A daily bond market chronicle
Merrill Lynch in its daily research note reports that the recent surge in interest rates at the front end of the fixed income market has prompted record redemptions from short term high grade funds.
Via Merrill Lynch Research:
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Via the WSJ:
TOKYO—Japan’s inflation rate fell to its lowest level in over a year in November as the economy struggles to emerge from a recession, in a fresh setback to Prime Minister Shinzo Abe ’s campaign to end more than a decade of chronic price falls.
The world’s third-largest economy remains largely stagnant except its labor market, an indication of the depth of a slump caused by a national sales tax increase in April this year.
The rate of increase in Japan’s core consumer price index—adjusted for volatile fresh-food prices and the impact of a national sales tax increase in April—fell to 0.7% in November from a 0.9% rise the previous month, according to government data released Friday.
Inflation has been slowing across the world, a trend that is strengthening with the rapid descent of international oil prices, complicating efforts by central banks, such as the Bank of Japan and the European Central Bank, to prevent or get rid of deflation.
The latest inflation reading is the lowest since September 2013, and matched a forecast of economists polled by The Wall Street Journal and the Nikkei.
Less than two months since the BOJ expanded its stimulus policy of flooding the economy with cash through government bond purchases, expectations are strengthening that cheaper imported oil will push the inflation rate further down and away from the BOJ’s target over the coming months, forcing the central bank to act once again.
“While a lot depends on U.S. employment data and movements of crude oil prices, it is possible that the BOJ will strike the market with additional easing as early as January,” said Junichi Makino, chief economist at SMBC Nikko Securities. Mr. Makino said the core CPI could slip into negative territory in that month.
The yield on the benchmark 10-year Japanese government bonds fell to a record low of 0.300% following the release of the data.
Central bank officials have been putting a brave face on the slowdown in inflation resulting from the lower oil prices, saying that cheaper crude will stimulate demand, eventually adding to upward pressure on prices. But economists suspect that such a transmission could take time to materialize, particularly in Japan, where consumption has been lackluster. In the immediate future, drops in petroleum costs will only pull down the inflation rate.
Industrial production fell 0.6% from the previous month, adjusted for seasonal variations, according to separate data, confounding economists’ forecast for a 0.8% increase.
Household spending also fell 2.5% from a year earlier in November, adjusted for price changes, according to separate government data. While the figure is better than economists’ forecast, it marked the eight straight month of decrease.
Mr. Abe has already delayed a second sales tax increase until 2017, and following a decisive election victory earlier this month and the launch of his new administration this week, he is working to get the economy back on track. His administration is expected to announce a stimulus package worth around ¥3.5 trillion ($29 billion) in the coming days. The amount is less than 1% of Japan’s annual economic output, and economists’ assessment of the expected measures has been mixed.
One of the few bright spots is the jobs market, which has been surprisingly resilient despite economic weakness, likely in reflection of Japan’s labor shortages and shrinking population.
The jobless rate was unchanged at 3.5% in November. The jobs-to-applicants ratio was up 0.02 points to 1.12, meaning there are 112 jobs available for 100 job seekers—the best showing in 22 years.
Via Brown Brothers Harriman:
Boxing Day Edition
Foreign Exchange: In thin trading conditions, the major currencies are little changed. The euro is straddling the $1.22 area. It has held above the low seen earlier this week near $1.2165. Since the low was seen, the reaction high has been limited to the $1.2250 area. For the third consecutive session, the dollar held above the JPY120 level. It had reached a high earlier this week near JPY120.80. Sterling is hovering about half a cent above the low set on December 24 near $1.5505. It has been capped near $1.5570. The dollar-bloc currencies are trading slightly firmer, but well within recent ranges.
Among emerging market currencies, the South Korean won is the strongest, gaining about 0.3%. This completes the third consecutive weekly gain. Foreign buying of equities was cited. The Russian rouble is the weakest of the emerging market currencies today, losing about 1.7%. However, earlier the rouble firmed to its best level since December 2. The government has taken steps to help banks and companies cope with the sharp depreciation of the rouble in servicing external debt obligations. Doing so has cost it $15.7 bln of reserves in the past week (~$4.6 bln in direct intervention and more than twice as much in the form of foreign exchange repos). The dollar is just below RUB53.00. A week ago it was just below RUB60.00.
Equities: European markets are closed for Boxing Day. Asian markets that were open mostly advanced, with the MSCI Asia Pacific Index up about 0.4%. It is sufficient to break a three-week losing streak. Of note, the Shanghai Composite jumped 2.75% after yesterday’s 3.4% gain, retracing in full the recent losses. The spark was new stimulative measures. The PBOC will reportedly waive reserve requirements on some bank deposits, which some are estimating to be equivalent to 150 bp cut in the required reserves. The Nikkei eked out a minor gain, though the slew of economic data was disappointing. Specifically, industrial production, which was expected to have risen by 0.8%, fell 0.6%. The consensus expected retail sales to rise by 0.2%. Instead, they fell by 0.3%. Overall household spending fell 2.5% from a year ago. Core CPI fell to 2.7% from 2.9%. When adjusted for the retail sales tax, this measure of inflation that the BOJ targets, fell to 0.7%.
Bond Markets: Quiet Asian session saw a small rise in the 10-year JGB yield. The US 10-year benchmark bond yields about 2.25%.
Via the FT:
BEIJING—China’s central bank is allowing banks to lend more out of their deposits as the world’s second-largest economy struggles to gain momentum, according to banking officials with knowledge of the matter.
At a closed-door meeting on Wednesday, officials at the People’s Bank of China told representatives from two dozen banks and other financial firms that the central bank will soon relax a major restraint on banks’ abilities to make loans, according to the banking officials. The move would essentially allow them to include more money in their deposit base, giving them more room to lend.
Still, the central bank refrained from making a broader easing move for fear that such steps would send the market too strong a signal about easing monetary policy.
“It’s a big help for the banks and at the same time, the central bank can maintain its neutral monetary stance,” said one of the banking officials.
Analysts estimate the move is roughly equivalent to injecting 1.5 trillion yuan—or about $242 billion—into the banking system. PBOC officials didn’t respond to requests for comment.
Chinese banks for weeks have been pressing the PBOC—known locally as “yang ma,” or big mama—to free up more funds to boost their lending abilities. A rare drop in bank deposits—historically the main source of cheap funding for Chinese banks—is forcing banks to curtail lending or look for more-expensive types of financing.
The PBOC worries that broader moves will only fuel China’s flush stock market, already among the world’s best-performing this year, and put money in the coffers of big state-run companies without helping smaller firms and the broader economy. A PBOC interest-rate cut last month resulted in a surge in China’s stock markets as investors bet on more monetary-easing moves and put money in new initial public offerings. Meanwhile, funding costs for Chinese businesses haven’t shown signs of dropping significantly.
But China’s economy keeps losing steam, forcing the central bank to turn to more aggressive measures to prop up economic activity. Economists warn that the Chinese government may miss its annual growth target—set at 7.5% for 2014—for the first time since the 1998 Asian financial crisis.
Shanghai’s benchmark stock index rose 3.4% on Thursday amid local reports of the PBOC’s move, led by banks and other financial firms.
Banks have been calling on the PBOC to lower the share of deposits banks must set aside against financial trouble, known as the reserve-requirement ratio. In past slowdowns, the central bank has lowered the ratio to boost credit.
In the latest move, the PBOC will significantly relax how banks calculate the loan-to-deposit ratio—the major restraint on banks’ lending abilities, according to the banking officials. Currently, Chinese banks can’t lend more than 75% of their total deposits, but that calculation doesn’t include large sums of deposits from nonbank financial institutions such as asset managers and securities firms.
Now, the PBOC will allow banks to add those deposits to their calculations of their loan-to-deposit ratios, according to the banking officials.
At the same time, PBOC officials told the participants at the meeting Wednesday that banks wouldn’t have to set aside additional reserves for these deposits with the central bank, according to the officials.
The two steps combined would have the same effect as a 1.5-percentage-point cut in banks’ reserve-requirement ratio, the banking officials said.
The central bank in the past month has also beefed up banks’ ability to lend in other ways. It rolled over part of the 500 billion yuan in loans to the country’s five biggest state-owned banks. The central bank also injected 400 billion yuan of short-term liquidity into the banking system.
Many Chinese banking executives have called those targeted steps inadequate as banks struggle with falling profits and rising bad-loan levels.
Via CRT Capital:
We are apprehensive about the prospects for this morning’s 7-year supply. The recent string of auction tails for 7s have us looking for a repeat performance today, if for no other reason than the holiday inspired low liquidity will present a challenge for drawing in bidding interest. Combined with the lack of key data and the early close we expect the auction will mark the end of the trading day – if it ever truly started. Yesterday’s 5-year tail offers a good blueprint for our expectations today – average non-dealer participation but with the added concession of a tail. Moreover, December 7-year auctions have a strong tendency to tail – in fact since the benchmark was reintroduced in 2009 we’ve only seen a stop-through once, 1.3 bp in December 2010. 7s have seen below-average volumes this morning with cash taking 81% of norms – suggesting less auction set-up than usual.
* 7-year auctions have recently met weak receptions with six of the last seven offerings tailing an average of 1 bp vs. a lone stop-through of 0.1 bp in August.
* Indirect bidding has been increasing at 7s, taking 48% at the last four auctions vs. 45% at the prior four. Direct bidding has decreased over the same period, taking 15% of the last four auctions vs. 19% at the prior four.
* Investment fund buying has increased slightly to 44% of the last four auctions vs. 42% of the prior four. In outright terms, that is $12.8 bn vs. $12.1 bn prior – so effectively unchanged.
* Foreign investors as a % of the auction have decreased recently, taking 15% of the last four auctions vs. 17% at the prior four. In outright terms, that’s $4.4 bn over the last four auctions vs. $5.0 bn during the prior four.
* Technicals are bearish as stochastics continue to favor higher yields. Initial support is the top of the yield range at 2.109% (set on the November NFP Friday). Break that and we see the prior breakout level at 2.19% before the 2.25% point. Initial resistance is the 21-day moving-average at 1.996% and then the 40-day at 1.963%. We also see last week’s closing at 1.967% as relevant in a larger rally.
Via Boomberg;
Corporate Bond Spreads Tend to Tighten in January: BI
2014-12-24 13:26:03.970 GMT
By James Holloway
(Bloomberg) — January is often favorable for corporate
bond markets as fund managers deploy cash from investment
mandates awarded at year-end, BI senior analyst Richard Salditt
writes in note.
* Since 1994, high-grade credit spreads have narrowed 75% of
the time by 7bps on average in the first month of the year,
while high-yield spreads narrowed 70% of the time by a mean
of 24bps, based on Barclays Corporate Bond Index data
* The only instance of spreads expanding in December and again
in January occurred in 2007-08
Via Bloomberg:
WHAT TO WATCH:
* (All times New York)
Economic Data
* 7:00am: MBA Mortgage Applications, Dec. 19 (prior -3.3%)
* 8:30am: Initial Jobless Claims, Dec. 20, est. 290k (prior
289k)
* Continuing Claims, Dec. 13, est. 2.375m (prior 2.373m)
* Continuing Claims, Dec. 13, est. 2.375m (prior 2.373m)</li></ul>
* 9:45am: Bloomberg Consumer Comfort, Dec. 21 (prior 41.7)
Central Banks
* 6:50pm: Bank of Japan issues minutes of Nov. 18-19 meeting
* 10:45pm: Bank of Japan’s Kuroda speaks in Tokyo
Supply
* 11:30am: U.S. to sell $29b 7Y notes
Via Brown Brothers Harriman:
Foreign Exchange: The US dollar’s gains scored yesterday in the wake of a strong upward revision in Q3 GDP to 5% have been pared slightly today in extremely thin market conditions. The euro was sold to a new 28-month low (~$1.2165) yesterday and is struggling to re-establish a foothold above $1.22. Encouraged by the US GDP, the backing up of US rates and a 1.25% rise in the Nikkei, the dollar above JPY120.25 today. Recall that the greenback hit a low of nearly JPY115.50 on December 16. Yesterday the dollar stalled just above JPY120.80, which is about one yen off the multi-year high set on December 8. Sterling is also consolidating its loss seen yesterday amid the contrasting Q3 GDP reports. While the US was revised higher, the year-over-year pace in the UK was cut to 2.6% from 3.0%. The dollar-bloc currencies are slightly firmer.
Despite the weaker oil prices and S&P’s warning that there is a 50% chance Russia could lose its investment grade status in the next three months, the ruble is slightly firmer day. The focus is on a modest form of capital controls (forcing 5 state-controlled companies to repatriate their fx holdings by March 1) and the government’s offer of hard currency loans to Russian banks and businesses to service external debt. The contagion has spilled over to Belarus. Separately, the Chinese yuan also stabilized after falling to six-month lows. Liquidity conditions have eased as the IPOs are launched and/or tie up less funds than projected.
Equities: The MSCI Asia-Pacific Index rose about 0.6%, helped by that advance in the Nikkei, and gains in Korea and Taiwan. China’s Shanghai Composite fell 2% after losing 3% yesterday. Reports suggest light suasion by Chinese officials have helped spark the profit-taking after a 30% rally from the unexpected PBOC rate cut on November 21 through December 22. Not all European bourses are open, and those that are, are mixed. The FTSE and CAC are about 0.25% lower, while Italy’s market is up over 1%.
Bonds: Turnover is quiet and benchmark 10-year yields are mostly at record lows. Bigger moves are being seen at the short-end as cash is parked for the holidays. Seven euro zone members have negative two-year yields. US yields are moving in the opposite direction. The US 10-year yield reached almost 2% on December 16 and is now 2.25%, a nearly three week high. The US 2-year yield was just below 48 bp December 16, and now it is near 75 bp.
Oil prices are lower following the API inventory report. US session features weekly initial jobless claims.
I want to wish readers a joyous Christmas and a Happy New Year. I will be spending the next several days enjoying life with my family and blogging will continue on the light side until 2015 arrives. Once again my best wishes for a blessed and happy holiday interlude.
Peace.
John Jansen
The Treasury market has stabilized at local low prices amidst very light volume. Dealers report real money and central banks taking advantage of the back up in yields to buy in the belly of the curve.
Today the Treasury will auction a batch of 7 year notes. I think there is more downside in price in front of the auction as apathy reigns and I do not see the impetus for any class of market participant to step in and stop the market out. I would use the 10 year as a barometer and there should be support in the zone between 2.27 and 2.30. One area of support for the 7year note is the cheapness of the US versus the rest of the globe. I do not follow the 7 year versus other sovereigns but I am sure that it tracks the 10 year. In the 10 year sector the US is at all time wides to Germany where it trades + 166 to Bunds. It is also a a wide to the UK where we are 37 cheap to the Gilt. The most amazing relationship is Spain where the US 10 year is + 60 to 10 year Spain.