Across the Curve

Dollar Demand in Europe

Via Bloomberg:
European Banks Are Asking the ECB for a Lot More Dollar Funding
Rise in dollar demand may point to increasing tensions for region’s lenders
Lorcan Roche Kelly
lorcanRK
September 30, 2016 — 5:21 AM EDT

The European Central Bank has been been holding U.S. dollar-providing operations since the weeks after the collapse of Lehman Brothers Inc., as part of its liquidity operations for European lending.

The totals drawn by banks from the operation have been relatively low for the past couple of years. That changed this week when 12 banks sought $6.348 billion in liquidity.

The total dollars sought was the most in four years. The number of bidders also jumped.

So what’s going on? With German banks under pressure this week as Deutsche Bank AG, the nation’s biggest lender, faces U.S. legal penalties, they might be viewed as the likely source of the increased demand.

However, there were no German bidders at the operation, according to a person familiar with the matter, who asked not to be named because the details of the operations are confidential. That suggests a possible squeeze on market liquidity may be a wider problem for banks in Europe.

A spokesman for the ECB declined to comment.

The operation does cover the end of quarter period, a typically volatile time. There was also a spike in operation size and number of bidders at the end of June, but that was far smaller.

Details of the next dollar operation will be published on the ECB website on Oct. 5.

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Lawless Chutzpah

The Washington Post reports that the Obama Administration is planning to use an obscure law to bail out insurance companies and defy the will of the Congress.

Via the Washington Post:
Obama administration may use obscure fund to pay billions to ACA insurers
By Amy Goldstein September 29 at 12:25 PM

The Obama administration is maneuvering to pay health insurers billions of dollars the government owes under the Affordable Care Act, through a move that could circumvent Congress and help shore up the president’s signature legislative achievement before he leaves office.

Justice Department officials have privately told several health plans suing over the unpaid money that they are eager to negotiate a broad settlement, which could end up offering payments to about 175 health plans selling coverage on ACA marketplaces, according to insurance executives and lawyers familiar with the talks.

The payments most likely would draw from an obscure Treasury Department fund intended to cover federal legal claims, the executives and lawyers said. This approach would get around a recent congressional ban on the use of Health and Human Services money to pay the insurers.

The start of negotiations came amid an exodus of health plans from the insurance exchanges that are at the heart of the law. More than 10 million Americans have gained coverage through the marketplaces since they opened in 2014.

But many insurers are losing money on their new customers, who tend to be relatively sick and expensive to treat. As a result, some smaller plans have been driven out of business and a few major ones are defecting from exchanges for the coming year.

The administration’s efforts reflect the partisan thorns that still surround the sprawling law a half-dozen years after its passage. The payouts that officials want to salvage were part of an ACA strategy to help the marketplaces flourish early on. But Republican opponents in Congress branded them an insurance industry “bailout” and restricted the use of HHS funds.

A settlement probably would rely on Treasury’s Judgment Fund, a 1950s creation that is allowed as much money as it needs to satisfy valid claims against the government. The fund’s website shows that it has been used for a few hundred claims against HHS in the past decade. Taken together, they amounted to about $18 million — a fraction of what the insurers are owed.

In the administration’s waning months, officials are continuing their upbeat portrayal of all aspects of the law. Behind the scenes, they think that making these payments to insurers — $2.5 billion for 2014 and an as-yet-undisclosed sum for 2015 — is crucial to the exchanges’ well-being.

“It’s a legacy item for the White House,” said Dan Mendelson, president of the health consulting firm Avalere and an adviser on the payout effort. “It’s more than just a lawsuit. It’s really about the future . . . and stability of these markets.”

GOP lawmakers are already beginning to cry foul. “It’s an end run on the clear . . . intent of Congress,” said Rep. H. Morgan Griffith (Va.).

The money in question involves one of three strategies to help coax insurers into the marketplaces by promising to cushion them from unexpectedly high expenses for their new customers. This particular strategy, known as “risk corridors,” was for the marketplaces’ first three years, when it was unclear how many people would sign up and how much medical care they would use.

The idea, patterned after a similar arrangement for health plans that sell Medicare drug benefits, is to balance out insurers’ costs by requiring those with unexpectedly low expenses to pay into a fund that would be used to compensate companies with unexpectedly high expenses. The program originally was not supposed to pay for itself, but two years ago the Republican-led Congress restricted HHS from using any of its other money for that purpose.

The risk corridors started in 2014. The crunch became apparent last fall, when federal health officials announced that they faced an enormous gap because so many more health plans incurred high expenses for their ACA customers than low ones. For that reason, HHS made less than $400 million in 2014 risk-corridor payments — just 12.6 percent of $2.9 billion it owed overall.

Beyond the 175 insurers owed money for the first year, health officials have not said how many need to be paid for 2015, how much they are due or how much money is available. But in a five-paragraph memo this month, HHS’s Centers for Medicare and Medicaid Services said any money that is available will be put toward what the government still owes for 2014.

The risk corridor payments are “an obligation of the federal government,” acting administrator Andy Slavitt told a recent House hearing.

The shortfall has contributed to the collapse of most of the 23 nonprofit, consumer-oriented health plans created under the ACA, forcing several hundred thousand people to find new coverage. Just six co-ops remain. Four of them, including two that have closed, are among the seven insurers suing the government for lack of payment.

[$1.2 billion in loans to ACA co-ops may be a loss]

CMS spokesman Aaron Albright referred questions to the Justice Department. Justice spokeswoman Nicole Navas declined to confirm the settlement talks because the litigation is pending.

One health plan executive, whose attorney has spoken with Justice officials, said the department is trying to reach an agreement with suing insurers in the next two weeks on what percentage of the remaining $2.5 billion would be paid out. At that point, the same offer would be made to every other insurer owed money. A judge would need to approve the arrangement, according to the executive, who spoke about the pending litigation on the condition of anonymity.

Stephen Swedlow, a lawyer for Health Republic Insurance in Oregon, a co-op that was forced to close early this year, said he is preparing a settlement proposal to send to Justice. Said Health Republic chief executive Dawn Bonder: “I don’t think DOJ is making a secret that they would like [the lawsuits] to go away.”

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More FX

Via Marc Chandler at Brown Brothers Harriman:

Dollar Finishing Week on Firm Note

• True to its recent habit, the US dollar is finishing the week on a firm note
• Japan released a mixed bag of data; Eurozone data was largely in line with expectations
• Better than expected UK data failed to lend much support to sterling
• There is a slew of North American data today
• Brazil reports consolidated fiscal data for August; Colombian central bank is expected to keep rates steady at 7.75%
• After markets close tonight, China reports official September manufacturing PMI and Korea reports September trade

The dollar is mostly firmer against the majors.  Kiwi and sterling are outperforming while the Swiss franc and the Swedish krona are underperforming.  EM currencies are mostly weaker.  INR and ZAR are outperforming while HUF and PLN are underperforming.  MSCI Asia Pacific was down 1.1%, as the Nikkei fell 1.5%.  MSCI EM is down 1.2%, as Chinese markets rose 0.3% ahead of a week-long holiday.  Euro Stoxx 600 is down 1% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 2 bp at 1.54%.  Commodity prices are mixed, with oil down 1.5-2%, copper down 0.1%, and gold up 0.5%.

True to its recent habit, the US dollar is finishing the week on a firm note.  On the month, though, the greenback has fallen against most of the majors, but sterling, the Canadian dollar, and the Swedish krona.  

Global equities are trading heavily, and investors’ angst is lending support to bond markets.  The concerns about the contagion effect emanating from Germany’s largest bank are taking a toll on sentiment.  Deutsche Bank stock fell to a new record low in the European morning but has turned higher in subsequent turnover.  Nevertheless, the financial sector is Europe is off twice what the loss of the overall market.  The Dow Jones Stoxx 600 is off 1%, while the financial sector is off more than 2%.  The Italian bank share index is off 2.5% and is near two-month lows.  

The MSCI Asia-Pacific Index fell 1%, to record its largest loss in three weeks.  Japan’s Topix was off 1.5%, with financials off 2.2%.  Chinese stock markets managed to buck the trend to post minor gains, but even in Shanghai, banks shares ended lower.  Separately, China’s Caixin manufacturing PMI edged up to 50.1 from 50.0.  The average in Q3 was 50.2.  That is the highest quarterly average since Q3 2014, and provides another piece of data suggesting that Chinese economy has stabilized, albeit at lower levels and with higher debt.   Chinese markets are closed the next week for national holidays, though official PMI data will be reported over the weekend.  

Japan released a mixed bag of data.   Prices pressures continue to ease.  Household spending fell more than twice what was expected.  Industrial output was stronger than forecast, helped by a surge in auto output. Unemployment ticked up to 3.1% from 3.0%.  

Headline CPI remained negative (-0.5% vs. -0.4% year-over-year) in August for the fifth consecutive month.  Excluding fresh food, which is the BOJ preferred measure, fell -0.5% from a year ago.  The measure excluding food and energy slipped to 0.2% from 0.3%.  Tokyo reports its inflation figures with less of a lag, but the September data give little hope of a recovery in the national price measures.    

The BOJ reported that its staff, excluding managers, will be given a 0.2% pay increase in the base wage.  This follows a 0.6% increase in the FY15.  Although it is the third year that the base wage has increased, the small amount illustrates the similar pressure facing the private sector.  Weak wage increases are one of the factors holding back consumption.  Overall household spending fell 4.6% in August from a year ago.  The Bloomberg median was for a 2.1% decline.  Household spending has been contracting on a year-over-year basis since February.  

Industrial output rose 1.5% in August, which is three times what the median guesstimate projected.  The year-over-year pace rose to 4.6% from -4.2% in July.  Vehicle production rose 8.8% after a 4.1% slide in July.  Construction orders jumped 13.8% after a 10.9% fall in July.     Japan will report the Q3 Tankan survey early Monday in Tokyo.  Sentiment among the large manufacturers is expected to post a small increase, and capex plans are expected to improve from the 6.2% of Q2.  

Eurozone data was largely in line with expectations.  The unemployment rate was steady at 10.1% in August, while the preliminary September CPI rose to 0.4% from 0.2%.  This picks up the gains in energy, as the core rate was steady at 0.8%.  

The euro has been pushed to new lows for the week, just below $1.1170.  Last week’s low was seen near $1.1125.  Barring new news, the intraday technicals suggest that the downside may have largely been exhausted in the European morning.  The dollar has largely matched yesterday’s range against the yen.  The greenback found sellers at JPY101.80 was approached, while buyers appeared after a big figure pullback.

Better than expected UK data failed to lend much support to sterling.  Yesterday’s losses were extended, but the week’s low near $1.2920 remains intact.  The intraday technicals warn that the low for the day, though, may not be in place.  

Still, the UK could not have hoped for better data today.  The Q2 GDP estimate unexpectedly rose to 0.7% from 0.6 but somehow, in the machinations of GDP calculations, this turned into a 2.1% year-over-year pace, down from 2.2%.  The Q2 current account deficit was also smaller than anticipated, while investment was stronger than expected, rising 1.0% or twice the median forecast.  Most promising for Q3 was news that the index of services for July rose 0.4%.  This is the second best of the year thus far.  The median forecast was for a 0.1% increase.  The June series was also revised higher (0.3% from 0.2%).  

There is a slew of North American data today.  In the US, the personal consumption expenditures will be used to calculate Q3 GDP.  After the improvement in the advance merchandise trade balance and inventory data, look for Q3 estimates to be raised again, with many, perhaps even the Atlanta Fed, returning toward 3% forecasts.  The core PCE deflator, the Fed’s preferred inflation measure is expected to tick up to 1.7%, which would represent new two-year highs.  The Chicago PMI may attract attention.  It is expected to improve from the 51.5 reading in August.  Lastly, the University of Michigan’s consumer confidence report and the inflation expectation will be reported.  

For its part, Canada reports July GDP.  It is expected to have risen by 0.3% after a 0.6% rise in June.  The monthly GDP readings in Q1 16 and Q2 16 have averaged zero.  Industrial and raw material prices are expected to have fallen in August.  The US dollar bottomed near CAD1.3050 yesterday and tested CAD1.32 in the European morning.  However, the greenback’s momentum appears to have stalled.  Similarly, the Australian dollar, which posted an outside down day yesterday, saw follow through selling today, but the enthusiasm waned below $0.7600 and near the 20-day moving average (~$0.7595).  There is scope toward $0.7630-$0.7640.  

In addition to the Chinese data, there are two other events this weekend to note.  The first is a formality.  The Chinese yuan will be included in the IMF’s SDR starting October 1.  The second is more substantive.  Hungary holds a referendum on the EU’s immigration policies.  It is likely to reject plans to relocate refugees, setting the stage for an escalation of the simmering confrontation with the EU.

Brazil reports consolidated fiscal data for August.  Yesterday, the central government primary deficit came in larger than expected at -BRL20.3 bln.  The 12-month total jumped to -BRL172.2 bln, the highest on record.  August tax revenues also came in lower than expected, and so the data point to upside risks to the consolidated budget data out today.  Consensus for the primary deficit is -BRL22.4 bln, which would lead to a big jump in the 12-month total too.  The fiscal outlook is the wild card for COPOM.  The fiscal numbers are still getting worse, and we think that any delays to passing fiscal reforms would make it hard for COPOM to start the easing cycle October 19.

The Colombian central bank is expected to keep rates steady at 7.75%.  Inflation appears to have peaked, while the peso has stabilized.  The tightening cycle has likely ended, but we do not see easing until 2017.  

China Caixin September manufacturing PMI ticked up to 50.1, as expected.  Official September manufacturing PMI reading will be reported after markets close tonight.  It is expected to tick up to 50.5.  The economy stabilized in August, and so the September readings will be important to show this is continuing.  

Korea provides the first snapshot of global trade for September tonight after markets close.  Exports are expected at -4.2% y/y, while imports are expected at -2.7% y/y.  Korea should benefit from the stabilizing Chinese economy, but we think Bank of Korea will maintain a dovish stance for now.  Earlier today, Korea reported August IP up 2.3% y/y.  It was expected to rise 1.6% y/y.  

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Early FX

Via Kit Juckes at SocGen:

A mixed bag of data overnight (Japan deflation poor PMI in Korea, marginally better one in China, solid UK consumer confidence) but gloom is returning to markets. Our rates strategists have thrown in the towel on short duration trades, and that’s leaving FX is a mostly directionless mess.

No help from Japanese data or European financials for yen shorts, but NZD is slipping. FX weekly is below, and lays out longer term thoughts about the Euro. It’s going nowhere but the downside is increasingly limited and the danger of a spike at some point is growing.

<http://www.sgmarkets.com/r/?id=h116dd669,1876aefa,1876aefb&p1=136122&p2=2aac4e5d34ad5a041281e3c4d1efc22d>

The Euro continues to trade sideways, mirroring range-bound bond yields and a lack of economic surprises. This uninspiring cocktail can remain in place for a while, but the balance of longer-term risks is shifting. Further US dollar strength is more likely to come at the expense of other key currencies such as the Chinese yuan and Mexican peso, which together account for over a third of the dollar’s trade-weighted basket. The Euro’s downside has narrowed from the Fed’s caution and the ECB’s lack of policy manoeuvre.

[http://email.sgresearch.com/Content/PublicationPicture/233283/1]

The Norwegian krone has been one of the top performers among G10 currencies. The bounce in crude oil prices from the lows in 1Q16 paved the way for the krone to revalue from cheap levels. A combination of resilient growth, persistent inflationary pressures and booming housing sector has also compelled the Norges Bank to switch to a more neutral policy-setting. We expect the krone to continue to do well in coming months and quarters.

[http://email.sgresearch.com/Content/PublicationPicture/233283/2]

Vol: Get ready for a USD/JPY rebound
:  Since June, USD/JPY has bounced off the 100 level four times, but the technical picture is now suggesting a large move either way by mid-October. We favour the topside, as the FX rate is lagging US yields, and the BoJ stance will weigh on the yen. Also, massive yen longs may be discouraged as the OPEC surprise is risk-friendly and the options’ skew is sending a softening signal. Buy a 3m digital call with a strike at 105, cheapened by a KO at 100 (leverage close to 7x). The level has been eagerly defended, and should not be tested if the bounce scenario materialises imminently.

[http://email.sgresearch.com/Content/PublicationPicture/233283/3]

EM – Latam FX divergence on politics

Latam FX has led the EM sell-off since Bernanke’s taper tantrum. Latam FX performance this year has been mixed despite the broad commodity rally, and the divergence can be attributed to politics, in our view. Major political events – impeachment of ex-President Rousseff in Brazil, the US presidential race, and the historic peace accord in Colombia – have affected various currencies significantly. We continue to see scope for differentiation, and single out BRL and COP as most likely to outperform in Latam, while the trigger for an unwinding of political risk premium in MXN remains subject to high uncertainty.

[http://email.sgresearch.com/Content/PublicationPicture/233283/4]

NZD/USD is showing signs of exhaustion in its rally with important near-term support at 0.7230/0.7200, and a break below would open the way to 0.6950. EUR/NOK meanwhile has confirmed a head-and-shoulders pattern with the projected target at 8.55/8.50.

[http://email.sgresearch.com/Content/PublicationPicture/233283/5]

The quant portfolio remains long carry and EM positions. The biggest longs are in NOK, AUD and NZD, while the most sizeable shorts are in USD, EUR, SEK and CAD.

[http://email.sgresearch.com/Content/PublicationPicture/233283/6]

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Credit Pipeline

Via Bloomberg:

IG CREDIT PIPELINE: $25b Priced So Far, More Today Is Possible
2016-09-30 09:28:56.36 GMT

By Robert Elson
(Bloomberg) — There has been issuance in a Friday session
at least 15x YTD. A self-led Financial may be possible.

LATEST UPDATES

* Comision Federal De Electricidad (CFELEC) Baa1/BBB+,
mandates BBVA/BAML/C for investor meetings from Oct. 4
* Global Bank Corp (GLBACO) Ba1/BBB-/BBB-, has mandated
C/DB/JPM/UBS for investor meetings Oct. 3-6; 144a/Reg-S
$benchmark deal is expected to follow
* Government of Bermuda (BERMUD) A2/A+, mandates HSBC for
roadshows from Sept. 30; 144a/Reg-S issue expected to follow
* Partial tender also announced
* Bermuda last priced a USD deal in 2013
* Export-Import Bank of Korea (EIBKOR) Aa2/AA, hires
ANZ/BAML/CA/Miz/Samsung/SG/UBS for investor meetings from
Oct. 3; USD intermediate maturity deal may follow
* UPL Corp (UPL) Baa3/BBB-, mandates ANZ/C/CS/DB/JPM for
investor meetings Sept. 29-Oct. 4; 144a/Reg-S may follow
* 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)
* Sumitomo Mitsui Trust Bank (SUMIBK) A1/A; mandates
C/Daiwa/GS/JPM to arrange investor calls beginning Sept. 26;
144a/Reg-S 3Y fixed and/or floating issue expected to price
in the near future
* Kingdom of Saudi Arabia (SAUDI), may raise over $10b
following roadshows in late Sept.
* KEB Hana (KEB) A1/A; mandates C/CA/JPM/SCB/UBS for investor
mtgs from Sept. 26; 144A/Reg S transaction may follow

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
* Korea Housing Finance (KHFC) Aa1/–; investor mtgs
* MTN Group (MTNSJ) Baa3/BBB-; roadshows from Sept. 9
* Korea National Oil (KOROIL) Aa2/AA; meetings from Sept. 6
* 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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Some Corporate Bond Stuff

Via Bloomberg:

IG CREDIT: DOW, KMI Led Trading on 100% Client Flows
2016-09-30 09:51:24.127 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $15.8b vs $18.6b Wednesday, $18.5b last Thursday. 10-
DMA $15.9b; 10-Thursday moving avg $15.3b.

* 144a trading added $3.2b of IG volume vs $2.6b on Wednesday,
$2.7b last Thursday; yesterday was the highest 144a trading
session since $3.5b June 8

* Trace most active issues:
* DOW 8.55% 2019 was 1st with client flows accounting for
100% of volume; buying twice selling
* KMI 3.95% 2022 was next; client selling was 2.3x buying,
together taking 100% of volume
* GS 4.25% 2025 was 3rd with trades between dealers taking
62% of volume, affiliate buying 19%
* CADES 1.25% 2018 was the most active 144a issue with client
and affiliate flows taking 80% of volume

* Bloomberg Barclays US IG Corporate Bond Index OAS remains
unchanged at 138 for 4th session in a row
* 2016 wide/tight: 215 (a new wide since Jan. 2012)/135
* 2015 wide/tight: 171/122
* 2014 wide/tight: 137/97
* All time wide/tight back to 1989: 555 (Dec. 2008)/54
(March 1997)

* Current market levels vs early Thursday, Wednesday:
* 2Y 0.726% vs 0.762% vs 0.746%
* 10Y 1.544% vs 1.582% vs 1.572%
* Dow futures -36 vs +10 vs -15
* Oil $47.23 vs $46.84 vs 44.86
* ¥en 101.10 vs 101.41 vs 100.72

* IG issuance totaled $10.2b Thursday vs $6.4b Wednesday, $3b
Tuesday, $5.6b Monday
* September volume at $172.41b, 2nd highest of the year;
May topped $200b
* YTD $1.33t

* Pipeline – $25b Priced So Far, More Today Is Possible; List
Grows Longer

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Ghost of Lehman Brothers

Via WSJ:

The Ghost of Lehman Brothers Haunts Deutsche Bank
But parallels to failed investment bank are misleading

By JAMES MACKINTOSH
Sept. 29, 2016 8:04 p.m. ET
0 COMMENTS
Eight years ago this month, Lehman Brothers failed in large part due to panicked hedge funds pulling their money. With some big hedge funds worried enough to cut their exposure to Deutsche Bank AG, the parallel is obvious—but also deeply misleading.

Deutsche Bank’s shares have plummeted in recent weeks after The Wall Street Journal reported that the U.S. Justice Department suggested the bank pay $14 billion from the bank to settle allegations around mortgage securities. The bank expects to agree to a lower figure.

Some hedge-fund clients have grown concerned about their exposure to the German lender, prompting them to pull assets and forcing bank executives to step up reassurances about its stability, according to people close to clients and the bank.

Hedge funds face the same dilemma all bank customers face. The gains from sticking with Deutsche are very small, while the potential losses if it were to run into trouble are very large.

“Everyone is hypersensitive,” said one hedge-fund manager caught out by the Lehman collapse. “Lehman’s taught everyone that there’s very little upside in keeping your exposure.”

Deutsche Bank’s Clients Move to Cut Exposure
Lehman failed the way all banks fail: It ran out of cash and liquid assets it could quickly sell to pay clients and counterparties as they ran for the exit.

In principle, the same could happen to any bank, as they never have enough easy-to-sell assets to pay back every depositor immediately. Deutsche is now in focus in part because clients have been spooked by its plummeting shares, down by more than half this year.

But Lehman was particularly vulnerable, due to its reliance on the overnight repurchase, or repo, market and on hedge funds to finance itself. Billions of dollars of cash and other assets from its so-called prime brokerage business drained away in its final few days, while repos couldn’t be renewed and banks and other counterparties demanded extra collateral to back derivatives trades.

Deutsche is different. It has a far more diversified client base, sourced from German retail banking and multiple institutional business lines. It has a lot more liquidity, amounting to €220 billion ($246.8 billion) at the end of June, equal to 12% of assets, against the $45 billion Lehman had a month before its downfall, 7.5% of assets.

Deutsche has a weak capital position made worse by weak profitability, but its problems aren’t as critical as Lehman’s, where losses amounted to more than a tenth of shareholder equity in each of the final two quarters of its life.

Most important, Deutsche has access to the European Central Bank as its house pawnbroker, meaning it can turn even fairly hard-to-sell assets into cash if it needs to. Lehman was refused extra credit by the U.S. Federal Reserve on the basis that it didn’t have enough reliable assets to post at the bank.

None of this makes Deutsche immune. No amount of liquidity could ever be enough if clients or depositors lose faith, because not all assets can be swapped for cash at the ECB. The task Deutsche Chief Executive John Cryan faces is to win back client confidence, and fast.

Expect Mr Cryan first to try the approach used by Richard Fuld at Lehman: If you are a big Deutsche client, reassuring personal phone calls are likely soon.

However, confidence would more surely be restored by issuing new shares, shoring up the strength of the bank at the expense of existing shareholders.

Deutsche has been resisting this as its stock moves ever lower. One lesson from Lehman is that it too proudly rejected rescue capital, not liking the price. Deutsche should be careful not to follow the same logic.
Write to James Mackintosh at [email protected]

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Yellen on Asset Purcchases

Via Bloomberg:

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Impaired Liquidity

Via Bloomberg:
Carney’s Corporate-Bond Purchases May Worsen Liquidity Squeeze
Joe Mayes
Joe_Mayes
September 26, 2016 — 6:05 AM EDT

Central bank aims to acquire 10 billion pounds of company debt
Buying may tighten shortage of notes in small sterling market

The start of the Bank of England’s corporate-bond buying program on Tuesday may exacerbate already tight liquidity in the sterling debt market.

The central bank plans to purchase 10 billion pounds ($13 billion) of sterling investment-grade corporate debt over 18 months, heightening competition in a relatively small market that is dominated by investors who favor sterling assets, such as U.K. pension funds. It also adds to a wider debt-market pinch, partly caused by the start of a similar European Central Bank corporate-bond buying program in June.

BOE note-buying “is another nail in the coffin of corporate-bond liquidity,” said Jeroen van den Broek, ING Groep NV’s Amsterdam-based head of debt strategy and research. “It creates a real squeeze in the market.”

Sterling corporate-bond yields fell after BOE Governor Mark Carney announced the purchase program last month as part of stimulus measures designed to help the U.K. economy weather uncertainty caused by the nation’s vote to leave the European Union. A flurry of issuance subsequently has also done little to expand the debt pool because sales have been dominated by companies such as National Grid Gas Plc refinancing existing debt.

“We’ve not really seen a lot of new issuers,” said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management Plc, which oversees about $380 billion. “That’s the thing we need to be looking out for.”
Shopping List

The Bank of England has drawn up a list of about 270 bonds that are eligible for purchase under its program, all of which have at least one investment-grade credit rating. The notes have a market value of about 150 billion pounds, the institution has said. The issuers are all non-financial companies that make a material contribution to the U.K. economy, including overseas companies, such as Verizon Communications Inc. and Apple Inc.

Under the purchase program, the bank will attempt to buy each bond on its list at least once a week through reverse auctions on Tuesdays, Wednesdays and Fridays. Purchases will be roughly in line with the makeup of the overall bond market, on an industry basis. In the first auctions on Tuesday, the bank will seek to buy notes in sectors including energy, industrial and transport, and water, according to a list on its website.

A Bank of England spokesman declined to comment on the impact of the program on market liquidity.
More Names?

To overcome the potential challenges in finding bonds, the Bank of England may extend its list of eligible notes. That could include adding companies such as GKN Plc, Telefonica SA and Wm Morrison Supermarkets Plc, which were surprisingly left out, said Joseph Faith, a credit strategist at Citigroup Inc.

“Some names that you would have expected to be on the list are not there,” Faith said. “We may see more bonds being added next month.”

Since the BOE announced the plan, yields on investment-grade corporate pound bonds have dropped to a record-low 2.06 percent from 2.48 percent, according to Bloomberg Barclays index data. They were at 2.23 percent on Friday.

National Grid Plc’s gas arm held a record 3 billion-pound sale earlier this month as it restructures debt ahead of a spinoff. That was the largest share of the about 8 billion pounds of highly rated corporate debt sold since the BOE unveiled the purchase plan on Aug. 4, based on data compiled by Bloomberg.

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Central Banks Turn to Sellers

Via Bloomberg:

Liz McCormick
mccormickliz
Andrea Wong
MsAndreaWong
Wes Goodman
richwesgoodman
September 25, 2016 — 7:00 PM EDT
Updated on September 26, 2016 — 4:04 AM EDT

Central banks have cut Treasuries for three straight quarters
Pullback may be a sign the bond market is at a tipping point

They’ve long been one of the most reliable sources of demand for U.S. government debt.

But these days, foreign central banks have become yet another worry for investors in the world’s most important bond market.

Holders like China and Japan have culled their stakes in Treasuries for three consecutive quarters, the most sustained pullback on record, based on the Federal Reserve’s official custodial holdings. The decline has accelerated in the past three months, coinciding with the recent backup in U.S. bond yields.

For Jim Leaviss at M&G Investments in London, that’s cause for concern. A continued retreat could lead to painful losses in a market that some say is already too expensive. But perhaps more important are the consequences for America’s finances. With the U.S. facing deficits that are poised to swell the public debt burden by $10 trillion over the next decade, foreign demand will be crucial in keeping a lid on borrowing costs, especially as the Fed continues to suggest higher interest rates are on the horizon.

The selling pressure from central banks is “something you have to bear in mind,” said Leaviss, whose firm oversees about $374 billion. “This, as well as the Fed, all means we are nearer to the end of the low-yield environment.”

To shield his clients from higher yields, Leaviss said M&G has scaled back on longer-term Treasuries and favors shorter-maturity securities.

Overseas creditors have played a key role in financing America’s debt as the U.S. borrowed heavily in the aftermath of the financial crisis to revive the economy. Since 2008, foreigners have more than doubled their investments in Treasuries and now own about $6.25 trillion.

Central banks have led the way. China, the biggest foreign holder of Treasuries, funneled hundreds of billions of dollars back into the U.S. as its export-based economy boomed.

Now, that’s all starting to change. The amount of U.S. government debt held in custody at the Fed has decreased by $78 billion this quarter, following a decline of almost $100 billion over the first six months of the year. The drop is the biggest on a year-to-date basis since at least 2002 and quadruple the amount of any full year on record, Fed data show.

The custodial data add to evidence that the retreat isn’t simply a one-off. Separate figures from the Treasury Department showed that China pared its stake to $1.22 trillion in July, the lowest level in more than three years. Others, like Japan and Saudi Arabia, have also reduced their holdings this year.

Big holders of Treasuries are selling for a variety of reasons, but they’re all tied to each country’s economic woes. In China, the central bank has been selling U.S. government debt to defend the yuan as slumping growth leads to more capital outflows. Japan, the second-biggest foreign holder, has swapped Treasuries for cash and T-bills as prolonged negative rates in the Asian nation pushed up dollar demand at local banks.

Oil-producing countries like Saudi Arabia have been liquidating Treasuries to plug their budget deficits following the collapse of crude prices. Saudi Arabia’s holdings have declined for six straight months to $96.5 billion — the lowest since November 2014.

“Their trade position is markedly worse” because of the slump in oil, said Peter Jolly, the head of market research at National Australia Bank Ltd. That means “their need to purchase Treasuries is greatly reduced.”

The decline in central bank demand — which some models show has cut 10-year Treasury yields by an extra 0.4 percentage point — points to one reason that U.S. borrowing costs may finally be on the upswing after they fell to a record-low 1.318 percent in July.

What’s more, some measures suggest Treasuries aren’t providing any margin of safety.

While 10-year notes yielded 1.60 percent as of 9 a.m. in London, that’s still leaves many overseas investors vulnerable. For yen- and euro-based buyers who hedge out the dollar’s fluctuations — a common practice among insurers and pension funds — yields are effectively negative. Meanwhile, a valuation tool called the term premium stands at minus 0.58 percentage point for 10-year notes. In the previous 50 years, it has almost always been positive.

Despite those warnings, the bulls say things like tepid U.S. growth and $10 trillion of negative-yielding government debt will keep Treasuries in demand.

“It’s still attractive of course,” said Hideo Shimomura, the chief fund investor at Mitsubishi UFJ Kokusai Asset Management, which oversees about $118 billion. “People might begin to chase yields again.”

Homegrown demand has helped pick up the slack. Excluding short-term bills, U.S. money managers have snapped up 45 percent of the $1.1 trillion in Treasuries sold at government auctions this year, the highest share since the Treasury began breaking out the data six years ago. In 2011, it was as low as 18 percent. U.S. commercial banks, for their part, have also added to their investments of government debt, boosting stakes to a record $2.38 trillion at the end of August.

Nevertheless, some of the most influential players say in the market it’s time to get defensive. Last week, DoubleLine Capital’s Jeffrey Gundlach predicted that benchmark Treasury yields will exceed 2 percent before year-end, echoing his earlier call that the bond market had finally reached a tipping point. At the same time, the Fed signaled at its September meeting that it’s likely to lift rates by December.

For central banks, “why wouldn’t they reduce their Treasury holdings?” said Mark Holman, the chief executive officer at Twentyfour Asset Management, which oversees $9.8 billion. “There is yield available there, but you have a Fed that’s been reasonably clear in what it wants to do — it’s looking to hike.”

Whatever the case, there’s little doubt that America’s borrowing needs will only grow with time — and that could add up to hundreds of billions of dollars in additional interest if foreign demand doesn’t hold up.

The Congressional Budget Office forecasts the U.S. deficit will rise to $590 billion in the fiscal year ending Sept. 30, the first annual increase since 2011. Over the next decade, successive shortfalls to cover costs for Medicare and Social Security will cause the public debt burden to balloon to $23 trillion.

“It’s just the beginning,” said Park Sung-jin, the head of principal investment at Mirae Asset Securities Co., which oversees $8 billion.

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