Corporate Bond Market in China

This is a troublesome story out of China as it reports that yields on AAA corporates bonds in China with maturities of 3 years have risen 17 basis points in the past week. The story was out on Bloomberg yesterday.

Via Bloomberg:

China’s Companies Scrap $1 Billion in Bond Sales as Yields Jump

Posted in Uncategorized | Comments Off on Corporate Bond Market in China

Two Year Auction Result

Via CRT Capital

*** A solid takedown with non-dealer bidding at 52% vs. 51% norm and a 0.7 bp stop-through — largest through-stop since Oct 2012. ***
* 2-year auction stops at 0.542% vs. a 0.549% 1-pm bid WI.
* Dealers were awarded 48% vs. 49% average of last four 2-year auctions.
* Indirects get 35.8% vs. 36% norm.
* Directs take 16.2% vs. 15% average.
* Bid/Cover was 3.71 vs. 3.34 average of last four.
* Dealer Hit-Ratio: Dealers take 18% of what they bid for vs. 19% norm.
* Indirect Hit-Ratio: Customers take 52% of what they bid for vs. 77% norm.
* Treasuries were trading lower, with the long-bond leading the downtrade while the 2-year sector outperformed but. Since the results, Treasuries have improved on the day with a modest rally.
* Volumes in the sector ahead of the auction were average for a 2-year auction day in cash terms at 101% of norms and took an above-average 17% marketshare vs. 12% norms. Overall Treasury volumes have been below average, with cash trading at 69% of the 10-day moving-average. 5s were the most active issue, taking 30% marketshare while 10s took 22%, 3s got 14% and 7s took 11%

Posted in Uncategorized | Comments Off on Two Year Auction Result

From the How Many Angels Can Dance on Head of a Pin Department

I have  my grandfather hat on so blogging is light today. Yahoo skewered me earlier with an extended outage in which i could not access email. Anyway this is interesting.

Via Bloomberg:

NY Fed Raises Idea of Treasury Support for Fed Balance Sheet
2014-11-24 17:18:09.901 GMT

By Vivien Lou Chen
Nov. 24 (Bloomberg) — Treasury support “would be
necessary only under what seem rather extreme scenarios” for
balance sheet levels similar to current ones of Fed system,
according to NY Fed staff report.
* Report looks at “unlikely, but nonetheless possible,
sequence of events that could undermine economic
stability,” NY Fed researcher Marco Del Negro, Princeton
University economist Christopher Sims write
* “Appropriate for a central bank with a large balance sheet
composed of long-duration nominal assets to have access to,
and be willing to ask for, support for its balance sheet by
the fiscal authority”
* “Otherwise its ability to control inflation may be at
risk”
* “Otherwise its ability to control inflation may be at
risk”</li></ul>
* “Possible” that central bank might need recapitalization
“if its balance sheet is sufficiently impaired” in order
to keep commitment to inflation target or policy rule
* A central bank that avoids any request for fiscal support
“can open the door” to situation “where expectations of
high inflation in the future lead to capital losses”
* NOTE: NY Fed is led by William Dudley, only Fed president
with permanent vote on policy; he’s never dissented on FOMC
decision

Posted in Uncategorized | Comments Off on From the How Many Angels Can Dance on Head of a Pin Department

MBS

Mortgages opened unchanged this morning. There was very little activity in the product in the overnight session. One trader noted that this should be a good week for MBS as the Treasury has a ton of belly paper for sale while reinvestment demand from the Fed soaks up supply.

Posted in Uncategorized | Comments Off on MBS

What to Watch Today

Via Bloomberg:

WHAT TO WATCH:
* (All times New York)
Economic Data
* 8:30am: Chicago Fed Nat Activity Index, Oct., est. 0.40
(prior 0.47)
* 9:45am: Markit US Services PMI, Nov. preliminary, est. 57.3
(prior 57.1)
* Markit US Composite PMI, Nov. preliminary, (prior 57.2)
*10:30am: Dallas Fed Manufacturing Activity, Nov., est.
9 (prior 10.5)
* Markit US Composite PMI, Nov. preliminary, (prior 57.2)
*10:30am: Dallas Fed Manufacturing Activity, Nov., est.
9 (prior 10.5)</li></ul>
Central Banks
* 6:50pm: Bank of Japan releases Oct. 31 meeting minutes
* 8:00pm: Bank of Japan’s Kuroda speaks in Nagoya
Supply
* 11:00am: U.S. to announce plans for auction of 4W bills
* 11:30am: U.S. to sell $24b 3M bills, $28b 6M bills
* 1:00pm: U.S. to sell $28b 2Y notes

Posted in Uncategorized | Comments Off on What to Watch Today

FX

Via Marc Chandler of Brown Brothers Harriman:

Drivers for the Week Ahead

– The highlight for this holiday-shortened week will be the EU and the OPEC meetings
– In terms of economic data, today’s German IFO surprised on the upside, helping the euro regain the $1.24 level against the dollar
– New record low benchmark 10-year rates were seen last week for France, Italy, and Spain
– Chinese investors have taken the PBoC’s rate cuts positively

Price action:  The dollar is little changed against most major currencies.  The euro is trading around the $1.24 level while the pound is at $1.5650.  The yen is underperforming, with the dollar rising back above the ¥118.0 level.  In the EM space, RUB is outperforming as short covering continues, with the currency up about 1.5% in each of the last three sessions against the basket.  The MSCI Asia Pacific index gained 1.1%, though the Nikkei was closed due to a holiday in Japan.  China equity markets responded positively to the PBOC rate cut, with the Shanghai Comp up nearly 2%.  EuroStoxx is up 0.5% near midday, with the Dax and the Ibex outperforming.  S&P futures are pointing to a higher open.

• The highlight of the holiday-shortened week (Japan on Monday, US on Thursday) ahead are two official meetings:  the EU and OPEC.  There are three issues at the EU meeting that will be important for investors.  First, the new European Commission will assess the 2015 budgets.  Although the outgoing commission let France and Italy slide with some financial sleight of hand to improve their initial offerings, the two countries still stopped shy of the previously agreed up targets.  If there is truly a new sheriff in town (and we are not convinced there is), France may be subject to a fine up to 4 bln euros or 0.2% of national income for breaching the fiscal rules.  
• To be clear, this is not a defense of the austerity fetish, rather it is a recognition of the untenable situation.  Despite its violations, France has not made a clear break from the ordo-liberal diktat, nor does it enact strong measures to boost aggregate demand.  France is neither fish nor fowl, but its goose is cooked as the political elite are intellectually bankrupt, and the National Front is the only ones promising change.  
• Second, EC President Juncker is expected to unveil a new three-year 300 bln euro infrastructure program by the European Investment Bank that will be administered by local governments.  Preliminary reports suggest that the funds will be used to facilitate private investment, but it is mostly funds already earmarked.  Less than a third can be considered what the Japanese call “real water.”  While we are sympathetic to the idea that what ails Europe is not something that monetary policy alone can fix, the program is far too small of a scale to make much of a difference.  It is not even 1% of GDP per annum.
• This infrastructure program is also too small given the capacity.  With the EIB, European officials have a rare opportunity.  Specifically, bonds issued by the EIB do not count toward any country’s deficit/debt levels.  It appears to be a financial black hole.  Moreover, as the ECB looks for other assets it can buy to expand its balance sheet, we have suggested that EIB bonds have much to recommend themselves.  ECB purchases of supra-national bonds, which include EU, EIB, EFSF, and ESM bonds, would be far less controversial that a sovereign bond purchase program.  It would also be much easier to administer than a corporate bond purchase program, which has been floated as well.
• Third, Juncker himself has been called upon to resign.  The far left tried to censure Juncker following the revelations that Luxembourg helped facilitate large-scale tax avoidance while he was prime minister and finance minister.  However, the Far Left could not get sufficient signatures to force a vote (10% of the members 751 members of the European Parliament).  Then the populist right, led by UKIP and France’s National Front, managed to get the signatures and a censure motion will be voted on, probably at mid-week.  For his part, Juncker denies any wrong-doing.  He claims not to have been the architect of Luxembourg’s tax regime.  It was out of his hands.  Yet, besides rigorous investigative journalism, the reform thrust of Luxembourg’s new finance minister helped shed light on the Lux-Leaks.  
• To succeed in forcing Juncker’s resignation, a two-thirds majority is needed, which seems unlikely.  The center-right Christian Democrats and center-left Socialists have stood by Juncker, and the far left refuses to support a motion brought by the populist right.  In Germany, Merkel was initially reluctant to support Juncker’s candidacy, and Finance Minister Schaeuble has made some not-too-thinly veiled criticism.  Germany may choose to continue to support Juncker and avoid the risk of a new crisis.  
• There may be some further fallout, even if the motion does not carry.  By joining forces with France’s National Front, which it said it would not do, the UKIP may be vulnerable to a backlash.  It might not have shown in last week’s by-election that was forced when a Tory MP Reckless decided to switch to UKIP.  He was re-elected.  And even if Juncker survives, his credibility may have been undermined, and this may weaken the EC as an institution at that moment in time when strong leadership is essential.  Third, the EU Parliament, perhaps emboldened by delivering the Council of Ministers (heads of state) a fait accompli by running presidential candidates, is likely to make its voice and will heard.  
• OPEC meets on November 27.  The price of oil is off by nearly a third over the past five months. The price is not below the cost of production, but it is below levels that were assumed in this year’s budgets.  The key issue for investors is whether OPEC can agree on a substantial cut in output to stabilize prices.  The operative word is substantial.  In October, OPEC’s data indicate the cartel produced about 30.25 mln barrels a day.  This is above 250k barrels a day above their production agreement.  
• Iranian oil is also a wild card.  Today is the deadline for an agreement on Iran’s nuclear capability.  Last minute negotiations were being held over the weekend.  There have been some optimistic noises, and although a short extension may be needed, a deal may be at hand.  This would end the sanction regime that has curtailed Iran’s oil sales.  
• The energy expert Daniel Yergin warns that OPEC has underestimated the resilience of the US shale producers.  He notes that the lion’s share (80%) of the new output next year would be profitable at $50-$69 a barrel.  In the first week in November, the US produced 9.06 mln barrels a day.  This is the most since the early 1980s when this time series began.  The drop in oil prices has seen 1) some rigs shut, 2) hit energy issues in the high yield bond market, and 3) led to some cuts in planned capital expenditures.  Yet the US oil industry, which is experiencing falling direct costs, appears in a better position to cope with lower prices than OPEC, despite its vast reserves and sovereign wealth funds.  
• In terms of economic data, today’s German IFO surprised on the upside, helping the euro regain the $1.24 level against the dollar.  The business climate component rose to 104.7 against expectations for a small decline to 103.0; the current assessment component rose to 110.0 from 108.4 and expectations component rose to 99.7 from 98.3.  Although the November PMIs released late last week were weaker than expected, the ZEW survey had been a huge positive surprise.
• The flash eurozone harmonized CPI due out on Friday may be the most important data, given the upcoming ECB meeting.  Draghi’s comments last week renewed speculation that a new initiative will be taken at the December 4 meeting.  Speculation in some quarters that a sovereign bond purchase scheme is imminent and inevitable seems misplaced.  There are many other assets that are less politically, legally, and operationally less complicated than purchasing sovereign bonds.  
• New record low benchmark 10-year rates were seen last week for France, Italy, and Spain.  Germany’s 10-year yield is within a basis point of the spike low to the record low of 75 bp on October 15.  Five EMU governments have negative yields on two-year obligations (Germany, Finland, Belgium, Netherlands, and Austria), while France pays half a basis point annualized.  EONIA itself is negative.  The efficacy of pushing sovereign bond yields even lower is not clear to us.  
• The UK and US also offer revisions to Q3 GDP estimates.  Economists do not expect a revision from the UK earlier estimate of 0.7% quarter-over-quarter and 3.0% year-over-year.  Investors may pay more attention to the details that may shed light on the future trajectory.  A big shift has already taken place in terms of pushing out interest rate expectations from the spring 2015 to late-2015, and some economists are pushing their call out into 2016.  
• The 3.5% estimate for Q3 US GDP is subject to downward revisions, stemming from construction spending and trade figures.  The Bloomberg consensus calls for a revision to 3.3%.  We would not be surprised with a somewhat deeper revision.  The US will also report personal income and consumption data, including the Fed’s preferred inflation measure, the core PCE deflator.  The core rate of inflation is expected to have remained steady at 1.5%.  
• Japan reports a host of data, including employment, retail sales, and inflation.  The BOJ has preempted the data.  However, just like the unexpected contraction in Q3 GDP put the BOJ aggressive measures in a better light, so too will the expected further easing of price pressures.  When adjusted for the sales tax increase, the key rate of inflation for the BOJ may slip further, possibly below 1.0%.  
• Lastly, turning to China, investors have taken the rate cuts positively. Looking at the Shanghai index, for example, the index rose nearly 2% today, but the moves were sector specific. Property stocks outperformed while banks were flat.  Indeed, the decision would seem to hurt banks over the shadow banking activity, and it might be aimed to help support the housing market in which prices have continued to fall.  It will also be a big week in China for initial public offerings.  The CNY1.6 trillion worth of shares being brought to market is reportedly the most of the year.  The anticipation has tied up liquidity and had lifted money market and repo rates in recent days.  Finally, we note that HK-Shanghai equity link did not produce the big bang that many anticipated.  It suggests that the missing element, at least at the moment, is desire rather than access.  The Shanghai Composite rose to a 3-year high on November 17, and finished last week a mere 0.3% higher.  

Posted in Uncategorized | Comments Off on FX

November 24 2014 Opening

Prices of Treasury coupon securities have sagged in a quiet overnight session. There was a holiday in Japan so there was no trading in that venue. In Europe the German IFO printed stronger than last month and beat expectations and the dampened sentiment. I suppose the advocates of an early QE from the ECB need constant reinforcement and that data point did not fill the bill as the yield on the Bund is a little higher this morning. The one highlight (to me at least) in Europe is the performance of peripherals. The 10 year in Spain is the one I follow and the yield on that bond has plummeted below 2 percent this morning. It trades currently at 1.965 which places it about 36 basis points rich to the still investment grade US 10 year note.

The benchmark US 5 year note trades at 1.631 which is up from 1.609 at the New York close. The yield on the benchmark 10 year note has climbed to 2.33 from 2.331 and the yield on the Long Bond has increased to 3.029 from 3.018. The yield curve has flattened with 5s 30s at major resistance at 139.8. I do not have Bloomberg but if my addled memory serves me correctly we have not closed that spread below 140 in many years. My calculation uses the current 5 year note and with the roll into the WI issue we are probably closer to 138. The 10s 30s spread is also at a watershed level as it as pierced 70 and trades at 69.8. I had closed Friday at 70.7. The 5s 10s spread also narrowed as it also trades at 69.8 which is in from 70.2 at the Friday close.

This will be a difficult week as Jack Lew and his minions sell $28 billion 2 year notes today and $35 billion 5 year notes tomorrow and then a Wednesday finale with $28 billion 7 year notes (nice website for your perusal). This is a holiday week and trading will be abbreviated on Wednesday and Friday. The auction schedule is accelerated because of the holiday and there has been less time to trade the WIs. I think the curve continues to flatten into the supply as it is also month end with the long end buying that will produce. Maybe sometime on Wednesday or Friday one can establish a starter kit long the curve for the next round of long end supply but early in the week it seems to me that the path of least resistance is for higher rates in the belly and a flatter yield curve.

Posted in Uncategorized | Comments Off on November 24 2014 Opening

Sexondary market IG Trading on Friday

Via Bloomberg:

IG CREDIT: Highest Friday Volume of Year; KOEWPW, MDT, DIS
2014-11-24 10:55:47.607 GMT

By Robert Elson
Nov. 24 (Bloomberg) — The final Trace count for secondary
trading was $15.3b, the highest volume Friday of 2014, vs
$18.4b, the highest Thursday session of the year and $14.5b the
previous Friday.
* 10-DMA $15.4b; 10-DMA of only Friday sessions $13.6b
* 144a IG trading added another $2.3b of volume
* JPM 3.625% 2024 topped the most active list with two-way
client flows accounted for 60% of volume
* PEMEX 5.50% 2044 was next; client buying 3:2 over selling,
together taking 76% of volume
* PETBRA 6.25% 2024 was 3rd; client selling 3:2 over buying
* BNG 0.625% 2016 was most active 144a IG issue; two-way
client flows accounted for 100% of volume
* BofAML IG Master Index at +134 vs +135, 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
+167 vs +168, the new wide for 2014; +140, a 2014 low and
new post-crisis low was seen July 30
* Markit CDX.IG.22 5Y Index closed at 63.8 vs 66.4; 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
* IG issuance was $1.25b Friday vs Thursday’s BABA led
$10.925b
* Last week’s IG issuance was $40.65b; tenors, ratings,
sectors
* MTD IG issuance at $128.5; YTD IG issuance now $1.324t
* KOEWPW may price as soon as today
* MDT deal may be this week or next; pipeline
* DIS has $1b maturing Dec. 1, has priced in late Nov.

Posted in Uncategorized | 1 Comment »

IFO Rises in November

Via FT:

Posted in Uncategorized | Comments Off on IFO Rises in November

Thoughts on ECB

Via a fully paid up subscriber across the pond:

GS: Base-case is now for Sov. QE in 1H15 (previously assigned a 1-in-3 chance), most likely at the Mar 5th meeting with a move at the Dec 4th meeting likely too soon for Draghi to gain consensus, and Jan 22nd also likely too soon. GS would expect the ECB to act boldly if it proceeds in this direction with purchases of at least €500bn (and likely closer to €1trn) over a 12-18 month period plausible.

DB: Continue to see Q1 2015 as the most likely time for the ECB to move to broader-based asset purchases, including public QE. Consensus Building Takes time: Mario Draghi presented a picture of a unified Council at the last monthly press conference, but there is still a question of who will support the policy when the time comes. Last week saw Mersch, Knot and Praet speak. Despite representing different ends of the policy spectrum, none ruled out sovereign QE. None ruled it in either.

JPM: Expect QE announcements in 1Q15 and there is a risk that something will be pulled forward to the December meeting (e.g. a pre-announcement of future corporate bond purchases). Regarding sovereign QE, JP still think that this is very close (30% likelihood conditional on our growth/inflation forecast and 50-50 unconditionally). Last week’s PMI clearly raises some downside risk to our forecast but, equally, the sovereign QE debate continues to feel polarised. Apart from the economic data, two other things may shape the debate. First, internal work by ECB/Eurosystem committees about future policy options may shape the debate about effectiveness going forward. Second, the Advocate General’s report at the ECJ in mid-January about the OMT case may advance the debate on legality.

RBS: Sovereign QE is still possible in December, Thursday’s inflation print will be critical to on this front. Yet, at a minimum in December, the ECB will in RBS’s view (1) announce corporate bond purchases, (2) easier TLTRO terms and possibly also (3) supranational purchases (e.g. EIB). Even then, they still expect sovereign purchases by March 2015.

Posted in Uncategorized | Comments Off on Thoughts on ECB