Merrill Lynch Research on the FOMC
December 18th, 2014 6:33 amVia Merrill Lynch Research:
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January Issuers
December 18th, 2014 6:29 amVia Bloomberg;
IG CREDIT PIPELINE: January Serial Issuers; M&A Deals for 2015
2014-12-18 10:19:36.303 GMT
By Robert Elson
(Bloomberg) — The following deals may be added to the IG
calendar in the coming days, weeks, months:
* ABIBB, BRK have history of January issuance
* GS often issues in January, has large maturities in 2015
* BAC historically issues in January
* JPM a likely January issuer, based on historical record
* GE Cap may open 2015 IG issuance
* Bank of India (SBIIN) Baa3/BBB-, hires Barc/C/HSBC/JPM for
USD issue
* Zimmer Holdings (ZMH) Baa1/A-, proposed acquisition of
Biomet (BMET); up to $7.66b of senior unsecured notes may be
part of debt financing
* Merck (MRK) A2/AA, says $9.5b of new debt to be issued in
Cubist Pharmaceuticals (CBST) acquisition; committed
acquisition financing in place; deal closure expected 1Q15
* Reliance Industries (RILIN) Baa2/BBB+, mandates
Barc/C/DB/JPM/MS for USD issue
* Valspar (VAL) Baa2/BBB, investor calls began Oct 8, via
BofAML/GS/WFS; deal may follow; VAL last seen in Jan 2012
* Republic of Indonesia (INDON) Baa3/BB+, selects
BofAML/C/DB/GS/HSBC/JPM/SoGen/SCB for offshore bond deals
next year
* Actavis (ACT) offers to buy Allergan for $219/Shr in cash
and stock; has committed bridge facilities via JPM/Miz/WFS;
statement
* Halliburton (HAL) A2/A, to buy Baker Hughes (BHI) A2/A for
$34.6b; HAL intends to use cash on hand and fully committed
debt financing via BofAML/CS
* Reynolds American (RAI) Baa2/BBB-, up to $9b bridge loan
from C/JPM for its Lorillard Tobacco (LO) Baa2/BBB-merger
agreement; debt issuance is planned
* AT&T (T) A3/A-, buying DirecTV (DTV) Baa2/BBB; AT&T “plans
to assume $18.6 billion in net debt, issue $34 billion of
new stock and borrow $7.5 billion to acquire DirecTV,”
Erich Marriott, Bloomberg Intelligence analyst, writes in
note
* Orix Corp (ORIX) Baa2/A-, 144a/Reg-S deal may follow
investor meetings via BofAML/MS; last issued in USD March
2012
Corporate Bond Trading Yesterday
December 18th, 2014 6:26 amVia the good folks at Bloomberg:
IG CREDIT: Spreads Improve vs Widest Levels of 2014
2014-12-18 10:59:56.635 GMT
By Robert Elson
(Bloomberg) — The final Trace count for secondary trading
was $15.7b vs $13.6b Tuesday and $15.8b the previous Wednesday.
10-DMA at $14.9b vs $15b; 10-DMA of only Wednesday sessions
$15.2b.
* 144a IG trading added $2.6b of volume
* MRO 3.625% 2024 was the day’s most active issue with client
flows accounting for 100% of volume that included 8 large
tickets
* JPM 4.125% 2026 was next; client buying 3:2 over selling,
together taking 88% of volume
* JPM 3.875% 2024 was 3rd; client flows, dominated by buying,
took 49% of volume
* BofAML IG Master Index at +150 vs +151, the new wide for
2014; +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
+176 vs +177, the new wide for 2014; +140, a 2014 low and
new post-crisis low was seen July 30
* S&P HY index at +626 vs a new wide for 2014 at +644
* S&P spread history in a 10-year lookback
* BofAML HY Index at +548 vs +571, a new wide for 2014, widest
spread since Nov 2012, vs +552
* Markit CDX.IG.22 5Y Index at 69.7 vs 76.1, a new wide for
2014; 55 was seen July 3, the low for 2014 and the lowest
level since Oct 2007
* No IG issuance
* Month’s IG issuance $60.5b; YTD $1.395t
* M&A-related deals dominate pipeline for 2015
* 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>
December 18 2014 Opening
December 18th, 2014 6:25 amPrices of Treasury coupon securities have posted bifurcated results in overnight trading. When viewed against levels which prevailed at 645PM last evening 2 year through 5 year yields are a tad lower while yields on the longer dated benchmarks are modestly higher. The yield on the benchmark 5 year note has slipped to 1.622 from 1.623. The yield on the 7 year note has increased from 1.947 to 1.958. The yield on the 10 year note has climbed to 2.162 from 2.146. The yield on the Long Bond has jumped to 2.766 from 2.733. The curve has unwound some of the significant flattening which occurred following Ms Yellen’s observation yesterday that rate hikes could be on the table in a “couple” of meetings. The 5s 10s spread at touched a cycle low at 52.3 but trade this morning at 54 basis points. Similarly 5s 30s made a cycle low at 111 basis points and now trade at 114.4. Likewise, 10s 30s trades at 60.4 this morning following a cycle low at 58.7 yesterday. The2s 5s 10s butterfly has richened to 46.9 from a near term high of 47.8. There is huge support for that spread at 50 basis points. The 5s 10s 30s spread is unchanged at -6.4.
Dealers reported modest flows in the overnight session. Central banks and commercial banks bought spread product in the belly of the curve. Central banks sold 7 year through 10 year off the run Treasuries. Real money in Japan bought the same sector but in smaller size than the central banks sold.
In overnight developments the Swiss National Bank announced that it will impose a negative rate on certain bank deposit to halt the rise of the currency. The oil market has posted modest gains and in the very short run it appears that some of the panic in that market has subsided. Russian autocrat Putin held his annual press conference and he did not rattle any sabers and his lack of belligerence was soothing to markets. The German IFO was mixed with current conditions unchanged but future expectations beat consensus forecasts and climbed from the previous month. Retail sales in the UK were robust.
Today is an interesting day in bond market history as on this date in 2008 the Long Bond closed at 2.53 percent. I never would have believed that we would be trading sub 3 percent six years later.
Hilsenrath Story
December 18th, 2014 5:48 amThis is a nice recapitulation of events but does not add to our store of knowledge regarding the near term course of monetary policy.
Via Jon Hilsenrath at the Wall Street Journal:
The Federal Reserve took a delicate step toward raising short-term interest rates in 2015, but at the same time exposed its skittishness about signaling a historic move away from easy-money policies in place since the global financial crisis.
In a statement Wednesday after a two-day policy meeting, the Fed broached the prospect of “beginning to normalize the stance of monetary policy,” the most direct formal reference to raising rates it has made in years.
Rates have been held near zero since December 2008 and since then the Fed has offered assurances that they would stay low amid low inflation and elevated levels of unemployment. The new statement said the Fed would be “patient” before raising rates, adding that the overall outlook hadn’t much changed from earlier assurances that rates would stay low for a “considerable time.”
Investors were whipsawed by the nuanced messages. Stock prices sharply extended gains when a reference to the “considerable time” assurance reappeared in the Fed’s statement. They fell when Fed Chairwoman Janet Yellen suggested a move after two meetings is possible, and then shot up again. The Dow Jones Industrial Average leapt 288 points, or 1.69%, to settle at 17356.87, its biggest gain in 2014.
Goldman Sachs economist Jan Hatzius said the market moves, taken together, amounted to a vote of confidence that the Fed and economy were on track.
In a news conference following the meeting, Ms. Yellen effectively said there are no promises. “The committee considers it unlikely to begin the normalization process for at least the next couple of meetings,” she said. “This assessment, of course, is completely data-dependent,” she added, meaning it will depend on the path of the economy.
The central bank’s next scheduled policy meeting is Jan. 27-28. The following is March 17-18. Several top Fed officials have said they expect they will start lifting rates around the middle of next year and the Fed’s interest-rate projections, released with Wednesday’s statement, suggested that remains the predominant view.
Staying on track could be a challenge, given divisions among policy makers.
Three Fed officials dissented at the meeting, all for different reasons, a sign of the discord that looms as the Fed chairwoman tries to chart a course away from zero interest rates.
Dallas Fed President Richard Fisher said rate increases might need to come sooner than the Fed plans. Minneapolis Fed President Narayana Kocherlakota said the Fed isn’t putting enough weight on the risks of low inflation. And Philadelphia Fed President Charles Plosser wants the Fed to stop giving time-linked guidance about its rate plans.
“At a time like this, where we are making consequential decisions, I think it is very reasonable to see divergences of opinion,” Ms. Yellen said at her news conference.
Federal Reserve Chairman Janet Yellen discusses why the Federal Open Market Committee updated its interest-rate guidance after the Fed’s rate decision. Photo: AP.
Fed officials’ choices won’t get easier in the months ahead. In forecasts released with the statement, officials said they expected rates to end up anywhere between 0.375% and 4% by the end of 2016. Within that range, 17 officials project 13 different points where interest rates might end up.
While there is no clear consensus on the outlook in two years, their expectations for the year ahead are more clear. Fifteen of 17 policy makers said they expected to raise short-term interest rates in 2015 and their median estimate—meaning half of estimates were above and half below—put short-term borrowing rates at 1.125% in 12 months. The median rate estimate for 2016 was 2.5% and for 2017 was 3.625%.
Those estimates are all modestly lower than the Fed projected in September, meaning that even though officials continue to expect to move rates up next year, they see a very gradual approach once they start. The estimates—though preliminary and subject to change—imply Fed officials have in mind four quarter-percentage point moves in 2015.
As it considers the timing and pace of rate increases, the Fed has been faced with a mixed economic landscape. Though the job market has improved and the Fed is sticking to forecasts for faster economic growth in the next two years, the rest of the world has been struggling with low or slowing growth and inflation is facing a new downdraft that officials said they were watching closely.
Fed officials projected the domestic economy would grow at a rate between 2.6% and 3% in 2015 and that the unemployment rate would fall to 5.2% or 5.3%.
That would put the jobless rate in a zone officials call “full employment,” in which joblessness is low but not so low that it sparks inflation.
Recent economic data did little to dissuade Fed officials from this view. “Labor market conditions improved further, with solid job gains and a lower unemployment rate,” the policy statement said.
“The tone for the outlook of the economy was relatively upbeat,” said David Stockton, a senior fellow at the Peterson Institute for International Economics and former head of the Fed’s economic research division. “She thought the recovery was on track.”
Yet there are several wild cards that could alter the Fed’s course. The most obvious is the path of inflation. Tumbling oil prices are pushing down consumer price inflation. The Labor Department reported Wednesday, hours before the Fed statement was released, that consumer prices dropped 0.3% in November from a month earlier, the largest one month drop since the 2008 financial crisis rocked the global economy.
Fed officials are sticking to their view that the downward pressure on inflation will be sharp but short-lived. Officials projected 1.0% to 1.6% consumer price inflation in 2015, a large downward revision from earlier estimates. But they saw it returning to between 1.7% and 2.0% in 2016 and between 1.8% and 2.0% in 2017.
Those longer-run forecasts suggest the Fed has confidence that recent oil declines won’t seriously derail their efforts to get inflation back to the 2% goal. It has been running under that goal for nearly three years but many officials believe that as labor market slack diminishes, inflation will move back toward 2%.
Ms. Yellen said the Fed would start raising rates as long as it was “reasonably confident” that inflation would move back to the 2% goal.
“The committee continues to monitor inflation developments closely,” the statement said.
Central Banker DNA and Other Musings
December 17th, 2014 4:10 pmI think the bottom line is that Ms Yellen does not possess the strand of DNA which allowed her predecessors to be nebulous and ambiguous. . Why have I gone off on a microbiology tangent? Well at her first press conference she talked about tightening six months after they finish buying assets and then today suggested that tightening may be on the table after a couple of meetings which places the tightening possibility in April. She is less than discrete in her verbal musings. So after the initial curve steepening which ramped 5s 30s to 122 we now have that spread at 114.
She was also hawkish in other spots. I thought she harped on the transitory nature of the benefits of the oil price declines on inflation. I would need to read a transcript of the conference but I believe she also implied that the FOMC might actually lob in a 50 basis point rate hike as she did not want to repeat the experience of 2004 through 2006 when Greenspan winked and delivered seventeen consecutive 25 basis point hikes.
I think that the whole concept of transparency is foolhardy. The statement says one thing and then we sit and hang on her every word to divine their real intentions. Instead we are left with conflicting views. I will go with the statement and the dovish spin of that.
I have heard of central bank buyers of 5s and 7s when 7 year traded behind 1.90. Fast money was a better buyer of 5s and one dealer reported heavy selling of 2s by fast money following her “couple of meetings” comment.
I have been dabbling in the 5 year future and it is nearing a key level. I was long some on the day of the bond auction and got stopped out I believe at 118-26+. It has traded between that level and 119-29 in the interim and a break below that level would be technically ugly.
TIPS cratered after the FOMC. I could not get a good quote on 5 year breaks. They were 116/110. I had marked them at 119 at about 130PM. The 10 year break is 162.5 and that is down from 168 prior to the statement. Thirty year breaks dropped to 191 from 194. There is a 5 Year TIPS auction tomorrow. They are exceedingly cheap but it is December and dealers have no balance sheet. It will be interesting to see how that goes.
MBS
December 17th, 2014 3:23 pmMortgages holding gains and remain 4+ to 5+ tighter to Treasuries.
Goldman on FOMC
December 17th, 2014 2:49 pmVia Goldman Sachs;
Goldman Haztius On The Fed – Slightly Dovish Vs Expectations
1. Downward move in the dots, opening up the door for hikes post the middle of
2015 with the decline in the median dot and the 4th lowest dot (which we think
is the fed leadership)
2. language of “closely monitoring inflation” chosen; “closely monitoring” in
the past has been relatively strong language i.e. they want to make it clear
they are focused on getting inflation in line with their mandate
3. on the more hawkish side was the replacement of considerable period language
i.e. the normalisation process has started. albeit this has been well flagged.
Flows
December 17th, 2014 2:30 pmOne dealer reported chunky buying of 18 month to 3 year sector by asset managers.
Another dealer reports hedge funds and asset managers buying the 5 year through 7 year sector outright and against back end. Yield curve reflects that flow as 5s 30s has gapped to 122 from 115.7 prior to statement.
More MBS
December 17th, 2014 12:16 pmIn an earlier post I noted that 3s were better by 3 ticks while the rest of the stack had improved by 1 to 1+ ticks. In a very recent note another trader reports buying in 4s and 4.5s and all mortgages are now 4 ticks to 4+ ticks better to Treasuries on the day.