The Daily Shot - 12/10/14
- From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
- To: <thedailyshot@xxxxxxxxxxxxx>
- Date: Thu, 11 Dec 2014 02:09:49 -0500
The Daily Shot™
Greetings,
We start with Japan, where household confidence fell back to levels we saw at
the time of the consumption tax hike.
As discussed before, the Bank of Japan is accelerating its bond purchases as it
tries to blunt the negative impact of the new taxes. The slope of the JGB
holdings (below) is turning higher.
BoJ holdings of JGBs
Source: BOJ
As a result, the 10 yr JGB yield is now at 40bp as BOJ buys up the supply. Some
are speculating that the BOJ will ultimately undertake some form of
monetization – effectively agreeing to roll existing debt in perpetuity.
Source: Investing.com
_____
In the Eurozone, the 10 yr Bund yield fell below 68bp – another low. In
addition to the deflationary pressures and renewed concerns about Greece, this
is a bet on QE. Many believe that the demand for second offering of TLTRO
(cheap 4-year loans from the ECB) will be weak, forcing ECB into outright
securities purchases (probably the only way it can increase its balance sheet
substantially). We will know about the demand tomorrow.
Source: Investing.com
In another Eurozone development, French payrolls are declining again – which
will put further pressure on the ECB to act more forcefully. Once again a
central bank will be asked to solve structural problems in the economy with a
blunt instrument.
_____
Ukrainian 3-yr dollar-denominated bond yield jumped above 25%, as the IMF now
expects a $15bn government funding gap. There is a restructuring on the way
here – the hole is way too big for Ukraine to plug on its own.
Source: @Schuldensuehner
_____
Speaking of restructuring, Argentina remains on an unsustainable path. Having
defaulted on dollar bonds and with no access to hard currency, the nation is
the next Zimbabwe.
And for those who like volatility, this is the market for you:
Source: Investing.com
_____
Now we return to everyone’s favorite topic: energy. Here are some developments:
1. WTI is now below $62 and Brent below $65.
2. Apparently a bunch of funds went long oil right after the mini-crash in
October and are now unwinding.
Source: @tracyalloway
3. A slowdown in Texas economy looms – what will be the impact on the US?
Source: @ac_eco, @EconBrothers
4. Energy projects in Canada, US, Brazil, Mexico are at risk (source: FT). So
go ahead, buy that overpriced house in Calgary – all is well.
Source: @FT
_____
In the United States the yield on the one-year treasury bills rose sharply. The
Treasury issued 1-yr bills on Tuesday with more supply than the market was
ready to absorb immediately. Other money market rates rose as well.
Source: Investing.com
Part of the issue is the Fed’s experimental rate normalization programs. The
Fed increased rates on the reverse repo program and continues with the term
deposit facility. These offerings have been “crowding out” treasury bills. In
that sense the rate increase experiment has worked.
_____
In credit-land pressure on leveraged finance assets remains. Here are some
traded US corporate credit products: blue=loans, green=HY bonds, red=BDCs
MLPs took a hit as well.
Source: Investing.com
Through November, the US CLO market has been doing quite well. Collateral
accumulation is less difficult now as prices for many leveraged loans are below
par. It will be interesting to see what the impending downgrades on energy
names will do to the CLO world (how big will the CCC baskets get?).
Source: @TRLPC
_____
Yesterday I included the chart below from Merrill Lynch of aggregate (index)
muni yield curve. Apparently the yield curve does not incorporate the call
schedule of muni bonds.
I got the following response on this:
I am surprised at your opinion on municipal bonds. The curve you published
uses very poor math and is a terrible comparison. I agree that through the
first ten years of maturities municipals have somewhat corrected, though the
curve you use is based on a fixed 5% coupon, so the durations are a bit shorter
than the “par” treasury curve you use. Furthermore, and more upsetting to me
is the fact that you seem to have fallen into the “muni index trap of bad math”
for long dated bonds. The “thirty year” index you use is based on a 5% coupon
with a 10 year call. With yields at <3% the effective duration on these bonds
is closer to the duration of the ten year treasury than it is of the thirty
year treasury.
To clarify, the state of Texas recently sold Aaa/AAA/AAA bonds with a final
maturity of 2044, and a call date of 2024. The bonds are an excellent
representative of the triple A muni market. The yield is currently 3.05% in
the market, but that is yield to call, with an effective duration of about 11.5
years. As you know the yield point for a treasury with an 11.5 year duration is
about 2.5%. The yield to maturity of the Texas bonds is above 4%. It is not
good math to compare 30 year non-call treasury yields with municipals that are
priced to a ten year call. I realize you have used a method of analysis
popular in the retail market , but institutions use effective duration for
municipals and arbitrageurs that break down the math see municipal as very
cheap. Below is a graph that is more accurate, comparing the yield to maturity
of the Bond Buyer municipal index to the 30 year treasury in the form of a
ratio:
Best,
Jon Fiebach
CIO / Co-CEO
_____
Now some food for thought. Hong Kong protesters' message to the government:
Source: @SCMP_News
_____
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