We are one day away from Argentina’s second default this century. Drama or farce?
Farce. For all the confusion that was on show in Judge Griesa’s hearing last week, about whether Argentina’s restructured local-law bonds should join the foreign-law debt within the pile of paper at risk…
At least holders of these bonds will be OK after all on Wednesday.
Only just this once, though. And they were let off for a reason which underlines tensions we’ve been noting in the pari passu saga between enhanced powers to enforce sovereign debt, and the complexity of international finance. Read more
Or, how far is market pricing of credit risk catching on in China, after all?
Here’s your default-risk adjusted corporate bond yields in China from Nomura (our emphasis):
Liquidity injections and targeted easing so far this year has had a material impact on corporate bond yields. Corporate bond yields have dropped across the rating spectrum, while a similar narrowing of spreads can be seen relative to Chinese government bonds. Data provided by the China Government Securities Depository Trust & Clearing Co Ltd (chinabond.com.cn) shows that both 1yr and 5yr AA-rated bond yields have fallen, from highs of 7.22% and 7.63%, respectively, at the start of the year to 5.38% and 6.53% today.
A lot of people are puzzled over why US yields are falling when nothing has changed on the Fed communication side, and QE is supposed to be slowing.
Frances Coppola notes an even stranger phenomenon. When you look at the very big picture you realise that if there is a correlation between QE and rates, it’s actually a very counterintuitive one:
Every time QE is announced, yields rise: when it ends, they fall. And no, this doesn’t just affect the 10-year yield. The same basic shape can be observed on just about any maturity over 1 year (short-term rates are propped up by the positive IOER policy).
We thought we’d ask, given some of the ‘high-level principles’ suggested by the ECB and Bank of England to revive the dead market for securitisation in Europe: Read more
Some broad thoughts on the economic and market cycle arrive from Nikolaos Panigirtzoglou and team at JPMorgan, to help active investors (most of them, it seems) who are scratching their heads and looking perplexed.
Despite range trading and low market volatility, active investors feel extremely uncertain about markets. Very few have beaten their benchmarks and our model portfolio also is barely in the black YTD.
Some charts will help below but the central question is why, five years into a US expansion, have bonds not sold off more? Read more
Moscow doesn’t send tanks into revolting former vassals any more. It sends dollars.
For anyone who decides to follow the money when it comes to Ukraine’s split between the EU and Russia, the consequences can sometimes be grimly surreal when it gets to the prosaic matters of bond finance. Read more
A lesson in African sovereign debt disclosure courtesy of Mozambican Tuna and brought to you by Bloomberg:
Two months ago, Credit Suisse Group and VTB Capital financed a flotilla of tuna boats for Mozambique, then packaged the debt into notes for overseas investors. It turns out the fleet also includes anti-pirate patrol boats, according to the French Foreign Trade Ministry. They are capable of being equipped with 20mm cannons and military drones, according to Stratfor, a global security advisory firm. Credit Suisse is adamant that its funding wasn’t used for armed boats.
“We are not involved in Icelandic banks,” an Elliott spokesperson said.
Yes, that’s an on-the-record statement from the notoriously publicity-shy hedge fund. The Icelandic banks part is going to need some explanation. Read more
So what have the retail investors been up to? Buying stocks! But, even with yields down low and no-where to go, they are yet to break the bond buying habit.
The PRA works with the FCA and the FRC to improve the quality and usefulness of information disclosed on firms’ safety and soundness… Consistent with that, we will work with the FCA and the FRC to review the extent to which there is scope to extend bondholder influence over banks, with a view to bringing forward recommendations in due course…
– Bank of England (and Prudential Regulation Authority) response to the Final Report of the Parliamentary Commission on Banking Standards
Alternatively… the PRA need look no further than the wreckage, on Monday, of the Co-operative Bank’s plan to deliver the £1.5bn recapitalisation they ordered.
Plan B (for Bondholder) has taken over. Read more
From the Orders of the Supreme Court on October 7:
This is a defeat for Argentina. Any legal setback is. But it’s also perhaps not the end of the prospect (however distant) of Justices Scalia, Ginsburg et al debating the pari passu saga. Read more
Is this hundreds of basis points safer than the Greek government?
You might well ask. Read more
Monday — The Co-operative Bank takes flak from yet another group of its bondholders for refusing to consider any sort of Plan B in getting them to share the burden of recapitalisation.
Friday — It starts considering Plan B. Read more
We hear that this year’s exodus from the US muni bond market by retail investors, nervous about the coming bond pain (from higher rates and Detroit nerves rather than predictions of default and disaster), has fixed income hedge funds dipping into the $4tn market.
Hence positive momentum for muni’s last week, which Citi declared was “swimming against the bond fund tide”. Read more
For the Co-operative Group, there is only one plan for fixing its bank’s embarrassing £1.5bn capital shortfall. Plan A.
Plan A is an exchange offer to holders of Co-op Bank’s subordinated bonds for more senior debt, plus shares in a public listing, alongside a stake taken by the Group. Bondholders said they need more detail about the haircut involved. But they’ve already been told to take it or leave it.
Well, increasingly — and therefore interestingly for the bail-in era — they’re doing neither, and preparing their own Plan Bs… Read more
In particular, the recapitalisation plan is subject to finalisation and its implementation is subject to a number of inherent risks. Risks include a failure by bondholders to participate in the Exchange Offer, a legal challenge by affected Bank bondholders to the Exchange Offer and a failure by, or inability of, The Co-operative Group to make its proposed contribution…
Failure to implement the recapitalisation plan may result in regulatory intervention that could reduce or eliminate the value of the equity and modify, reduce or eliminate debt payment obligations.
– ‘Cautionary Statements’, The Co-operative Bank plc Interim financial report 2013
That’s the official version of the Co-op Bank warning to subordinated bondholders to swallow conversion of their debt into equity, in order to ensure its £1.5bn capital rescue. The unofficial version, from the mutual whose model was once lauded by politicians? “There is no plan B”.
Well, the bondholders are starting to think of Plan C. Read more
Sounds impressive, doesn’t it — more than $100bn in investor money has sploshed over to the US stock market since the start of 2013, according to EPFR and BNP Paribas:
1986: In a note headlined ‘Bond Wars’, Bill Gross lightheartedly suggests the Force is with PIMCO, much as it was with Luke Skywalker in the fictional Star Wars films.
(If inaccurately — Gross called the Force “really the intuition handed down to [Skywalker] through generations of previous starfighters”. Nah.)
2013: In a note headlined ‘Bond Wars’, Bill Gross says “PIMCO will not go down at the Somme.”
Really. Read more
Did you forget that Japonica’s offer to buy up a huge chunk of the Greek bond market still exists?
It might be easy to. They’ve just extended the deadline again by another month.
For holders tendering at a 15 percent to 20 percent large block illiquidity discount to observed bid-ask midpoint prices, the Acquirer reserved the right to reimburse up to 50 percent of the cost of independent fairness opinions. These fairness opinions specify the range of the double discount in the current market and are an industry best practice. The double discount includes the discounts for large blocks of fixed income securities and for highly illiquid fixed income securities.
The chart is from Credit Suisse Trading, which notes that June’s bond fund outflow of roughly $60bn represents the largest monthly fund flow — in or out, equity or bond — of any kind since records began in the early 1990s. Read more
Merrill Lynch’s Michael Hartnett sure knows how to grab the readers’ attention…
Not long now until the US Court of Appeals for the Second Circuit finally makes its ruling on trickier parts of the Argentina pari passu case. No later than early July, probably. Can’t wait.
Argentina couldn’t wait. The government filed its long-expected cert petition to the Supreme Court this week, mostly in order to complain about the federal-law implications of the Second Circuit’s original ruling in October 2012. There’s lots of outrage about ‘sovereign property’ and the US Foreign Sovereign Immunities Act.
But one Taiwanese development bank and its Caribbean island borrower, fighting each other over $32m of defaulted loans in The Export-Import Bank of the Republic of China v Grenada, really couldn’t wait… Read more
Now north of 2.5 per cent:
The level of debate for a lot of money in emerging markets on Thursday must have been whether or not to hide under the desk with a bottle of bourbon. So, kudos to Olgay Buyukkayali and Tony Volpon, top EM strategists at Nomura, for standing back and raising the tone a little…
The bank’s published a debate between the two about the sell-off. Tony’s vaguely bearish and Olgay’s vaguely bullish. But that doesn’t do justice to what’s quite a nuanced debate on EM: Read more
And so FT Alphaville comes across “TENDER OFFER MEMORANDUM — INVITATION FOR TENDER IN RESPECT OF BONDS OF THE HELLENIC REPUBLIC”: the official launch of Japonica Partners’ eye-catching attempt to buy up to 10 per cent of Greece’s restructured bonds, in a kind of Dutch auction.
And there’s one very important point here. Read more
Business Insider suggested the ascent of US real yields was possibly the most important development in the market right now. We don’t disagree.
As we noted, it represents the market’s reconnection with disinflationary reality. The smoke and mirrors are fading. What is worrying, however, is that a move of this size has been prompted by simple talk of tapering. If that’s what tapering does, what will the first hint of a proper QE exit inspire?
As a result, it’s unlikely that an outright QE exit is viable at this stage. The deflationary consequences (which include the chances of a major market-sell off) would arguably be too large. Given that let’s analyse what the move in real yields really signifies. Read more
By now, everyone knows Tuesday was a big day for the EM bond market. But has the market really taken stock of how ‘bad’ things are?
Bloomberg reports on Thursday that this is probably the biggest drop in creditworthiness for emerging-market borrowers since the credit crisis started. Worse still, it is deepening. This they say is because speculation is intensifying (no-doubt among the buy-side) that central banks will scale back record stimulus**. Read more
Yes yes — suddenly, a bad last day of May for the stock market:
Gary Jenkins from Swordfish Research is having a moment; but it’s an interesting moment. On Monday he wrote:
“A while back I said that everything was now a credit and at the time that seemed a fair appraisal of the situation… However the market moves quickly and it is probably fair to say that right now everything is a rate product.*”
(The Co-Op bank, he says in the footnote, being the exception that proves the rule.) Read more