This is an excerpt from TDSecurities overnight note to customers which discusses the rate hike by Russia to defend the ruble (which has failed ignominiously).
Via TDSecurities:
RUB The Central Bank of Russia decided to show the market its bazooka
last night. In an emergency meeting around 10:00PM yesterday, the CBR
hiked the key rate by a large 650bp to 17.00%. Most secondary rates have
also been tightened by roughly the same magnitude. Moreover, in order to
expand credit institutions’ capability to manage FX liquidity in
troubled times, the CBR has increased the maximum allotment on the
28-day FX repo auctions to $5bn from $1.5bn, while the 12-month FX repo
auctions will be conducted on a weekly basis instead of being monthly.
So, for the first time since the Crimea annexation and the imposition of
Western sanctions on Russia, the CBR has shown a true resolve to use
interest rates as an active tool to tackle ruble depreciation and
consequent inflationary implications (“This decision is aimed at
limiting substantially increased ruble depreciation risks and inflation
risks”). Yet, even after such a large-scale hike, the RUB has continued
to depreciate vs. USD. With the limits of tightening now exposed, we can
expect some large-scale FX intervention in the coming hours or days. But
when even this fails, the only logical conclusion is that Russian
authorities will have to start imposing selective capital controls. For
our detailed view read Russia: CBR shows the bazooka, but markets remain
unimpressed.
Posted in Uncategorized | Comments Off on On the Russian Rate Hike
China held $1.25 trillion in U.S. debt as of October, a $13.6 billion drop from September, the Treasury Department said in a monthly report today. The nation remains the largest foreign holder, ahead of Japan, whose stockpile increased $0.6 billion to $1.22 trillion, reducing the gap between the two countries to the narrowest since September 2012.
The yuan rose 0.4 percent against the dollar in October as the government moves toward a market-determined exchange rate, part of efforts to expand the currency’s use worldwide. The less China intervenes to weaken its currency, the less it needs to buy securities such as Treasuries.
“The lack of growth in their Treasury portfolio has been happening throughout this year, so I tend to think it’s more of a structural trend that’s developing,” said Stanley Sun, an interest-rates strategy analyst at Nomura Securities International Inc. in New York. He said he expects “a grind lower rather than any sharp decline” in holdings.
While the yuan has weakened 1.3 percent since October, it’s still the only one among 31 major global currencies tracked by Bloomberg to strengthen against the dollar in the second half.
Capital Flows
The Treasury’s latest report, which also contains data on international capital flows, showed a net outflow of U.S. long-term securities of $1.4 billion after a record net $164.3 billion inflow in September. It showed a total cross-border inflow, including short-term securities such as Treasury bills and stock swaps, of $178.4 billion. That followed a revised $57.2 billion outflow the prior month.
Previously released figures showed Japan last exceeded China’s Treasury holdings in August 2008.
China had net purchases of $28.4 billion of Treasury notes and bonds in October, according to Treasury figures that don’t include bills or reflect maturing securities. That indicates China has bought $184 billion in longer-dated Treasuries this year, “even as overall holdings have declined modestly,” Gennadiy Goldberg, a U.S. strategist at TD Securities USA LLC in New York, said in a note.
China’s foreign-exchange reserves, the world’s biggest, stood at $3.89 trillion at the end of the third quarter, official figures show. That’s down from a record $3.99 trillion at the end of June, when reserves were boosted by China’s current-account surplus and dollar purchases.
Reserves Proportion
Even as China’s Treasury holdings have declined, the level as a proportion of the nation’s foreign-currency reserves has held steady this year. Treasuries represented 32.6 percent of reserves in September, compared with 31.8 percent in June, based on data compiled by Bloomberg. It was 34.9 percent in October 2013.
China’s economy slowed in November as factory shutdowns exacerbated weaker demand, raising pressure on the central bank to add further stimulus. Bloomberg’s gross domestic product tracker came in at 6.78 percent year-on-year in November, down from 6.91 percent in October and a fourth month below 7 percent, according to a preliminary reading.
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This is an informative note via Bloomberg which lists companies likely to issue in the coming weeks:
IG CREDIT PIPELINE: BAC, JPM, GE Are Historical January Issuers
2014-12-16 10:22:51.681 GMT
By Robert Elson
(Bloomberg) — The following deals may be added to the IG
calendar in the coming days, weeks, months:
* 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
Posted in Uncategorized | Comments Off on Corporate New Issue Calendar
Prices of Treasury coupon securities have registered solid gains in the overnight session as a oil continues its plunge. In my opinion there is a bit of a risk off trade at work here as a sense of panic develops in the markets. One only has to observe the 7 percent hike in rates in Russia to know that its central bank is fearful. They are even more nervous this AM as the huge rate hike only stabilized the currency at its lowest levels ever against the US dollar (around 66). The yen is the classic indicator of fear and it trades with a 116 handle this morning . Just one week ago that currency traded with a 121 handle. Crude continues its death spiral and weaker than expected manufacturing data in China fueled the decline.
The yield on the 5 year note has declined to 1.543 from 1.571. The yield on the 7 year note has slipped to a.873 from 1.905. The yield on the 10 year note dropped to 2.093 from 2.12. The yield on the Long Bond dropped to a crazy 2.735 from 2.75. The yield curve has steepened overnight reversing some of the recent flattening.The 5s 10s spread widened to 55 from 54.9. The 5s 30s spread moved to 119.2 from 117.9. The 10s 30s spread moved to 64.3 from 63. For the lepidopterists in the room the butterfly spreads I observe are all richer. The 5s 7s 10s spread has moved to 11 from 11.9. The 5s 10s 30 spread is at a cycle high of -9.2. The 2s 5s 10s spread has moved to 42 from 43.7.
Dealers report an active evening of trading with clients. There was spread product related selling in the 10 year sector. Trading accounts sold 5s through 30s. Real money domiciled in Japan bought 10s. There was spread product selling in 3s. Central banks bought 5 year notes.
The Riskbank in Sweden did not act but did say that it is preparing measures which can make monetary policy more expansionary.
I do not have a strong view today. Waiting for the Godot which is the FOMC will temper risk taking today. I have been observing the 5 year note contract of late and there has been a bid in the zone of 119-06. For day trading purposes I would buy some there and look to sell around 119-12.
Posted in Uncategorized | Comments Off on December 16 2014 Opening
CREDIT: Spreads Continue to New Record Wides for 2014
2014-12-16 10:40:30.43 GMT
By Robert Elson
(Bloomberg) — The final Trace count for secondary trading
was $11.6b vs $10.1b Friday and $16.2b the previous Monday. 10-
DMA at $15.5b.
* 144a trading added another $1.6b of IG volume
* Jan and April 2015 issues from CS, BAC topped the most
active list
* BAC 2.60% 2019 was 3rd with 2-way client flows accounting
for 89% of volume
* MDT 4.625% 2045 was most active 144a IG issue; client flows
accounted for 68% of volume
* BofAML IG Master Index at +147, a new wide for 2014, vs
+145; +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
unchanged at +175, the new wide for 2014; +140, a 2014 low
and new post-crisis low was seen July 30
* S&P HY index made a new wide for 2014 at +629 vs +619
* S&P spread history
* BofAML HY Index at +552, a new wide for 2014, widest spread
since Dec 2012, vs +547
* Markit CDX.IG.22 5Y Index closed at 74.4 vs 72.6; 55 was
seen July 3, the low for 2014 and the lowest level since Oct
2007; 2014 high of 74.5 was seen Feb 3
* No IG issuance
* Month’s IG issuance now $60.5b; YTD $1.395t
* M&A-related deals dominate pipeline for 2015
* GE Capital may open 2015 issuance
* JPM a likely January issuer, based on historical record
* BAC historically issues in January
Posted in Uncategorized | Comments Off on Secondary Market Corp Bond Trading Yesterday
Confidence in Europe’s largest economy has zoomed up to a level not seen since the spring, according to an influential indicator.
The Zew Indicator of Economic Sentiment for Germany gained more than 23 points to stand at 34.9, from 11.5 in October.
The figure, compiled from the views of more than 200 analysts, was far above the level of 20 expected by economists polled by Reuters and the highest since April when the indicator reached 43.2
The improved confidence comes despite the German central bank having halved its forecast for economic growth for next year to 1 per cent.
This further dashed hopes that Germany could power the eurozone to recovery, although ongoing stagnation may bring the European Central Bank closer to taking the tough decision to buy government bonds.
A separate assessment of current conditions was in Germany increased by 6.7 points from the previous month to 10, far beyond expectations of 5.
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Richard Gilhooly of TDSecurities discusses the collapse in EM currencies in 1998 and implications for the market today:
Via Richard Gilhooly:
Given the collapse in EM currencies in recent weeks, with quite a few stories circulating comparing the current malaise to the 1998 developments, it is worth considering the possible implications for short Treasuries with FX reserves significantly larger than they were in 1998. The first round of deflation contagion in Asia started in June 1997, with Thailand, when the Thai Baht started a melt-down from around the 25 level and bottomed around 56 to USD by January 1998. Of more economic significance to the US. the Korean Won went from roughly 900 per USD to a low of 1800, also in January 1998.
Crude oil prices were then at the paltry level of around $20 a barrel, initially trading higher after the devaluations brought hope of economic rebound, reaching $23 a barrelby September 1997. However, oil prices resumed their decline into 1998 and finally bottomed in December 1998 at $10.79. The $10 price decline may seem small compared to the $50-60 drop since June of this year, but in percentage terms the moves are similar. And the casualty of the devaluations and commodity price collapse were Russia on August 17, 1998, followed by LTCM in September of that year. Russia announced a devaluation on August 17, defaulted on domestic debt and declared a moratorium on payment to foreign creditors.
Front-end Treasuries are under pressure today, with 3yr notes 5bp higher in yield, while EM equities are FX are in free-fall, while US equities have reversed earlier gains and continued Friday’s drop. In addition to concerns over the FOMC dropping 2 words from their statement, there may also be a growing belief that EM Central Banks will start to liquidate their holdings of US Treasuries, which are concentrated in shorter maturities. In an attmept to defend their plunging currencies in 1997, many Asian Central Banks depleted their FX reserves and subsequently built up those reserves to much higher levels to prevent a similar run re-occurring.
One could argue that Japan was the original source of the most recent spate of spreading devaluations (in fact, we did argue that a year and a half ago) that have morhped into a stronger USD, collapsing commodities and spreading deflation concerns. The Yen has been “devalued” by roughly 50% in the acceptable guise of QQE, which stepped up a notch on October 31 with the surprise QQE2. And almost on cue, around 1.5yrs later, oil prices are collapsing and currencies are in free-fall in EM, but defence of those curencies have been limited to a few substantial rate hikes that anyone who watched the ERM in 1992 knows, never work.
Selling some of those significant EM FX reserves and repatriating the proceeds would assist the FOMC in their apparent desire to tighten, while at least buying some time for the endangered currencies without making matters much worse through penal rate hikes that never work, lead to a weaker FX and ultimately more pressure for rate hikes as imported inflation accelerates.
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The head of the United Auto Workers union is seeking to dismantle the two tiered wage system currently in place in the auto business. The union and the companies negotiated that plan during the bankruptcy proceedings at the height of the financial crisis when the auto companies received a government bail out. Under that arrangement legacy workers receive a higher wage than new hires. The union thinks that two employees doing the same job should earn the same pay.
Via the WSJ:
By
John D. Stoll
United Auto Workers President Dennis Williams said on Monday the current two-tier wage scale for auto workers is un acceptable, and the roughly $19.50 an hour wage new hires earn should be a “good starting point” for negotiations with Detroit auto makers next year.
Mr. Williams, speaking at the UAW’s headquarters, said a “general wage increase is important to our members.” He noted that two tiers of wages—one for legacy workers and one for newer hires—were established during and after a financial crisis when General Motors Co. , Ford Motor Co. and Chrysler Group LLC were facing deep challenges.
It is the fundamental belief of the union that people doing the same job should get paid the same wage.
Currently, veteran auto workers who were hired before the economic crisis make roughly $28 an hour. Employees hired more recently start at about $16 an hour and increases over time to about $19.50. At some point, those on the lower wage scale theoretically are eligible to graduate to the veteran’s tier, but that would require a relatively high level of hiring at U.S. auto plants.
Mr. Williams said the lower-wage scale is unacceptable and the quality of living needs to lifted for all of Detroit’s manufacturing workforce. Higher paid veteran workers haven’t had a real wage increase in nearly a decade. Mr. Williams indicated that needs to be addressed in contract talks.
GM and Chrysler, now controlled by Fiat Chrysler Automobiles NV, filed for bankruptcy in 2009. The federal government bailed out both car companies, and the UAW was forced to make concessions in return for equity stakes.
“You’ve got to remember that we were bargaining in a postbankruptcy” environment, he said. And, he noted, “we were in negotiations with the federal government.”
Mr. Williams, who declined to be too specific about the bargaining agenda in 2015, said “we had no idea whether we were going to be successful.”
In recent years, auto makers have paid out historically-strong annual profit-sharing checks—including as much as $8,000 at Ford. Mr. Williams said the UAW is in “continued discussions” to potentially tweak the profit-sharing formula so that workers aren’t penalized for certain one-time items, such as recall costs that are currently hitting GM.
Separately, Mr. Williams said the UAW has seen no impact from the recent right-to-work laws that went on the books in Michigan, the organization’s home turf and one of its largest geographic footprints due to auto-industry representation.
He said the union hasn’t seen a decline even after renegotiating some deals that would allow workers to opt out of paying union dues. “We haven’t seen the falloff,” he said, adding “challenging right- to-work isn’t a priority right now.”
Michigan Gov. Rick Snyder signed right-to-work into law that makes payment of union dues voluntary for private-sector unions and most public-sector unions. Often cast as being antiunion, the legislation was opposed by the UAW, but Mr. Williams said the union’s efforts fell short because the organization was “not as prepared for that debate as we probably should have been.”
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US consumer confidence is finally roaring back to pre-crisis levels on the collapse in gas prices.
But we have to respect the markets – that means further decline in oil the risk of further risk-off.
This is not the time to set tactical longs and we remain underweight the HG Oil & Gas sector, in our view.
Oil pressure. While our inner contrarian is itching to take the opposite side of recent market moves – and thus become a bear dressed tactically in bulls clothes – we have to respect the markets. If Brent can decline $16 in two weeks after OPEC refrained from cutting production, clearly the risk of much further declines in oil is very high as excess oil supply can only decline very slowly absent intervention from OPEC. Hence we should see further risk-off moves – i.e. declines in long term rates and credit spread widening – especially as many investors remain on the sidelines until the new year.
Low on fuel.Furthermore we remain underweight the HG Oil & Gas sector. Key to outperformance in 2015 will be to time the move back into this sector. However, with significant further downside risk to oil prices, and a sector that trades in tandem with oil – despite generally speaking very low leverage and little default risk – we expect further underperformance of the sector relative to the market – Hans Mikkelsen (Page 4)
Big re-pricing of Russia exposures. EM continues to get squeezed rapidly as oil declines. For Russia that weakness was compounded today with the US congress approving The Ukrainian Freedom Support Act of 2014 (see below). Thus the Russian Ruble collapsed another 10% against the USD to 64 – the biggest 1-day decline since the 1998 Russian crisis. At the same time Russia sovereign CDS widened 95bps to 537bps – the biggest bps weakness since the 2008 financial crisis. – Hans Mikkelsen (Page 6)
Russia Watch: Escalation from the West. Escalation of pressure and the crisis. The US congress has approved The Ukrainian Freedom Support Act of 2014, which would give the President more powers to impose economic sanctions against Russia and also authorize him to provide military aid to Ukraine to counter Russian pressure. The bill now needs only President Obama’s signature to become law, which could happen shortly. Overall, we see the development as a meaningful escalation of pressure on Russia from the West, which could add further pressure on the already pressured Russian markets. In particular, the provisions relating to potentially extending military aid to the Ukraine could provoke escalation from the Russian side as well, but also could push for more talks as well. – Vladimir Osakovskiy (Page 10)
Foreign buying of US corporate bonds slows. In October, foreign investors remained buyers of US corporate bonds (excluding ABS), according to the TIC data, but at a slower pace than the prior month (Figure 1). Thus, foreigners bought $6.9bn of corporates in October, down from $18.3bn net buying in September. Overall, foreigners sold a net of $1.4bn of US long-term securities in October, including $27.5bn in stocks, $3.4bn of Agency MBS, $2.3bn of Agency bonds and $1.3bn of Non-Agency MBS. At the same time, foreign investors purchased $0.5bn of Treasuries. – Jon Lieberkind (Page 7)
Is Santa Claus delayed?. One of the more reliable seasonal patterns since the financial crisis has been the year-end rally. Specifically, during the 2009-2013 period HG credit posted positive excess returns each December – on average +1.1% compared with average monthly performance of +0.57% across all months. However, this year, for the first time post-crisis, we are seeing a sell-off into year-end, as spreads have widened 10bps and excess returns stand at -0.77% month-to-date – the worst December on record. However, there is no reliable historical pattern suggesting that weak Decembers tend to be followed by strong Januaries. – Jon Lieberkind (Page 8)
Greece Conference Call: the month and the year ahead. Greece is back in global headlines. The program with the Troika is on hold and the Presidential elections in December could trigger early national elections in January. Join us to discuss what we expect for the month and the year ahead, and market implications for Greece and the rest of Europe. Please join David Hauner, Ruben Segura-Cayuela , Athanasios Vamvakidis and Olga Veselova on Wednesday, 17th December 2014 at 3pm BST/10am EST/4PM CET. Please see separate invite for dial-in details.
Liquid Insight:Another December to remember?.Is the sum more hawkish than the parts? Last December the Fed started tapering, two meetings later than the consensus among economists at the time. For this December, many anticipate that the FOMC will drop “considerable time” from the forward guidance and signal rate hikes in the first half of next year. We believe the consensus is once again ahead of the Fed. The main message from the December meeting is likely to remain a patient and gradual transition toward liftoff in 2015; the Fed is not in a rush. However, we see a risk that a number of modest updates to the statement and the FOMC’s forecasts collectively could look, to the markets like a bigger shift in policy – that the whole could appear more hawkish than the sum of the parts. – Michael S. Hanson, Priya Misra, Ian Gordon(Page 9)
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