Across the Curve

Everything You Need to Know About Corporate Bond Issuance in 2014

Via Bloomberg:

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Trenchant Analysis

The author is a former colleague and friend and writes great stuff which always makes you think.

Via Richard Gilhooly at TDSecurities:

The panic is starting to set in as the market re-assesses recent developments in the light of a hawkish FOMC and an ECB that continues to drag its feet, while possibly facing new constraints if Greece votes against austerity on January 25th. The past 3 days has seen a dramatic reversal in sentiment, culminating today in a 20bp rally in blue-pack euro-dollars and 14bp in the red-pack as the market prices out rate hikes. Of course, the FOMC will likely view things differently, following the flash crash of October 15th and the more limited risk-off trade in early December, both of which have fuelled the view that illiquid markets and a reduced ‘term premium’ in inflation break-evens may be distorting market signals.

However, the return to the flash crash lows in 30yr yields and now to the record low area of 2.45/50% continues to send a strong message to the FOMC, which is being re-inforced by 10yr Break-evens at significant new lows of 1.57% today. Naturally, overseas events will be seen as the catalyst, as 30yr Bunds trade to JGB levels of 1.18%, but the US economy does not operate in a vacuum and weak global demand is clearly a driver of collapsing commodity prices, in addition to the energy glut and break-down in OPEC support. The strong USD policy has played a big role in delivering lower inflation break-evens and lower commodity prices in a more controlled fashion up until the OPEC meeting on Thanksgiving day and continues to add a negative dynamic as the market braces for tighter Fed policy.

The problem in communication is compounding the dilemma, with the first rate hike from zero or even the second, not much of an issue. But the message of much tighter policy down the road, starting on schedule sometime this year, continues to resonate with a market grappling with deflation risks, even if the FOMC attempts to de-emphasise the significance of its own ‘dots’. The last press conference was dominated by Yellen’s reference to 2 meetings and even though 3yr notes have rallied 20bp from post-FOMC highs, the safe-haven nature of the bid leaves the front-end open to re-pricing quickly on hawkish Fed comments or strong payrolls.

What can change the current very negative market dynamic? A set of dovish FOMC minutes might have alter the mood and break the downward spiral, while a hawkish set of minutes would likely add fuel to the fire and drive yields even lower. The message from the market is that the Fed is wrong and their consensus forecasts, which Yellen fully agrees should differ from the market’s views, are also wrong. As to when the Fed would change course and admit being wrong is very difficult to foresee, given that such reversals have in the past only occurred after things go badly wrong. When you are working off a long-term forecast, short-term deviations are seen as noise and economic forecasting is not subject to the same stop-loss or mark-to-market rigor that forces frequent re-assessments.

A break under 1.00% on 5yr break-evens is one thing we are watching, but even that will be dismissed by the FOMC as ‘transitory’. They might even go as far as to say that collapsing headline inflation fosters higher core inflation pressures down the road and become even more hawkish. As regards the 10yr break-even, the 1.53% area was the low in 2010, before the Fed enacted QE2 and a break of, say, 1.50% might focus their attention on non-transitory influences that have lowered longer-term inflation expectations to unusually low levels. However, even there, excuses of illiquidity and lowered inflation ‘term premium’ will likely be heard, which results in the conclusion that there is no upside to owning inflation protection and still a lot of downside when the Fed continues to dismiss the relevance of signals from that market.

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Collapsing oil Prices Bring layoffs

Via the WSJ:
Business
U.S. Steel Lays Off 614 Because of Low Oil Prices
Steel Maker Idles Ohio Plant That Makes Pipes for Oil Exploration, Drilling

John W. Miller
Updated Jan. 6, 2015 11:38 a.m. ET

PITTSBURGH—Citing the collapse in global oil prices, U.S. Steel Corp. will idle its plant in Lorain, Ohio, laying off 614 workers, a company spokeswoman said Tuesday.

The plant makes steel pipe and tube for oil-and-gas exploration and drilling. With oil prices currently around $50 a barrel, their lowest level since 2009, energy companies have far less incentive to drill for new supply, reducing demand for the plant’s products.

“The company has suddenly lost a great deal of business because of the recent downturn in the oil industry,” Tom McDermott, president of United Steelworkers local 1104 wrote to workers, in a letter reviewed by The Wall Street Journal. “What appeared just a few short weeks ago as being a productive year, [with new hires in December and extra turns going on], has most abruptly turned sour.”

Layoffs will begin on March 8, “with additional layoffs occurring through May 2015,” a U.S. Steel official wrote to the union.

Workers for U.S. Steel in Lorain said they would find out who is being laid off at an evening meeting Wednesday.

The so-called oil country tubular goods, or OCTG, industry has been built up massively in the past few years to provide pipe and tube for the boom in drilling for shale gas and new oil in the Gulf of Mexico.

U.S. Steel, which is trying to reverse five straight years of losses, has bet heavily on OCTG. The company’s tubular division posted an operating profit of $140 million during the first nine months of 2014, up from $23 million over the same period in 2010.
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Chief Executive Mario Longhi told analysts in October that, while the swoon in global oil prices wouldn’t affect the fourth quarter, “the recent turmoil in the crude oil markets could have an impact on the level of drilling activity as we move into the new year.” He added that “we are at a transitional moment that is going to take a little bit of time for people to sort out exactly where this is going to go.”

Oversupply in the market has been exacerbated by huge flows of steel imports into the U.S. Overall steel imports rose 35% to 38 million tons during the first 10 months of 2014, according to Global Trade Information Services.

Last summer, U.S. Steel and others won import tariffs on imports of OCTG from South Korea and other exporting countries. But that won’t be enough to prop up the industry amid falling oil prices.

Spending on exploration and production is expected to fall around 20% year on year, according to Susan Murphy, publisher of the OCTG Situation Report. She expects land oil rigs to decline by up to 500 in 2015.

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New Issue Calendar Today

Via Bloomberg:

IG CREDIT: List of New Issues Expected to Price in U.S. Today
2015-01-06 15:12:47.994 GMT

By Greg Chang
(Bloomberg) — The following is a list of new issues
expected to price today:
* Rentenbank $2b Aaa/AAA
* 10Y Global
* Final Spread MS+9 vs IPT MS+10 area
* Books: Barclays, C, DB, TD
* Books: Barclays, C, DB, TD</li></ul>
* Republic of the Philippines $benchmark Baa2/BBB
* 25Y
* Final guidance 4% +/- 5 bps vs IPT 4.20% area
* Books: C, CS, DB, GS, HSBC, JPM, MS, StanChart, UBS
* Books: C, CS, DB, GS, HSBC, JPM, MS, StanChart, UBS</li></ul>
* General Electric Capital Corp. $benchmark A1/AA+
* 2Y FRN, 5Y fxd and/or FRN
* IPT 2Y FRN 3mL +30 to low 30’s, 5Y fxd +80-85, FRN 3mL
equiv
* Books: C, GS, JPM, MS
* Books: C, GS, JPM, MS</li></ul>
* Ford Motor Credit Co. $benchmark Baa3/BBB-
* 3Y fxd and/or FRN, 7Y fxd
* IPT 3Y fxd +125 area, FRN 3ml equiv, 7Y fxd +155 area
* Books: Barclays, CA-CIB, GS, JPM, RBC
* Books: Barclays, CA-CIB, GS, JPM, RBC</li></ul>
* FedEx Corp. $benchmark Baa1/BBB
* 5Y, 10Y, 20Y, 30Y
* IPT: 5Y +105, 10Y +140, 20Y +155, 30Y +175 (all area)
* 101 CoC put and downgrade below IG
* Books: BofAML, C, MS
* Books: BofAML, C, MS</li></ul>
* May price tomorrow:
* European Investment Bank $benchmark Aaa/AAA
* 5Y Global
* IPT MS +2 area
* Books: DB, GS, HSBC
* Books: DB, GS, HSBC</li></ul>
* Information from people familiar with the matter, who are
not authorized to speak publicly and asked not to be
identified

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Morning Miscellany

The Treasury market continues to rally with 10 year yields piercing 1.97 percent. The yield curve continues to flatten with 5s 10s and 5s 30s 1basis point to 1.5 basis points flatter than 500AM levels.

Dealers report central bank buyers in the 3 year sector and insurance company buying in the back end.

Swap spreads are unchanged across the curve. However, one trader recounted an interesting story regarding swap spreads. He said that he has heard stories that some Danish investors had sold receivers on 30 year Euro swaps and that there would be weeping and gnashing of teeth (and receiving) by those folks if we break 1.25 percent on that swap rate. He described as a circumstance similar to that which developed at the height of the crisis when Japanese clients were compelled to hedge Power Reverse Dual Currency Notes. (See this post on that esoteric topic.) 

The salient point is that many positions were structured with a view that in our natural lifetimes we would never see 1.99 10 year yields again or $50 oil. There are positions out there in jeopardy and one of those positions will blow up and motivate a cathartic end to this trade.

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MBS

Mortgages are opening unchanged to Treasuries to as much as 4 ticks wider (in the higher coupons). One trader in a note offered the view that MBS are not cheap but technicals are superior with Fed buying swamping origination. For example the Fed will be in buying about $1.9 billion today.

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JPMorgan Duration Survey

Via Bloomberg:

RATES: Client Shorts Fall as New Year Begins, JPM Survey Says
2015-01-06 12:10:53.970 GMT

By Robert Elson
(Bloomberg) — The JPMorgan Treasury Client Survey for the
week ended Jan. 5 vs week ended Dec. 15.
* Longs 17 vs 15
* Neutrals 66 vs 61
* Shorts 17 vs 24
* Net Longs 0 vs -9
* “The all clients survey shows the most neutrals since
October 27, 2014’’
* Active clients:
* Longs 25 vs 17
* Neutrals 75 vs 58
* Shorts 0 vs 25
* Net longs 25 vs -8
* “The active clients survey shows the fewest outright
* “The active clients survey shows the fewest outright</li></ul>
shorts since August 27, 2012’’

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What to Watch for Today

Via Bloomberg:

WHAT TO WATCH:
* (All times New York)
Economic Data
* 9:45am: Markit US Composite PMI, Dec. final (prior 53.8)
* Markit US Services PMI, Dec. final, est. 53.7 (prior
53.6)
* Markit US Services PMI, Dec. final, est. 53.7 (prior
53.6)</li></ul>
* 10:00am: Factory Orders, Nov., est. -0.5% (prior -0.70%)
* 10:00am: ISM Non-Manufac. Composite, Dec., est. 58.0 (prior
59.3)
Supply
* 11:30am: U.S. to sell $25b 52W bills, $TBA 4W bills

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FX

Via Marc Chandler at Brown Brothers Harriman:

Oil Continues to Tumble, Driving Yields Lower

– Oil prices are tumbling following yesterday’s announcement by Saudi Arabia of deeper discounts for the US and Europe, and is spurring a significant decline in bond yields
– The yen is being lifted by the drop in US yields and the Nikkei
– We expect Italian politics to become more salient in the next couple of weeks
– The Chinese government continues to press ahead with measures to shore up the country’s economy

Price action:  The dollar is mixed on the day.  The Norwegian krone is the biggest loser, with the dollar rising to a 12-year high near NOK7.7250.  The euro and the pound are modestly lower at $1.1900 and $1.5180, respectively.  The yen is outperforming, with the dollar falling to just below the ¥119.0 level.  In EM, the RUB is again underperforming, followed by other commodity sensitive currencies such as MYR.  The MSCI Asia Pacific index fell 1.8%, with the Nikkei down 3.0%.  Euro Stoxx 600 is down 0.6% and the UK FTSE is down 1.1% near midday.  S&P futures are pointing to a lower open.  In fixed income markets, US 10-year Treasury yields have fallen below 2%.  WTI and Brent continue to tumble, down another 2.5% at around $48.70 and $51.60, respectively.

• Oil prices are tumbling with Brent approaching $51 and WTI near $48.5.  This follows yesterday’s announcement by Saudi Arabia of deeper discounts next month for the US and Europe.  This was seen as a further confirmation that it adheres to its market share strategy.  The move is spurring a significant decline in bond yields.  The US 10-year yield is below 2% for the first time since mid-October and new record low yields are being seen throughout European core bonds.  The German 10-year yield is below 50 bp.  
• Equity markets are continuing the decline that began at the end of last year.  The MSCI Asia-Pacific Index is off 1.8%, though Shanghai eked out a minor gain and the Shenzhen Composite rallied 1.7% (ostensibly on the idea of a link with Hong Kong).  European shares are trading heavily, led by the energy sector.  The Dow Jones Stoxx 600 is off about 0.6% near midday in London.  Looking at the S&P 500, we have identified the gap created by the sharply higher opening on December 18 (2016.75-2018.98) as an important area.  It also corresponded with a retracement objective of that advance.  The gap was entered yesterday but not filled.  A break of 2000 could see a return to the December low near 1972.  
• The yen is being lifted by the drop in US yields and the 3% fall in the Nikkei, bringing the four-day decline to 5.8%.  It is the strongest currency today, gaining about 0.75% against the dollar.  The US dollar approached JPY118.65, its lowest level since December 18.  It is not so much that investors are flocking to the yen, as the safe haven thesis implies.  Rather the yen’s strength appears largely a function of short-covering.  
• The euro can’t get out of its own way.  Although it drifted higher in Asia, reaching almost $1.1970, it has come off in Europe and returned to the $1.1900 area.  The market did not seem to pay much notice to the service PMIs, and instead appear focused on the possibility that tomorrow’s flash CPI reading shows outright deflation (that is, a negative y/y print).  That said, there were some surprises with the euro-area service PMI readings.  France offered an upside surprise, and that is something that has not been said often in recent months.  The French service PMI rose to 50.6 from 49.8 in the flash and 47.9 in November.  Germany upgraded its flash reading of 51.4 to 52.1, which is the same as November.  Spain improved to 54.3 from 52.7.  Italy was a disappointment, falling to 49.4 from 51.8.  It is the first contraction in three months.  
• While the Greek election later this month is clearly the most immediate political risk, we expect Italian politics to become more salient in the next couple of weeks.  Italian yields the rotating EU presidency to Latvia in the coming weeks, and Italy’s president has indicated he will step down.  His replacement will pose a serious political challenge to Prime Minister Renzi.  
• Meanwhile, the UK economy appears to be losing momentum ahead of the election in the May.  Today, the UK reported its third disappointing PMI.  At the end of last week, it reported a weaker-than-expected manufacturing PMI.  This was followed by yesterday’s softer construction PMI.  Today it was the service sector’s turn.  The PMI came in at 55.8, down from 58.6 in November.  The consensus had expected a 58.5 reading.  This pushed sterling to new multi-month lows near $1.5175.   The recent data are also encouraging participants to further push out when the BOE can hike rates.  This can be seen in the December 2015 short-sterling futures contract.  The implied yield has fallen to 75 bp, the lowest since last May.  
• The Australian and New Zealand dollars are firmer today.  Partly this seems to reflect cross position adjustments.  However, Australia did report favorable news on the trade front.  The November trade deficit was about 40% smaller than expected at A$925 mln.  Moreover, the October deficit was revised sharply lower as well (-A$877 mln from A$1.3 bln).  Despite the Aussie’s upticks, it is hard to get too excited.  It continues to run into resistance near the 20-day moving average (~$0.8160).  We suspect this bounce off yesterday’s $0.8035 low is offering a new selling opportunity.  
• The North American session features the US service ISM/PMI and factory orders.  The focus is elsewhere, as market participants watch US bond and stock markets.  Tomorrow’s ADP employment estimate, trade balance, and FOMC minutes are more important.  
• The Chinese government continues to press ahead with measures to shore up the country’s economy.  Overnight, 300 infrastructure projects (worth about $1.1 trln) have been approved to help boost growth.  The industries involved include energy, health, clean energy, and transport. This move seems to be more about accelerating the projects rather than new projects.  Still, it was enough to cheer markets.  The Shanghai index bucked the trend of the region by ending the day flat, compare with sharp declines elsewhere.
• India is facing two very different protests.  First, the coal unions will start a 5-day strike against a move by PM Modi to open up the sector for foreign investment.  The idea is to break the monopoly of the state-owned Coal India, which accounts for 82% of domestic output.  Some have already said it could cause problems for the country’s power supply.  This is just another taste of the challenges Modi will face in trying to modernize the country.  The second protest was against the blockbuster Bollywood film PK which is set to be the biggest grossing film in the industry’s history.  Protesters vandalised theatres in the western Indian state of Gujarat (amongst others) for exhibiting the film which many saw as making fun of Hindu Gods. Dealing with religious tensions will be another challenge for PM Modi, who was often accused of repressing religious communities and minorities in his home state.

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Secondary market Corporate Bond Trading Yesterday

Via Bloomberg:

IG CREDIT: Long Bonds Most Active; PHILIP, RENTEN to Price
2015-01-06 10:53:48.539 GMT

By Robert Elson
(Bloomberg) — The final Trace count for secondary trading
was $11.8b vs $1.9b Friday. 2014 secondary trading high was in
Jan., low in Dec.
* 144a trading added $2.3b of IG volume
* Most active issues longer than 2 years
* AMZN 4.95% 2044 was the day’s most active issue with
two-way client flows accounting for 83% of volume,
client selling 3:2 over buying
* VZ 6.55% 2043 was next with client flows taking 74% of
volume
* PEMEX 6.375% 2045 was 3rd with client trades accounting
for just 29% of volume
* PEMEX 6.375% 2045 was 3rd with client trades accounting
for just 29% of volume</li></ul>
* MDT 4.625% 2045 was most active 144a issue; client flows
took 98% of the volume
* BofAML IG Master Index at +146 vs +145 ; +151, the wide for
2014 was seen Dec 16; +106, the low for 2014 and the
tightest spread since July 2007 was seen June 24
* Standard & Poor’s Global Fixed Income Research IG Index at
+173, unchanged; +177, the wide for 2014 was seen Dec 16;
+140, a 2014 low and new post-crisis low was seen July 30
* Click here for S&P spread history in a 10-year lookback
* Markit CDX.IG.22 5Y Index at 69.3 vs 67; 76.1, the wide for
2014 was seen Dec 16; 55 was seen July 3, the low for 2014
and the lowest level since Oct 2007
* December’s IG issuance was $60.5b; 2014’s was $1.395t
* RENTEN, PHILIP to price today ; pipeline includes expected
domestic, SSA January issuers; M&A-related deals for 2015
* 2015 has expected multibillion refis
* Serial January issuers:
* GE Capital may open 2015 issuance
* JPM a likely January issuer, based on historical record
* BAC historically issues in January
* GS often issues in January, has large maturities in 2015
* ABIBB, BRK have history of January issuance
* ABIBB, BRK have history of January issuance</li></ul>
* Serial SSA January issuers added to pipeline
* EIBKOR may be first Asian issuer in new year

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