Across the Curve

Largest Multi Tranche Deal of Year

Via Bloomberg:

IG CREDIT: MDT to Sell $17b in 7 Parts, Largest Jumbo Deal YTD
2014-12-01 18:35:32.168 GMT

By Lisa Loray
Dec. 1 (Bloomberg) — Today’s $17.0b 7-part offering from
Medtronic (MDT) A3/A is the largest multi-tranche deal of 2014.
* $12.0b Apple Inc. (AAPL) Aa1/AA+ 7-part on April 29 held the
title until today
* $10.0b Oracle Corp (ORCL) A1/A+ 7-part on June 30 and $8.5b
Petrobras (PETBRA) Baa2/BBB- 6-part on March 10 round out
the top three.

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Medtronic Deal

I had to look up the company to find out what they do. They manufacture medical devices. They are probably contributing for some of the curve steepening today as they are bringing a $17 billion multi trance deall

Via Bloomberg:

BFW 12/01 18:34 *MEDTRONIC $2.5B 20Y BONDS LAUNCH AT +150
BFW 12/01 18:34 *MEDTRONIC $4B 10Y NOTES LAUNCH AT +140
BFW 12/01 18:33 *MEDTRONIC TOTAL DEBT OFFERING SIZE $17B

Update at 143PM:

BFW 12/01 18:34 *MEDTRONIC $4B 30Y BONDS LAUNCH AT +170
BFW 12/01 18:34 *MEDTRONIC $2.5B 20Y BONDS LAUNCH AT +150
BFW 12/01 18:34 *MEDTRONIC $4B 10Y NOTES LAUNCH AT +140

So there is also a huge Long Bond in the deal.

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Treasury Market Update

The long end of the Treasury market has a case of social disease today as it steepens appreciably. The 5s 10s spread opened early this morning at 68.5 and is out to 70.2. The 5s 30s spread started the day at 141.4 and is currently 143.4. The 10s 30s spread began the session at 72.9 and trades currently at 73.9. The front end is a rock as 2s 5s 100.4 and has only moved to 100.8. Consequently the 2s 5s 10s spread has actually narrowed to 30.9 from 31.3. That is a very uncharacteristic move in a down market.

Why has the curve steepened today? Maybe, because it can. A non flippant response would be that it flattened too much last week in the holiday shortened lightly staffed environment to underwrite the dollop of 2s 5s and 7 offered by Jack Lew and his minions.

One yield curve aficionado offered the opinion that there are several trades going on. He said that there is a large real money seller of 7s and that has battered the 7 year note and the note futures. I see 5s 7s 2 basis points steeper than where it opened early this morning when it was 40 versus 42 currently. He also noted that 5s versus 15s is 3.5 steeper while 15s 25s is 0.4 flatter. He has not heard or observed significant end user flow but noted that the traditional bond contract is taking a pummeling while the ultra trades superbly.

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TIPS

TIPS spreads are relatively unchanged from Friday levels but still well below Wednesday levels. For some perspective I marked 5 year TIPS Breakevens at 153 on November 18 late in the day. Ten year breaks were 186 and 30 year breaks traded at 202.5. On Wednesday 5s were 147.5, 10s were 184 and 30s were 200. As we speak they are 141,180 and 198 in the middle.

There has been very little trading and it is somewhat instructive that with the bounce in oil and gold there are no bottom feeders in looking for value in TIPS.

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Treasury market Update

One dealer reports end user buying this morning of 5s and 10s. I failed to report this earlier but dealers also reported end user clients in japan buying 7 year sector over night.

I had opened 5s 30s early this morning at 141.8 and that spread rests at 142.8 currently.

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On Black Friday

Via Stephen Stanley at Amherst Pierpont Securities:

As most of you have undoubtedly seen, the early returns on the long weekend for retailers were not good.  The National Retail Federation survey estimated that total spending over the four-day weekend fell by 11% from a year earlier.  They were quick to spin the results positively, noting that stores had been offering Black Friday-like discounts for weeks before the day after Thanksgiving.  The NRF also posited that consumers must be so confident that they ‘don’t need no stinkin’ discounts,’ i.e. their tolerance for standing in line at 3 AM to buy a $29 TV is lower this year than when finances were in worse shape.

To be clear, these arguments may have an element of truth in them.  In particular, I think that many people probably have tired of staying awake all night and freezing their fingers and toes off as they stand in line for 8 hours just so they can be stampeded and have a small chance at getting the doorbuster item that they could have bought before or after at a similar but not quite as aggressive discount.  In short, the word has gotten out that Black Friday doorbusters are more of a gimmick than something to flock to.

In any case, do not get overly excited about these early “statistics.”  Their quality is poor, and they have often given an inaccurate signal for the season overall.  The Christmas season is almost always made or broken in the last few days before the holiday.  Also, keep in mind that the NRF survey is merely a poll of 4,600 consumers.  I would venture a guess that half of the people that they spoke to could not accurate report within $50 exactly how much they spent over the weekend (unless the figure was $0!).  The slightly more concrete data were still weak but less so than the NRF figures.  ShopperTrak, which measures the number of visits to stores and then has to guess about the per visitor spending rate, reported that sales were down 0.5% year-over-year through Friday, while IBM’s collection of transactions at 800 retail websites showed a year-over-year rise but by less than in 2013.

In short, while the headlines seem awfully disappointing, we don’t know much just yet.  Having said that, I would repeat that retailers have a lot riding on the Christmas season.  By all accounts, retailers aggressively geared up for the best Christmas season since the crisis, so if shoppers fail to show up in the next few weeks, stores will be sitting on piles of inventories heading into the stretch run of the season, at which time you may well see some ridiculous discounting.  My sense is that retailers might have overestimated the state of the consumer.  Many households are better off than they were a year ago and may splurge a little more than they did last year, but we still live in very sober times, where people do not have a high level of comfort about the medium- and long-term outlook.  Sure, parents will stretch a bit to make their kids happy, but this is not going to be a banner year with mountains of impulse buying.  The early returns may bring expectations back to a more realistic footing, but retailers are still stuck with whatever amount of goods they ordered back in the summer.  I expect that by mid-December, shopkeepers around the country will be sweating bullets, and a high percentage of Christmas purchases made in the final days will be at deep discounts.  Stay tuned.

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Corporate Bond Spreads

The IG 23 is opening 1 1/2 wider at 62 1/2  63.

LOng dated financial paper is opening 1 to 2 wider.

Here is an early run on some paper in that sector:

11/28 CLOSE    12/1  OPEN      CHANGE

C  24      123/120        124/121          +1
WFC 24      101/98        102/99            +1
BAC 24      123/120        125/122          +2
JPM 24      112/109        113/110          +1
GE  24        84/81          85/82            +1
GS  24      135/132        136/133          +1
MS  24      134/131        135/132          +1

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What to Watch for Today

Via the Good Folks at Bloomberg:

WHAT TO WATCH:
* (All times New York)
Economic Data
* 9:45am: Markit US Manufacturing PMI, Nov. final, est. 55
(prior 54.7)
* 10:00am: ISM Manufacturing, Nov., est. 58.0 (prior 59)
* ISM Prices Paid, Nov., est. 52.5 (prior 53.5)
* ISM Prices Paid, Nov., est. 52.5 (prior 53.5)</li></ul>
Central Banks
* 12:15pm: Fed’s Dudley speaks in New York
* 1:00pm: Fed’s Fischer speaks in New York
* 10:30pm: Reserve Bank of Australia seen maintaining 2.5%
cash rate target
Supply
* 11:00am: U.S. to announce plans for auction of 4W bills
* 11:30am: U.S. to sell $24b 3M, $26b 6M bills

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FX

Via Marc Chandler at Brown Brothers Harriman:

– Three forces continue to drive markets: policy divergences, decline in commodity prices, and China’s slowdown
– While lower oil prices boosts disposable income (especially in the US), it poses a challenge for the ECB and BOJ in their goal to arrest deflation
– The ECB may disappoint this week; we do not think that sovereign bonds are the next asset class that the ECB will purchase
– While a rate cut by the RBA next year is gradually being priced into debt markets, the Bank of Canada seems steadfastly on hold

Price action:   The US dollar is mostly softer as North American participants prepare to return from what was a long weekend for many.  The greenback had initially moved higher, hitting ¥119.15, while the euro slipped to $1.2420.  The proximate cause was the continued fall in oil prices and news that Moody’s cut Japan’s credit rating to A1 from Aa3.  However, the dollar shed its gains in the European morning, as falling equity markets sent the dollar to almost JPY118 and the euro recovered to almost $1.2480.  There was little sustained reaction to the EU PMI, which fell to 50.1 from the 50.4 flash reading.  Germany’s PMI was the lowest since June 2013, and the second sub-50 reading in the past three months.  In the EM space, RUB is again making new lows, falling 4.5% against the basket.  Other oil exporters have also been hit heavily, notably Malaysia and Colombia.  The MSCI Asia Pacific index fell 0.7%. The Nikkei was 0.7% higher and Shanghai Comp was flat, despite the official manufacturing PMI coming in on the weak side (50.3 vs. expectations for 50.5 for the official reading).  Euro Stoxx are down 0.3% near midday while S&P futures are pointing to a lower open.  Brent futures fell below $68.0 per barrel, but have since recovered back to just under $70.0.

• Throughout the last few months, we have identified three forces that are shaping the investment climate:  the economic and monetary divergence that favors the US, the decline in commodity prices, and a slowing of China.  These forces remain very much intact, and if anything, have strengthened and reinforcing each other.  Over the weekend, the PBOC announced it is ready to implement guarantees on deposits (as much as RMB 500,000 or about $81,500).  This pushes the agenda towards interest rate liberalization.
• The unexpected upward revision to Q3 US GDP is likely to be matched by a downgrade in Q3 eurozone GDP (to 0.1% from 0.2%) in the week ahead.  The slowdown in China, coupled with falling house prices, rising bad loans, and low inflation prompted the PBOC to deliver its first rate cut in a couple of years, and is spurring speculation of a cut in the required reserve ratio in the coming weeks.
• There are two ways that the precipitous decline in energy prices, and commodity prices more broadly, will impact the world economy.  US policy makers will likely emphasize the spur to growth.  The IMF, for example, estimates that a $10 fall in oil prices boosts world growth by 0.2%.  The decline in gasoline prices can be expected to boost discretionary spending by American households, who have largely forsworn the use of revolving credit (credit cards) during this expansion cycle.
• On the other hand, European and Japanese officials will find in the decline in energy prices an additional obstacle in their mission to arrest the disinflation or deflationary forces.  Under Trichet, the ECB failed to look past the increase in oil prices in 2008, and hiked interest rates on the eve of a great economic downturn from which is has not yet escaped.  It is likely to repeat that from the opposite direction now.  It is likely to see the deflationary impact of the drop in energy prices rather than enhancing growth prospects.
• The ECB meeting is one of four major central banks that meet in the week ahead (Australia, Canada, and UK central banks meet as well).  It is the only one that could do something.  Some believe that the Draghi and Constancio have expressed a sense of urgency that is consistent with announcing a sovereign bond purchase program at this week’s meeting.  We are less sanguine.  We do not think that sovereign bonds are the next asset class that the ECB will purchase.  We think the supra-national bonds have much to commend themselves.  The ECB is already buying covered bank bonds, and with the Asset Quality Review and stress tests behind us, a case can be made for uncovered bank bonds.  The idea of buying corporate bonds has also been floated.
• There is scope for some disappointment if our assessment of the ECB is correct and no sovereign bond purchase scheme is unveiled.  The euro could bounce and peripheral bonds may see some profit-taking after ten-year yields have fallen to record lows.  However, the forward guidance, and specifically the promise to do more if needed (to expand its balance sheet), which appears to have unanimous support, may prevent a significant reversal.  January or February may be a more likely time frame for more action.  The second TLTRO (expected take down of 120-150 bln euros) on December 11, and the progress on the covered bond and ABS purchases will likely confirm that a wider range of assets need to be purchased if the ECB is going to meet its balance sheet goal.  In addition, pay down of the outstanding LTROs may weigh on the balance sheet, even if some is replaced by other refi facilities.
• The other central banks that meet are unlikely to do anything.  The Reserve Bank of Australia’s statement is likely to be dovish, though Q3 GDP to be reported next week is likely to show a respectable 0.7% quarterly pace.  Still, the RBA can be counted on to continue to warn that the currency is over-valued given the decline in commodity prices and the terms of trade.  What it is less likely to talk about is the attractiveness of its relatively high-yielding triple-A rated bonds for large pools of capital, including other central banks.
• While a rate cut by the RBA next year is gradually being priced into debt markets, the Bank of Canada seems steadfastly on hold.  Although price pressures ticked up, Governor Poloz argues to look past what he says is a transitory in nature.  Canada reports its November jobs report at the end of the week.  After strong growth in September and October, a softer report is expected.   On the other hand, at the same time as its employment report, and despite the drop in oil prices, Canada will likely report a further rise in its trade surplus from the C$700 mln reported in September.
• Our analysis shows a more complicated role of oil for the Canadian economy than many may suspect.  In the eastern provinces, for example, Canada imports more expensive Brent.  Canada is a destination of US oil exports, being a loophole in the US restrictions.  The market nevertheless treats the Canadian dollar like a petro-currency.  However, to the extent that parts of the real estate market and consumer debt were built on prospects of peak-oil, the secondary impact of the drop in oil prices could have serious implications for the Canadian economy.
• The Bank of England meets.  It is not going to do anything; therefore, it won’t say anything.  In a couple of weeks, with the minutes, we’ll likely learn that the two dissents persist in favoring an immediate hike.  The market does not believe they will convince their colleagues, and to the contrary have steadily pushed out the first rate hike as reflected in rally in the December 2015 short-sterling futures contract.  More important than UK monetary policy will be fiscal policy.  Chancellor of the Exchequer Osborne delivers the Autumn Statement.  With the drop in oil prices, which means lower North Sea oil tax revenue, there is little scope for pre-election fiscal gifts.  Indeed, despite the talk of austerity, the UK budget deficit for fiscal year that ended in April was 6.6% of GDP.  The appropriate comparison is the US, where the deficit has fallen from over 10% of GDP to less than 3% in the last fiscal year.  The UK structural deficit has hardly been addressed, and the Prime Minister’s push to deny immigrants from the EU welfare benefits (employed or not) for the first four years that they are in the UK is not a real answer.  
• In Japan, the BOJ focuses on the core inflation measure, excluding the impact of the April 1 sales tax increase.  The core measure includes energy.  Over the last several months, core inflation measured this way has slipped below 1%, and a further decline looks likely as the decline in energy is larger than the decline in the yen’s exchange rate.  There is increasing talk that the BOJ will be forced by the middle of next year to boost its efforts yet again.  The lower house election in a fortnight is the next main focus.  The key issue is not if, but how many seats the LDP loses.
• We do not put much stock in Moody’s downgrade of Japan to A1.  It matches the earlier Fitch move, which leaves both one notch below S&P.  Japan remains investment grade, and the lion’s share of Japanese government bonds are in the hands of domestic investors, especially the BOJ.   The reasons Moody’s cited, especially the uncertainty over Abenomics, is hardly new news.  It acknowledges that the delay in implanting the second leg of the sales tax increase and the call for snap elections could be a favorable, but is concerned about the medium term risk to JGB yields and the fiscal credibility
• The US monthly jobs report is still arguably the most important high-frequency data point.  This may be surprising for two reasons.  First, the Federal Reserve has played down what this report measures.  Yellen has preferred a wider range of indicators of the labor market.  Second, the monthly non-farm payroll growth has been remarkably steady.  The three-month average is 224k.  The six-month average is 235k, and the 12-month average is 226k.  And remember that with millions of people losing and landing jobs over the course of the month, what we see is just the net figure.  
• Roughly half the decline in the US unemployment rate can be accounted for by the decline in the participation rate.  However, in October jobs report (reported in early November) saw a decline in the unemployment rate even though the participation rate rose.  One month can be a fluke.  This will be monitored closely going forward.  In any event, the point is that the Federal Reserve’s appears to continue to have under-estimated the improvement in the labor market.  It is also noteworthy too that the improvement in the labor market has been steady despite the volatility in the economy.  
• The decline in oil prices has contributed to the decline in US 10-year yields.  The yield fell more than 14 bp on the week to finish at 2.16%.  It ranks as one of the biggest weekly declines this year.  Although the S&P 500 made new record highs before the weekend, it reversed and finished the holiday-shortened session near its lows.  While we would not want to read too much into that action, it does seem that the S&P 500 has lost some momentum that may foretell a near-term pullback.  The energy sector accounts for an eighth of the S&P 500, but there are plenty of offsets (intense energy consumers, like airlines).
• Lastly, we note the three electoral decisions over the weekend.  First, Swiss voters handily rejected all three referendum issues that it faced this weekend.  This included the much-publicized measure that would have required the central bank to cease selling gold, boost gold holdings to 20% of reserves, and repatriate its gold that currently sits in foreign vaults.  Swiss voters also reject efforts to cut annual immigration by 75%.  The third motion that was rejected was aimed a abolishing a tax perk for wealthy foreigners.
• Second, the election in Taiwan has resulted in a stunning loss of the ruling Kuomintang, and Premier Jiang Yi-huah quickly indicated plans to resign.  The Democratic Progressive Party will head the next government.  A key issue, according to local media, was the trade agreement struck with China last year.  Taiwanese President Ma Ying-jeou has promised to respect the electoral outcome, which can only mean some dilution in the efforts to forge closer ties with the mainland.  Over the last six years, nearly two dozen agreements have been struck.  A rearguard action to secure and protect what has been achieved will likely dominate the agenda until the 2016 presidential election.  The TWD has gradually but steadily depreciated against the USD since early September.  If anything, the implications of the electoral results are likely to pressure it to decline further.

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Corporate Bond Trading Friday

Via Bloomberg:

IG CREDIT: Lowest Volume of 2014; MDT May Price as Soon as Today
2014-12-01 10:54:46.720 GMT

By Robert Elson
Dec. 1 (Bloomberg) — The final Trace count for secondary
trading was $1.5b vs $7.2b Wednesday and $15.3b the previous
Friday and the highest Friday session of the year.
* 144a trading added another $200m of IG volume
* JPM 3.40% 2015 topped the most active list with one large
client purchase accounted for 100% of volume
* MS 5.55% 2017 was next; one large (over $5m) client sale
accounted for 100% of volume
* NYLIFE 0.75% 2015 was most active 144a IG issue; a client
sale accounted for 100% of volume
* BofAML IG Master Index at +134 vs +133; +135, the new wide
for 2014 was seen last week; +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
+169, a new wide for 2014, vs +168; +140, a 2014 low and new
post-crisis low was seen July 30
* Markit CDX.IG.22 5Y Index closed at 61.1 vs 60.2; 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
* Last week’s IG issuance was $10.675b vs $40.65b the previous
week
* November’s IG issuance ended at $139.2b; YTD IG issuance at
$1.335t
* MDT expected to price as soon as today
* DIS has $1b maturing today

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