50-day moving average, have been rare since 1990 — and are generally bad news for investors. In the seven instances that occurred before this year, all but two portended further losses in the next three months, with the S&P 500 falling a median 1.3 percent, according to data compiled by Sundial Capital Research Inc.

“This recent weakening in breadth is troubling,” Jason Goepfert, president of Minneapolis-based Sundial, wrote in a note to clients. “It rarely ends well for stocks — usually, the indexes follow breadth as opposed to the other way around.”

Tuesday marked the second time in the past month when the S&P 500 closed within 2.5 percent of a peak while fewer than 45 percent of its components traded above their average price over the last 50 days. This occurred in June and July of last year, and the index plunged into a 10 percent correction a month later as China’s currency devaluation sparked the biggest selloff in four years. Stocks ended the year down 0.7 percent for the worst performance since the 7 1/2-year-old bull market began in 2009.

Before 2015, a divergence like this hadn’t shown up during the rally. The rising frequency highlights the vulnerability of the stock market to potential shocks, according to Yana Barton, a fund manager of Eaton Vance Focused Growth Opportunities Fund in Boston.

Coincidentally or not, the other time when two warning signals like this flashed within three months of each other, in December 1999 and February 2000, equities ended up erasing half their value over the next two years.

U.S. stocks fell on Thursday, extending their weekly decline to 1 percent, as anxiety over earnings and interest rates sent banks sliding a day before JPMorgan Chase & Co. and Citigroup Inc. deliver their latest earnings reports.

“Uncertainty breeds fear. All the things that we’ve been uncertain about, whether it’s political outcome, monetary policy or the earnings recession — those are the same fear we’ve been dealing with,” Barton said. “When you have a larger participation, it always helps because you have more names that pop up the market so you’re less susceptible to potential declines.”

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Some Corporate Bond Stuff

Via Bloomberg:

IG CREDIT: Spreads See New Tight Levels YTD
2016-10-17 10:22:17.859 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $11.7b Friday vs $17.8b Thursday, $11.2b the previous
Friday. 10-DMA $13.9b; 10-Friday moving avg $11.4b.

* 144a trading added $1.9b of IG volume Friday vs $2.5b
Thursday, $1.9b last Friday

* Trace most active issues:
* CSX 3.80% 2046 was 1st with client and affiliate flows
accounting for 79% of volume; client buying 9:7 over
selling
* ECL 2.70% 2026 was next with client and affiliate trades
taking 80% of volume; client buying 3:2 over selling
* ORCL 2.50% 2022 was 3rd with client trades taking 100%
of volume; buying 4x selling
* DB 4.25% 2021 was the most active 144a issue with client
trades taking 100% of volume; client selling 2.6x buying

* Bloomberg Barclays US IG Corporate Bond Index OAS at 131, a
new YTD tight and tightest level since May 2015, vs 132
* 2016 wide/tight: 215 (a new wide since Jan. 2012)/131
* 2015 wide/tight: 171/122
* 2014 wide/tight: 137/97
* All time wide/tight back to 1989: 555 (Dec. 2008)/54
(March 1997)
* BofAML US Corporate Index also made a new tight for 2017
at +136 vs +137; it hit +221 in Feb., the wide for the
year

* Current market levels vs early Friday levels:
* 2Y 0.831% vs 0.855%
* 10Y 1.798% vs 1.775%
* Dow futures -58 vs +59
* Oil $50.23 vs $50.92
* ¥en 104.12 vs 104.36

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Yield Rally Continues

Via Bloomberg:

German Bund Yields Surge to the Highest Since U.K. Referendum
Marianna Duarte De Aragao
aragaomarianna
October 17, 2016 — 4:54 AM EDT
Updated on October 17, 2016 — 6:27 AM EDT

Ten-year yield climbs above 0.1% for first time since June 23
Rising inflation expectations are pressuring debt prices

A selloff in European government bonds pushed yields on Germany’s benchmark 10-year securities to the highest since the U.K.’s June 23 Brexit vote.

The declines are being spurred by rising investor expectations for consumer prices, just as a euro-zone inflation report showed an uptick on a monthly basis. Losses in the U.S. Treasuries and U.K. gilt market are also spilling over to Europe, with German bund yields climbing above 0.1 percent for first time since Britain’s referendum.

“The ongoing repricing in inflation expectations in the U.K. and the pressure on gilts is spilling over to European bonds,” said Elia Lattuga, a fixed-income strategist at UniCredit SpA in London. “The market is increasingly concerned about rising breakevens, because of what is happening in the U.K. but also because of the recent trend in oil prices and the expected rise in inflation.”

Benchmark German 10-year bund yields rose two basis points, or 0.02 percentage point, to 0.082 percent as of 11:25 a.m. in London, and earlier touched 0.103 percent. The zero percent security due in August 2026 fell 0.232, or 2.32 euros per 1,000-euro ($1,099) face amount, to 99.201.
Inflation Upshoot

Government bonds around the world are retreating after comments from policy makers suggested faster inflation will be tolerated. Federal Reserve Chair Janet Yellen put forward an argument for Fed policy to be tightened slowly, saying on Friday that there are “plausible ways” that running the economy hot for a while could repair some damage caused to growth during the recession.

In the U.K., where the pound’s 18 percent decline since the Brexit vote pushed inflation expectations to the highest since 2014, Bank of England Governor Mark Carney echoed that sentiment, saying last week that he’ll tolerate an inflation-target overshoot. U.K. gilts have been the hardest hit in the recent selloff, with losses accentuated by the turmoil arising from the Brexit vote.

Even as they suffer from spillover effects from the global bonds retreat, European debt still outperformed its peers in Britain and the U.S. in the past month, according to Bloomberg World Bond Indexes.

Economists surveyed by Bloomberg see scope for more stimulus by the European Central Bank. Seventy-eight percent of the 50 analysts forecast it will announce fresh easing measures, with nine in 10 saying it will come in December at the earliest. Few expect action when the Governing Council meets in Frankfurt on Thursday to set policy.

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