Credit Pipeline

October 17th, 2016 6:27 am

Via Bloomberg:

IG CREDIT PIPELINE: 3 Yankees to Price, Domestics Expected
2016-10-17 09:50:10.486 GMT

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

* Industrial & Commercial Bank of China (ICBCAS) A1/A, to
price 2-part deal, via managers BNP/BAML/C/WFS
* 5Y, IPT +150 area
* 10Y, IPT +170 area
* Korea National Oil (KOROIL) Aa2/AA, to price 2-part
144a/Reg-S deal, via C/GS/HSBC/KDB/SG/UBS
* 5Y, IPT +100 area
* 10Y, IPT +100 area
* Turkiye Is Bankasi (ISCTR) Ba1/na/BBB-, to price $benchmark
144a/Reg-s 5.5Y, via BAML/CMZB/MUFG/NBAbuDhabi/SCB

TO PRICE TUESDAY:

* Japan Finance Organization for Municipalities (JFM) A1/A+,
to price $benchmark 144a/Reg-S 7Y, via BAML/C/Daiwa/Miz; IPT
MS +90 area

LATEST UPDATES:

* 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
* Enersis Americas (ENRSIS) Baa3/BBB, mandates
BBVA/C/JPM/MS/SANTAN for roadshow Oct. 17-19; intermediate
maturity deal expected to follow
* International Finance Corp (IFC) Aaa/AAA, to market 5Y
inaugural Forest Bond, via BNP/BAML/JPM; at least $75m may
price week of Oct. 24
* Hyundai Capital Services (HYUCAP) Baa1/A-, to hold investor
meetings from Oct.17, via C/HSBC/Nom
* Kingdom of Saudi Arabia (SAUDI), to hold investor meetings
Oct. 12-18, via C/HSBC/JPM along with BoC/BNP/DB/GS/MS/MUFG;
144a/Reg-S 5Y/10Y/30Y deal expected to follow
* Sirius International Group (SIRINT) na/BBB/BBB-, has
mandated AMTD/BoC/C/JPM/WFS for 144a/Reg-S USD bond; last
issued in 2007
* Honeywell (HON) A2/A,announced a possible 4Q debt
refinancing in its guidance release Oct. 6
* May consider refinancing 2018, 2021 bonds, BI says
* 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)

MANDATES/MEETINGS

* HollyFrontier (HFC) Baa3/BBB-; investor calls Sept. 15-16
* 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
* Industrial Bank of Korea (INDKOR) Aa2/AA-; mtgs from Aug. 22
* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19

M&A-RELATED

* Bayer (BAYNGR) A3/A-; ~$66b Monsanto acq
* Hybrid bond sales 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)
* Pfizer (PFE) A1/AA; ~$14b Medivation acq;
* Expects to finance deal with existing cash (Aug. 22)
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* 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)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)

SHELF FILINGS

* 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)
* Enbridge (ENBCN) Baa2/BBB+; $7b mixed shelf (Aug. 22)
* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Reynolds American (RAI) Baa3/BBB; automatic debt shelf; sold
$9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)

OTHER

* GE (GE) A1/AA-; Ratings cut by S&P on assumption of
increased debt for next couple of yrs on possible
acquisitions (Sept. 23)
* 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)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)

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More FX

October 17th, 2016 6:26 am

Via Marc Chandler at Brown Brothers Harriman:

Four Key Events in the Week Ahead

  • ECB meeting
  • Bank of Canada meeting
  • UK High Court ruling on role of Parliament in Brexit
  • DBRS Reviews Portugal credit rating

The US dollar is narrowly mixed.  The Australian dollar is competing with sterling for the heaviest today with both off almost 0.2%.  The New Zealand dollar is leading the advancing currencies, rising 0.5%.  The yen is little changed.  The euro was sold to a marginal new 11-week low in the Asian morning, but has rebounded to test the $1.10 level in Europe.  MSCI Asia-Pacific equity index was off marginally.  It has fallen in six of the past seven sessions.    MSCI Emerging Market equity index is off 0.5% through the European morning.  It has fallen in four of the past five sessions.   European shares are under a bit more pressure with the Dow Jones Stoxx 600 is down nearly 0.7%, with energy and the consumer sectors down the most.   Bond yields are most mostly high.   US shares are trading lower in Europe and the S&P 500 is called about 0.3% lower.  

Of the forces driving prices in the week ahead, events appear more important than economic reports.   There are four such events that investors must navigate.  The Bank of Canada and the European Central Bank meet.  The UK High Court will deliver its ruling on the role of Parliament in Brexit.  The rating agency DBRS updates its credit rating for Portugal.

The Bank of Canada is not going to change interest rates.  Still, growth has disappointed, and price pressures appear to be ebbing.  It will take longer than the BoC is currently anticipating to close the output gap.  It may adjust its forecasts accordingly.  In addition, the recent use of macro-prudential policies to address housing market activity eases one of the inhibitions for a rate cut.  The market is currently pricing in about a one in 20 chance of this materializing next year.

The risk may be somewhat greater than that  In part, there seems to be too much made of the trade-off between the fiscal stimulus and monetary easing.  It is so pre-crisis.  This week’s data is likely to show that CPI continues to moderate and, despite the launch of a new low-income family benefits program, retail sales like fell in August, and the risk is on the downside of the median forecast of -0.1%.

It does not appear that the ECB is prepared to announce a decision about whether it will extend its asset purchases after the current soft end date of March 2017, or about how it will address the potential scarcity of particular securities.  Although we thought there was an opportunity to do so last month, it now seems more likely that the ECB will make its decision at the December meeting.

In addition to giving it more time see the impact of its current policy setting, it will also have new staff forecasts, which Draghi seems to prefer. The updated forecasts are helpful in stealing some thunder from his critics that often make it sound as if Draghi’s commitment stems from his national origin rather than “objective” economic analysis.

Draghi will likely be pulled in at least two directions at the press conference.  One set of questions will likely address the tapering story.    Draghi was clear at the last meeting, saying the issue was not discussed.  More information will be sought amid suspicions that the ECB President was disingenuous. 

However, Draghi indicated before and will likely restate that the asset purchases should not end abruptly.  This implies some kind of tapering process.  It does not say anything about when the asset purchase program will end of when the tapering begins or the pace of tapering.    At this juncture, our best guess is that one way or the other, the ECB will be expanding its balance sheet most if not all of next year.   

Another set of questions will likely revolve around the capital key.  To avoid appearances of favoritism, the ECB  buys assets in proportion to the economic size of its members.  There is a concern, seemingly higher among some market participants than policymakers that shortages are emerging that could threaten the program.  Those shortages will become more acute the longer the purchases continue.

The less disruptive and, perhaps, the easiest to reach an agreement on, seems to be to ease self-imposed rule of not buying a security that yields lower than the minus 0.4% deposit rate.  The concern here is a forcing a national central bank to realize a loss.  However, instead of a narrow security-by-security imposition of the rule, it really needs only apply to the portfolio as a whole, or the average yield of the bonds purchased. 

The UK’s decision to leave the EU remains a high divisive issue not only in Europe but within the UK itself.  The referendum was approved with the narrowest of margins, but a combination of hubris and naivete prevented the establishment of a threshold for such a significant change, such as 60% or 2/3.  Also, since the decision profoundly impacts the future of the UK, there is no compelling reason why the franchise was not extended to 16-year olds, as Scotland did for its referendum on independence.

Despite the proximity of the outcome, pundits and politicos are trying to divine the will of the people, and like a Rorschach test, people see what they want.   There was nothing in the referendum that indicated the role of Parliament and the Prime Minister in devising and negotiating with the EU over the separation.  Treaty negotiation and foreign policy is usually a remit of 10 Downing Street.

At stake how acrimonious does the divorce need to be, and the referendum did not address this issue.  A hard Brexit is one that denies the UK access to the single market on the same terms as is the case currently.  A soft Brexit preserves this access.   The dilemma turns on how hard the UK wants to free itself from the EU principle of free movement of people, though it is not a member of the Schengen Agreement.

The UK’s “Brexit” team, which Prime Minister May selected, is inclined to push for hard Brexit.  For them, limiting immigration is the number one priority.  The former head of UKIP was quoted in press putting the fine point on it:  less prosperity is acceptable if it means fewer immigrants.   On the other hand, Parliament is coming from the other direction.  There is both a constitutional issue of the role of parliament as well as a more moderate approach to Brexit. 

The UK High Court is expected to announce its ruling on Monday.  Sterling’s near-free fall in the foreign exchange market is a reflection of the risks of a hard exit.  The value of UK assets is understood to be less if it is no longer has access to the single market.  The greater the role of that the High Court insists on for Parliament, the more hard Brexit may be tempered.  In turn, this could help spur a short-covering recovery of sterling. 

However, there are two mitigating factors that will not be lost on investors.  First, regardless of the decision, one side or the other will appeal to the UK Supreme Court.  A decision would be expected before the end of the year.  Second, in some ways, and not to put too fine of a point on it, but what the UK wants may not be the deciding issue (and who doesn’t want one’s cake and eat it?).

It is not in the EU’s interest to make it easy anyone that wants to leave or to allow any member to treat the Community as a smorgasbord where one can pick the and chose one what is on one’s plate.   Benefits cannot come without costs.    The idea that the UK can retain access to the single market without accepting the free movement of people is a non-starter.  Judging from comments from EU’s Tusk, any exit from the EU will be a hard exit.  Article 50 of the Lisbon Treaty, which is to govern the exit process, is designed to give the EU not the member state the upper hand in the negotiations. 

At the end of the week, DBRS will update its assessment of Portugal’s sovereign credit rating.  The ECB recognizes four rating agencies and provided that at least one rates a country as investment grade, the country’s bonds will be including in the asset purchase program.  A country’s rating also determines the haircut given to the government bonds used by banks to secure funding from the ECB.  A loss of investment grade status would make the country’s bonds no longer acceptable as collateral (without a waiver). 

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Early FX

October 17th, 2016 6:21 am

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h1188ae10,18a21a46,18a21a47&p1=136122&p2=3ac2afd229b864222aa934befde45602>
Link to last night’s piece again. Not a lot has changed. Sterling’s no lower than it was when I went to bed, Brent unch’d at $51.90, 10yr Notes steady at 1.79. Japan IP was revised down to +1.3 m/m, UK Rightmove house prices +4.2% y/y. Asian equities are mixed. More Rosengren in the WSJ, though nothing very different from the speech in last night’s link, so it’s really the Hilsenrath take…{http://www.wsj.com/articles/rosengren-signals-willingness-to-keep-rates-steady-in-november-1476676803}.                                                                                                                                I like short EUR/$ this morning because 1) break of 1.10 Friday, 2) US yield uptrend intact and possibly helped by Rosengren & Hilsenrath, 3)Edginess ahead of ECB, DBRS review of Portugal’s rating, and 4) positioning with CFTC data supporting a view that the EUR positioning is light enough that shorts can be built easily while T-Note longs are still there to flush out.                                                                                                With oil in no man’s land  there’s no direction from that front but the on-going steady USD/CNY rise is enough to keep me bearish of AsianFX overall.                                                                                    USD/JPY needs risk sentiment to hold up and then it can push higher again. staying long…                                                                                                                                                Every tragedy needs a comedy villain – if Sterling’s Ophelia, then the Gilt market’s  Claudius. Sorry, the Rosengren and Hilsenrath thing’s got stuck inside my head now….
Today’s data: US Empire State survey (mkt 1.0), IP (mkt 0.2), Cap use (75.6) and late tonight Kiwi inflation. Speakers include Mersch at 10:45, Broadbent at 15:45, Stan Fischer at 17:15, Draghi and Weidmann at 18:35…

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Hilsenrath Article

October 17th, 2016 6:17 am

WSJ scribe Hilsenrath interviews recent dissenter Rosengren who favors a steady course in November and a rate hike in December.

Via Jon Hilsenrath of the WSJ:

Rosengren Signals Willingness to Keep Rates Steady in November

By

Jon Hilsenrath

0 COMMENTS

BOSTON— Eric Rosengren, president of the Federal Reserve Bank of Boston, signaled a willingness to keep short-term interest rates steady at the central bank’s next policy meeting in November and wait until mid-December before moving them higher.

Mr. Rosengren dissented at the Fed’s September policy meeting because he wanted to raise rates then. The Fed next meets Nov. 1-2, a week before the U.S. presidential election.

In an interview with The Wall Street Journal on the sidelines of a Boston Fed conference here, Mr. Rosengren suggested he would be comfortable avoiding action right before the election and waiting until year-end to move.

“I don’t think elections and politics should play a significant role,” he said. “That being said a delay of one meeting, in no econometric model does that make an economic difference. Now if you start waiting quarters that starts making an economic difference.”

The Fed’s last meeting of the year is Dec. 13-14.

Traders in futures markets place just an 8% probability on a Fed rate increase in November and a 70% probability on a quarter percentage point rate increase in December. “That probably is a reasonable bet,” Mr. Rosengren said.

While politics don’t play into his thinking about interest rates, he said it is possible election surprises could affect the economic outlook, which the Fed would need to consider in its actions. “We should be looking at what we think is going to be happening to the economy,” he said. “To the extent that an election changes my forecast in a material way, I should take that into account.”

Mr. Rosengren was one of three Fed officials who voted to raise rates at the September policy meeting. They lost in a 7 to 3 vote.

He sees inflation reaching the Fed’s 2% goal “relatively soon,” he said. He also sees the unemployment rate resuming a downward drift after holding steady near 5% for all of 2016.

Fed Chairwoman Janet Yellen has argued that an improving economy is drawing individuals from the sidelines of the labor market back into the workforce, which is preventing the job market from overheating and holding the jobless rate up. Mr. Rosengren said he wasn’t too confident that trend would continue.

“I am expecting the unemployment rate to drift below 4.7%,” he said. His worry, he said, is that the Fed could find itself behind the curve on rates and forced to move them up abruptly, knocking the expansion off course.

 

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Predatory Trading in Treasury Market

October 16th, 2016 9:39 pm

A new electronic platform will allow dealers to blacklist counterparties they deem predatory.

Via Bloomberg and quite interesting (at least to me):
One Man’s Crusade to Tame Most Dangerous Predators in Treasuries
Eliza Ronalds-Hannon
ElizaHannon
October 16, 2016 — 7:00 PM EDT

Ex-BrokerTec CEO starts new platform to combat abusive HFTs
Critics blame ‘phantom liquidity’ for drop in trading volumes

 

Nowadays, a persistent worry in the U.S. Treasury market is that high-speed traders are running amok.

One Wall Street veteran says he’s hit on a way to tame their most predatory instincts.

David Rutter, the former head of the biggest electronic venue for Treasuries, says his startup will launch a new trading platform called LiquidityEdge Select this week. According to Rutter, a big draw is that it will enable clients to shut off bids and offers from firms they suspect are using hair-trigger algorithms to trade against their orders. He’s enlisted Cantor Fitzgerald to backstop the transactions and signed up about 90 clients, including most of the Treasury market’s 23 primary dealers and several high-speed trading firms.

“There’s a lot of pent-up demand to fix the inherent disadvantages” on some of the existing venues, Rutter said from his midtown Manhattan office. Going up against certain kinds of speed traders can be “a huge frustration.”

Success is far from guaranteed and there’s considerable debate over whether high-frequency traders, or HFTs, actually do more harm than good. But one thing is undeniable: technological advances and post-crisis bank regulations designed to limit risk-taking are transforming the inner workings of trading U.S. government debt and creating a sense of disorder among the more traditional players in the world’s most important bond market.

“The game is changing every day,” said Tom di Galoma, the managing director of government trading and strategy at Seaport Global Holdings. On electronic platforms, the rise of HFTs “concerns anybody else who trades on them.”
Liquidity Woes

Regardless of who or what is responsible, there are signs U.S. government bonds have gotten harder to trade, even as Treasury Department officials say the $13.7 trillion market is sound and the ability to transact remains robust.

An average of $491 billion of Treasuries have changed hands each day in the past year, down from $600 billion in 2011, according to JPMorgan Chase & Co. The ability to trade without moving prices has also deteriorated, with another measure indicating Treasuries are now 50 percent more sensitive to price fluctuations than they were five years ago.

At the same time, the market itself has become more prone to sudden shocks, with the Oct. 15, 2014 “flash crash” in Treasury yields the most prominent example. While regulators still haven’t figured out what triggered it, they concluded that automated trading firms made the wild ride that much worse.

All these changes have come as regulations imposed in the aftermath of the financial crisis prompted Wall Street banks to retreat from dealing. Computerized firms have swept in to fill the void.

Electronic platforms like ICAP Plc’s BrokerTec and Nasdaq Inc.’s eSpeed now account for almost half the volume in the Treasury market. Bloomberg LP, the parent of Bloomberg News, and its affiliates also provide trading in Treasuries.
‘Phantom Liquidity’

On the main venues that cater to dealers, 8 of the 10 biggest firms by volume last year were non-bank proprietary trading firms, according to Greenwich Associates, a financial services consulting firm. Their influence has led HFT critics to blame computerized traders for providing “phantom liquidity.”

That occurs when those firms use their speed to suddenly change the amount they are willing to buy (or sell) once they detect incoming orders. And it can be costly for slower-footed investors who enter the market thinking there’s a certain amount they can trade, only to have it disappear. In some cases, predatory firms use sophisticated algorithms to decipher a counterparty’s intentions and race ahead of its orders.

The problem was underscored by the Bank for International Settlements, which concluded in a January paper that such strategies have the potential to depress bond-market liquidity. According to Greenwich, less than half the trading activity on inter-dealer platforms last year consisted of “true market making,” which the research firm defined as the willingness of firms to buy and sell a specific security on demand.

“A lot of the intermediaries that had balance sheets to absorb risk and trade, they’re gone,” said Ed Al-Hussainy, senior global interest-rate analyst at Columbia Threadneedle Investments, which oversees $460 billion.
Value Proposition

That’s where Rutter comes in. LiquidityEdge is the first of at least four companies that are planning to start trading platforms by year-end.

LiquidityEdge Select differs from traditional electronic platforms in a few distinct ways. First, clients can pre-select counterparties and trade with them using anonymous user IDs, rather than sending an order into a central market that everyone can see. That maintains confidentiality and enables clients to receive bids and offers only from parties they want. Second, the system allows customers to exclude any streams at any time.

Rutter says this kind of self-policing gives non-bank traders a greater incentive to provide firm orders, while weeding out predatory firms that try to game the system.

LiquidityEdge will also use Cantor Fitzgerald as a central clearing counterparty, settling trades via the Fixed Income Clearing Corp. That means trades are guaranteed even if one party fails to deliver on either payment or bonds. The lack of a such an arrangement precipitated the demise of Direct Match, a Treasuries trading startup that shut down in August.
Diminishing Returns?

To be sure, a proliferation of trading platforms could potentially harm liquidity more than help it.

New venues may poach clients from the incumbents — BrokerTec, Rutter’s former employer, and eSpeed — but that may just lead to shallower liquidity across more venues and result in a Treasury market that’s more fractured than it is now. LiquidityEdge Select will be the firm’s second trading venue for Treasuries. It will sit alongside the firm’s one-year-old bilateral platform, LiquidityEdge Direct.

“Is it a case of, the more liquidity pools the merrier?” said Anthony Perrotta, global head of research and consulting at Tabb Group, which specializes in market-structure research. “Some would say yes. At the same time, people’s bandwidth is only so great.”

The Treasury market’s two incumbents, BrokerTec and eSpeed, already have plans to launch competing trading venues later this year.

BrokerTec Direct will let investors trade with dealers and HFT firms whose identities are disclosed. Like LiquidityEdge, it will also use private streams of bids and offers instead of a central order book.

 

ESpeed’s CrossRate venue will classify members into two categories: providers and consumers of liquidity. It’s designed to bring together smaller dealers and regional banks — which typically lack the technology and know-how to compete against proprietary trading firms — with a few of the most active primary dealers in Treasuries. For the bigger dealers, the platform will give them the chance to widen their client base.
‘Toxic Flow’

“It used to be the business model for the large dealer was to crush the small dealer,” said David Light, CrossRate’s co-founder and the former head of rates at RBC Capital Markets. For dealers, it’s now a “symbiotic one.”

And to deter what Light calls “toxic flow” of predatory traders, CrossRate plans to offer rebates to firms that don’t engage in those practices.

LiquidityEdge’s Rutter isn’t worried about the competition. Instead, he says the perceived problems associated with certain high-speed strategies have become so pervasive that everyone is looking at alternatives to the status quo.

It’s “one of the reasons we exist,” he said.

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Easy Money on Steroids

October 16th, 2016 7:57 pm

Via Bloomberg:
Big Central Bank Assets Jump Fastest in 5 Years to $21 Trillion
Phil Kuntz
October 16, 2016 — 7:00 PM EDT

Up 10% this year to almost a third the size of world economy
Trajectory coincides with the rise in global stocks and bonds

 

The world’s biggest central banks are bulking up their balance sheets this year at the fastest pace since 2011’s European debt crisis to boost lackluster economic recoveries with asset purchases that are supporting stock and bond prices.

The 10 largest lenders now own assets totaling $21.4 trillion, a 10 percent increase from the end of last year, data collected by Bloomberg show. Their combined holdings grew by 3 percent or less in both 2015 and 2014.

The accelerating expansion of central banks’ balance sheets comes as debate rages over whether their asset purchases and continued low interest rates are creating bubbles, especially in the bond market. Such quantitative-easing programs are aimed at driving up the prices of the securities they purchase to lower bond yields, encourage investment and boost economic growth.

 

The growth of central-bank holdings has coincided with the mostly upward trend of stock and bond prices. As the top 10 expanded their balance sheets by 265 percent since mid-October 2006, the MSCI All Country World Index of equities gained 19 percent and the Bloomberg Barclays Global Aggregate Index of bonds advanced 50 percent.

Over the past decade, the Swiss National Bank expanded its holdings the most among those with the largest portfolios, almost eight-fold in U.S. dollar terms. The Bank of Russia was the least aggressive with a 68 percent increase.

As the biggest banks’ holdings grew 10.4 percent this year, the stock gauge gained 3 percent and the bond benchmark jumped 7.4 percent.

The Bank of Japan and the European Central Bank together have expanded their assets by $2.1 trillion since Dec. 31, more than accounting for all of the top 10’s combined increase. The balance sheets of the People’s Bank of China and the U.S. Federal Reserve fell 2 percent or less as the Swiss and the Central Bank of Brazil boosted their holdings 15 percent or more.

How much is $21.4 trillion?

It’s 29 percent of the size of the world economy as of the end of 2015, double what it was in mid-September 2008, when Lehman Brothers Holdings Inc.’s collapse sparked the global financial crisis. It’s a third of the combined market capitalization of every stock in the world and almost half the value of all debt in Bloomberg’s global bond index.

Almost 75 percent percent of the world’s central-bank assets are controlled by policy makers in four places: China, the U.S., Japan and the euro zone. The next six — the central banks of Brazil, Switzerland, Saudi Arabia, the U.K., India and Russia — each account for an average of 2.5 percent. The remaining 107 central banks tracked by Bloomberg, mostly with International Monetary Fund data, hold less than 13 percent.

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ObamaCare (Res Ipsa Loquitur)

October 16th, 2016 4:31 pm

Via Bloomberg:

More Than 1 Million to Lose Obamacare Plans as Insurers Quit
Zachary Tracer
ZTracer
Tatiana Darie
tatianadariee
Katherine Doherty
October 14, 2016 — 5:00 AM EDT
Updated on October 14, 2016 — 4:34 PM EDT

Insurers quitting is latest threat to health law’s markets
Health law has become major focus of Trump, Clinton election

 

A growing number of people in Obamacare are finding out their health insurance plans will disappear from the program next year, forcing them to find new coverage even as options shrink and prices rise.

At least 1.4 million people in 32 states will lose the Obamacare plan they have now, according to state officials contacted by Bloomberg. That’s largely caused by Aetna Inc., UnitedHealth Group Inc. and some state or regional insurers quitting the law’s markets for individual coverage.

 

Sign-ups for Obamacare coverage begin next month. Fallout from the quitting insurers has emerged as the latest threat to the law, which is also a major focal point in the U.S. presidential election. While it’s not clear what all the consequences of the departing insurers will be, interviews with regulators and insurance customers suggest that plans will be fewer and more expensive, and may not include the same doctors and hospitals.

It may also mean that instead of growing in 2017, Obamacare could shrink. As of March 31, the law covered 11.1 million people; an Oct. 13 S&P Global Ratings report predicted that enrollment next year will range from an 8 percent decline to a 4 percent gain.
Vanishing Plan

Last year in Minnesota, Theresa Puffer, 61, used Obamacare to sign up for a BlueCross BlueShield plan after leaving her job following a skin cancer diagnosis. “I would have had a hard time finding any sort of coverage before the ACA,” Puffer said by phone.

Next year, Puffer’s plan is disappearing from Obamacare — making her one of about 20,000 Minnesotans in the same situation. To make matters worse, premiums for other plans in the state will rise by at least 50 percent, though subsidies under the law can help cushion the blow.

“Trying to determine which would be the best plan for my situation is not easy,” Puffer said. Her dermatologist appears to be out of network in other plans, she said. “I’m willing to pay a higher premium to see him, because when you have cancer you want to stay with the same group of doctors,” she said. “I’ve spent so much time trying to figure out what my options are.”

Bloomberg contacted officials in all 50 states and Washington, D.C., and the 1.4 million-person estimate includes 32 states and only plans sold on the individual “exchange” markets. In Texas, Arizona, Georgia and Missouri, insurers have pulled out, but regulators couldn’t or wouldn’t say how many people are affected. Three states didn’t provide sufficient data.

Eleven states said they weren’t affected. In Washington, D.C., because one insurer withdrew some of its offerings, about 7,800 customers will need to choose new plans.
Normal Disruption

The U.S. agency that oversees Obamacare has said that some disruption is normal, and that choosing a new plan can help people get the best deal.

“It’s part of the normal business cycle for insurers to discontinue, change, and replace plans from year to year,” Benjamin Wakana, a spokesman for the Department of Health and Human Services, said by e-mail on Oct. 5. “Such changes don’t prevent people from obtaining coverage. People can shop for new coverage through a transparent market.”

HHS said Thursday that it will contact people losing their coverage and encourage them to sign up with new plans. The law requires all Americans to have insurance or pay a fine.

Nationwide estimates of the number of people losing their current plans are higher. For example, Charles Gaba, who tracks the law at ACASignups.net, estimates that 2 million to 2.5 million people in the U.S. will lose their current plans, compared with 2 million a year ago. Gaba’s estimate is based on insurance company membership data.
Fewer Choices

For the people losing plans, there are fewer and fewer choices. One estimate by the Kaiser Family Foundation predicts that for at least 19 percent of the people in Obamacare’s individual market next year there will be only one insurer to choose from.

In North Carolina, for example, a BlueCross BlueShield insurer will be the only option in 95 of the state’s 100 counties after Aetna and UnitedHealth said this year that they would leave. That will leave 284,000 people looking for a new plan, according to the state.

“Without any significant statutory and regulatory changes on the federal and state levels, we may face the crisis again,” said North Carolina Insurance Commissioner Wayne Goodwin, a Democrat who’s up for election this year. “There needs to be a wholesale re-evaluation by leaders in Washington.”
Losing Access

In Tennessee, UnitedHealth and the state’s BlueCross BlueShield plan are pulling back, and about 117,000 people will lose the plans they have now.

Amanda Page Cornett, a 34-year-old musician and athletic trainer in Nashville, is among them. For 2015, Cornett was careful to pick a BlueCross BlueShield plan that covered specialists at Vanderbilt Health, to treat nerve pain stemming from a 2013 accident. Her condition worsened recently, she said, and she’s worried about losing access to her doctor.

“I’m hopeful that he’s going to be able to help me,” she said of her current physician. “I feel like now I have two and a half months to figure it out before they shut me out.”

 

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October 14 2014 Flash Crash and Treasury Market Liquidity (or lack Thereof) Revisited

October 16th, 2016 4:26 pm

Via Bloomberg:
Once-in-4,800-Year Shock Is Bond Market’s Cold Case Two Years On
Rebecca Spalding
@rcurtisspalding
Eliza Ronalds-Hannon
ElizaHannon
October 13, 2016 — 7:45 PM EDT
Updated on October 14, 2016 — 11:00 AM EDT

Regulators say market safer now than before 2014 flash rally
Analysts say next sudden swing could be even more extreme

Two years since a burst of unprecedented volatility shook the $13.7 trillion U.S. Treasuries market, regulators still haven’t worked out what triggered it, let alone how to prevent a recurrence.

The Oct. 15, 2014 flash rally saw yields move by almost five standard deviations — analogous to an event that should occur about one day every 4,800 years. A 2015 report by five government agencies found no smoking gun, and with insufficient data on trading at the time of the surge and then slump in Treasuries prices, the trail is running cold.

What is clear, analysts say, is that the next sudden swing could be even more extreme as algorithmic and electronic trading account for a greater share of transactions. Trading volumes are on the decline and liquidity — the ability to trade large amounts of securities without triggering volatility — is also waning. By one measure, the market’s depth makes it 50 percent more sensitive to price fluctuations than it was five years ago, according to JPMorgan Chase & Co. research.

“Shocks to the system are resulting in much bigger moves than they ever had,” said Ralph Axel, a rates analyst in New York at Bank of America Merrill Lynch. “As it’s moved all into electronics, it’s become that much more mysterious.”

While liquidity appears adequate under normal circumstances, it’s what can happen during times of distress that concerns investors. Average daily trading volume in Treasuries fell to $491 billion over the past year from around $600 billion in 2011, while daily market turnover has declined to 3.7 percent, the lowest in more than two decades, JPMorgan analysts led by Jay Barry wrote in an Oct. 7 report.

Market depth in 10-year Treasuries tends to decline by $38 million for each increase of one basis point, or 0.01 percentage point, in the intraday yield range, versus a $25 million decrease five years ago, according to the report.

Based on Bloomberg’s U.S. Government Securities Liquidity Index, which measures how much yields on U.S. government bonds are deviating from where a fair-value model indicates they should be trading, liquidity conditions have deteriorated over the past four years.
Shock Absorber

Before the financial crisis, banks with large trading desks were the principal market makers for U.S. debt. That changed after regulations curtailed banks’ willingness to hold certain securities on their balance sheets and discouraged risk taking. Non-bank principal trading firms, many of which use algorithms to execute high-frequency computer-driven transactions, have stepped into that void.

“Headline liquidity seems to be just fine but if you go a little deeper, some of the fundamental things have changed,” said Krista Schwarz, assistant professor of finance at the Wharton School of the University of Pennsylvania in Philadelphia, who studies asset pricing and the effects of liquidity in fixed-income markets. “There has been this dramatic shift in the Treasury market between who’s transacting, how they’re transacting.”

The shift may intensify market moves, according to Haoxiang Zhu, an assistant professor of finance at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, because high-frequency firms are less likely to take the other side of a prevailing trade.
Trade Direction

“Dealers can accommodate a one-way flow, but high-frequency traders don’t want to take inventory because they are very lean,” said Zhu, who studies asset pricing and financial-market structure. “Matched orders are easier to execute. Huge one-way flows could be trickier.”

On Oct. 15, 2014, benchmark Treasury 10-year yields plunged as much as 34 basis points before reversing direction to finish the day six basis points lower at 2.14 percent. The 2015 investigative report found that so-called principal trading firms that employ high-frequency trade strategies were the primary contributors of liquidity throughout the episode, even though liquidity was broadly depressed.

“When you have government policy makers trying to limit the participation of banks, you have to ask yourself, where will the liquidity come from?” said Bill Harts, chief executive officer of the Modern Markets Initiative, an HFT advocacy group. “If there’s any regulatory response at all, it’s to incent more PTF activity in these markets so that there can be more liquidity.”
Liquidity Gauges

Bid-asks spreads, a traditional liquidity measure, have been stable since the financial crisis, according to data from the New York Fed. Still, regulators say more data are needed to capture all aspects of market liquidity.

“Structural changes mean that our interpretation of some liquidity measures must adapt, and that we may also need to search for new ways to measure liquidity,” Nathaniel Wuerffel, senior vice president at the New York Fed, said in a speech delivered in May. “In other words, both the interpretation and measurement of liquidity must evolve as market structure evolves.”

The Treasury declined to comment for this story but referred to previous statements on the topic. In a May 2016 blog post, officials rejected Wall Street’s complaints that trading conditions have worsened, pointing to measures such as trading volumes and bid-ask spreads that remain near historic averages.

“While no individual metric is dispositive, these measures together suggest that liquidity in the Treasury market is consistent with historic levels,” James Clark, Treasury deputy assistant secretary for federal finance, and Gabriel Mann, policy adviser in the Office of Debt Management, wrote in the post.
Flash Events

Treasury Counselor Antonio Weiss told the Senate’s banking committee in April that there was no evidence of deterioration in liquidity in fixed income and that markets are better equipped to respond to volatile events as a result of post-financial crisis regulation.

The New York Fed referred Bloomberg to a statement issued in August in coordination with the four other government agencies involved in the 2015 report.

While agencies are still collecting data related to the flash rally, regulators aren’t waiting to introduce new rules to increase market transparency. In August, the U.S. Securities and Exchange Commission asked for comment on a proposal that would require members of the Financial Industry Regulatory Authority to report Treasuries trades to officials.

Treasuries have avoided any repeat episodes over the past two years, but such flash events have occurred elsewhere in financial markets. Earlier this month, the British pound plunged during two chaotic minutes of Asian trading, with traders saying computer-initiated sell orders exacerbated the slump.

“My guess is we see more of these mini flash crashes and flash rallies,” said Zhu. “It may not be at that huge scale we saw two years ago, but it’s also up to the regulators to look more closely at what’s going on. The small ones may become big ones.”

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Sunday Evening FX Musings

October 16th, 2016 4:13 pm

Via Kit Juckes at SocGen:

Two Sunday evening links. One from Michala on the economics of bond yields and one from me on why the Euro looks vulnerable this week.
<http://www.sgmarkets.com/r/?id=h1188ae10,18a21a46,18a21a47&p1=136122&p2=3ac2afd229b864222aa934befde45602>

Euro and T-Note positions – room to break EUR/USD lower

For once, the most interesting data in this week’s CFTC (FX) position report wasn’t how short everyone is of sterling, but a renewed build-up of Euro shorts. OK, in the 5-eyar chart below you can see that it’s not a huge increase, but maybe that’s part of the point too. EUR/USD closed the week below 1.10, in part after Boston Fed President Eric Rosengren suggested that if the Fed were concerned about historically low 10-year yields, the composition of the Fed’s balance sheet could be adjusted to steepen the yield curve [(see here): https://www.bostonfed.org/news-and-events/news/top-takeaways-oct-14-economic-conference-remarks.aspx]. Mr Rosengren did nothing to dissuade the market from the idea that a rate hike is coming in December unless something happens to de-rail a move (again) but equally, he didn’t seem very hawkish beyond that.

The market has room to get shorter Euro

[http://email.sgresearch.com/Content/PublicationPicture/234156/1]

Mr Rosengren is helping the Treasury correction continue, adding to the angst among Treasury holders and if the market shows a growing Euro short, it also shows a shrinking T-Note future long. But a smaller long is still a long and the tide has turned in bond-land. There’s plenty of data in the week ahead and the balance of risks is for higher yields, and a weaker Euro. If you’re into Euro-gloom, Ambrose Evans-Pritchard cited this article<http://www.sgmarkets.com/r/?id=h1188ae10,18a21a46,18a21a49> by Otmar Issing today, but I’m more interested in the widening yield gap, the Treasury bear market, the psychological break below EUR/USD 1.10 and the positioning (still a small Euro short and still a net T-Note long). All of which suggests that we can see a move to 1.08, perhaps a little below, but positions and small relative yield moves aren’t really enough to get a move to, say, 1.00-1.04

And it has plenty of room to get nervous about Treasuries

[http://email.sgresearch.com/Content/PublicationPicture/234156/2]

The Pound just looks odd now: I don’t know if next week’s CFTC positioning data will make the latest sterling slide look sensible but the market was very short before the last lurch and relative rates don’t justify a further fall at this point. The FX and rates markets have de-coupled somewhat, and gilts look more vulnerable here to me, than the pound. The Government’s weekend public relations effort has seen talk of paying money to maintain access to some bits of the single market, while also supporting BOE Governor Carney. And yet, so far in early Asian trading, sterling is lower yet again, That doesn’t often tell me much about what happens in the days ahead but beyond repeating firstly, that the risk of short-covering isn’t negligible, secondly that we still think medium terms shorts against both Euro and Dollar will pay off and finally, that a fall in GBP/USD below 1.20 is dangerous in terms of what it does for broader confidence in sterling assets, I’ve got very little helpful to add.

Sterling shorts cut back marginally, pound tumbled anyway

[http://email.sgresearch.com/Content/PublicationPicture/234156/3]

Yen longs are also being cut back, but the market’s still long and unless higher US yields trigger broad-based risk aversion, we’ll stay with longs in USD/JPY

USD/JPY bulls are helped by yen longs as well as Tnote longs

[http://email.sgresearch.com/Content/PublicationPicture/234156/4]

This week’s data calendar is pretty full. Tuesday sees the ECB bank lending survey and there is going to be speculation about what the ECB may say on Thursday about tapering bond purchases (though they may say nothing at all); The UK’s got CPI data and Unemployment on Tuesday and Wednesday, and the US has industrial production Monday, CPI Tuesday, the Beige Book on Wednesday, and Philly Fed and Thursday. And finally, Chinese Q3 GDP data re due, though the real debate s how much debt each unit of growth currently costs, rather than whether the data is better (it is). The Chinese authorities meanwhile are just nudging their currency ever-so-slowly lower. Oil prices and OPEC’s ability to deliver production cuts are the other main topic the markets will watch.

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Rising Deficit and Rising Spending

October 15th, 2016 9:09 pm

Via Bloomberg:

Saleha Mohsin
SalehaMohsin
October 14, 2016 — 4:00 PM EDT
Updated on October 14, 2016 — 4:36 PM EDT

Receipts rise 1%, outlays increase 5% in year, Treasury says
Deficit as a share of GDP near 40-year average: Treasury

 

The U.S. budget deficit as a share of the economy widened for the first time in seven years, marking a turning point in the nation’s fiscal outlook as an aging population boosts government spending and debt.

Spending exceeded revenue by $587.4 billion in the 12 months to Sept. 30, compared with a $439.1 billion deficit in fiscal 2015, the Treasury Department said Friday in a report released in Washington. That was in line with a Congressional Budget Office estimate on Oct. 7 for a shortfall of $588 billion. As a share of gross domestic product, the shortfall rose to 3.2 percent from 2.5 percent a year earlier, the first such increase since 2009, government figures show.

“The slowdown in tax collections suggests some cooling in labor market activity,” said Gennadiy Goldberg, a strategist at TD Securities LLC in New York. He sees the higher budget deficits implying more borrowing needs by Treasury.

The rising deficit also comes amid warnings from the International Monetary Fund last week of the risks of increasing debt loads, which it says complicates the task for policy makers who have pledged to use fiscal policy to give the global economy a fillip.

 

Debt levels are seen rising under both U.S. election candidates. Democratic nominee Hillary Clinton’s spending proposals include $275 billion for infrastructure and $350 billion on making college more affordable. Her proposals would add $200 billion to $1.8 trillion to deficits, according to recent independent economists’ projections. She has proposed tax increases for the wealthy to help fill the gap.

Donald Trump, the Republican candidate, has pledged to cut taxes and spend as much as $500 billion on infrastructure programs. Projections of the impact of his proposals say he’d increase the national debt by roughly $5 trillion over 10 years. Trump says his proposals would boost economic growth, which in turn would help reduce the federal debt.

The Treasury said receipts in fiscal 2016 totaled $3.27 trillion, or 17.8 percent of GDP, while spending totaled $3.85 trillion, or 20.9 percent of GDP. Receipts rose $18 billion from fiscal 2015, while outlays jumped $166 billion, the figures showed. The department cited higher spending on Social Security, Medicare, Medicaid and interest on government debt.

For September, which is the final month in the fiscal calendar, the government reported a $33.4 billion surplus. That was lower than the $90.9 billion surplus a year earlier, in part due to calendar adjustments, according to the Treasury.

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