Posts tagged 'Bonds'

This is nuts. PIK toggle edition

From IFR/Reuters on Thursday…

Schaeffler is looking to price the largest post-crisis PIK toggle bond, in a 2.5bn-equivalent deal that is expected to have the lowest coupons yet seen for the risky instrument. Read more

ECB warnings and yield target allusions

Or illusions…

Before that though, here is a thing we know and have known since the ECB launched its (probably) soon to be extended QE programme: Draghi et al will have to deal with the idea of QE scarcity — it’s running out of available bonds to buy. It’s already coming up against a self-imposed constraint and it has been well flagged that the big one, Germany, is looming as an ever larger roadblock.

Here is a thing we also know and have already mentioned in this post: The constraint is self-imposed and, as such, can be alleviated. Like this, for example: Read more

How much auction information is too much?

Some people aren’t terribly happy with the way government debt is sold in the US and UK. Some even say using auction data and game theory that full pre-auction information sharing between dealers and investors would raise $4.8bn more revenue for the US Treasury each year than a fully closed bidding mechanism where no information is shared. Read more

Bond love up, bond supply down

Bond supply goes up, bond supply goes down. Same for demand, really.

Like this (warning, listening for more than 2mins will drive you insane):

This time the two might contrive to create the most favorable bond demand/supply balance since 2009. Read more

India, in search of a suitable bond yield

Competitive federalism in India has had some weird effects. For one it has led to slogans like this becoming apparently acceptable:

Happening Haryana? Really? Not that the drive to get India’s states to compete with each other to attract business is a bad thing and not that Haryana isn’t a nice place but, again, “Happening Haryana”? We’d like to see what focus group got that one over the line. Read more

Of A-share bull markets and China bond market correction triggers

A cut out and keep on those triggers, from HSBC, to be read alongside all of the China corp bond market nuttiness that’s around at the moment and the resurgent A-share story.

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A China bond market nuttiness deadline?

Stop me if you’ve heard this one before…

China’s bond markets are nuts — particularly at the moment — and are doing a poor job of pricing risk. Over a future unspecified timeframe the government will have to normalise their operations or risk everything getting out of control and messy. In the shorter term we can only gawp and remember that said government has the firepower to keep things going for quite a while… assuming, which we do, that it wants to.

On the more general nuttiness, here’s BofAML’s China equity strat guy David Cui (with our emphasis): Read more

The maddening task of measuring the “term premium”

There’s no good way to separate the duration risk premium — the compensation investors get for locking up their money for long stretches rather than constantly rolling it over — from a long-term bond yield, although plenty of people try.

A recent blog post by economists at the New York Fed gives a flavour of the challenge. You can see their results in the following chart, which attempts to decompose actual 10-year interest rates (blue) both now and in the future into pure measures of expected short-term interest rates (red) and what they call the “term premium” (yellowish): Read more

Who sold European bonds?

Someone had to, because the net supply of new bonds was minimal and the European Central Bank has been buying €60bn per month.

Foreigners? No, according to a chart from Citi’s Han’s Lorenzen, it was the locals:

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People are worried about people being worried about bond market liquidity

Matt Levine in particular has been acting as collator of the collective angst for quite a while.

And the latest addition to that angst would suggest that (t)he(y) may well have a point:

That’s from Goldman’s Top of Mind, its regular outpouring on topic x. Where x = liquidity this time round. Read more

The bond liquidity ‘cognitive bandwidth deficit’ problem

The laissez faire school of finance has always orientated towards the notion that capital market funding is preferable to bank financing. Why? Because it’s only by taking your business to the open market that a borrower’s situation can be properly scrutinised and a fair price arrived at.

But, of course, some capital markets are more developed, sophisticated and disintermediated than others. In the US, for example, funding by way of the capital market is common practice even for small and medium-sized corporations. Unsecured household borrowers are even heading to P2P market-based lending solutions. In Europe, however, the private sector — especially the SME sector — has always tended to fund through bank loans. Read more

The BIS on ETFs and bond market liquidity

The latest BIS Annual Report, released on Sunday, cites numerous concerns about the unseen damage being caused to financial stability on account of ultra-low interest rates.

Key among those concerns: how liquidity-guaranteeing ETFs in the bond sector may be contributing to a global liquidity illusion, disguising the true state of the ability to trade positions on the bond market — a topic very close to FT Alphaville’s heart. Read more

A spot of value

European bond markets in context for global investors, via a helpful UBS matrix below.

Naked yields along the top, 12 month currency hedged variety for investors in various domiciles underneath.

Thoughts from a glance? Maybe firms worried that few traders remember what high rates look like should just hire Brazilians. Also, Aussies should buy Treasuries. Read more

The 100-year carwash

Click above for the prospectus for the 100-year bond being marketed on Monday by Petrobras, the Brazilian state-owned oil giant and sometime corruption-riddled enterprise.

Pricing (says Bloomberg) is somewhere around 8.8 per cent. Read more

This is €1trn less nuts

It took 102 trading days for 10-year Bund yields to rally from 68bp to their all-time low of 7bp on April 20th.

It took just 15 days after that to jump back to 68bp again.

That fact, and many more on our favourite nutty asset, European sovereign debt, via Bank of America’s credit strategists (with our emphasis):

In the volatility of the last week, the backdrop of negative yielding assets in Europe has changed significantly. Higher yields mean fewer negative yields. Chart 5 shows that the peak of negative yielding Eurozone government debt was just over €2.8tr at the end of March. But this has now declined to €2tr. In other words, Europe has “lost” almost €1tr of negative yielding assets in the last month.

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When in bond rout doubt, Occam’s razor

So this could be the beginning of the end.

Or, alternatively, the bond price rout is a perfectly predictable response to…:

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A circuit breaker for the Wunderbund?

What will save the Wunderbund* (and related QE trades)?

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Are we there yet?

The long awaited, much predicted start of the great turning point in bond markets after which yields will rise, prices fall and teeth gnash has arrived. Maybe.

We have had a moderate bit of violence and surprise in fixed income, after all. A sample of sentiment below, but a word of caution up front: higher volatility might have caused the market moves, meaning the big reaction is still to come and/or potentially distant.

Here’s Jens Nordvig of Nomura late on Tuesday: Read more

No, stocks aren’t a good inflation hedge. Try bonds (really).

Stocks are basically bonds where the coupons tend to grow faster than the level of consumer prices. That makes equities sound like a great thing to own if you’re worried about inflation, and, in fact, Mr Stocks-for-the-Long-Run made this case a few years ago. While the actual article is more nuanced than the headline and opening paragraph would suggest — he admits that stocks only become immune to inflation over multi-decade periods — it’s still a bit misleading. The last time the rich world had to deal with meaningful inflation, it was bonds that beat stocks.

We’re reminded of all this because of two striking charts from a new report from Goldman Sachs on the implications of negative, long-term real interest rates. Consider the following chart, which compares the returns you would have gotten from buying and holding US stocks versus US 10-year bonds over decade-long periods: Read more

You’ve taken our bonds, so we’ll….

Ever wondered why hedge funds remain so popular? Against much sense?

Here’s one suggestion from JPM’s Niko Panigirtzoglou and team, with our emphasis:

Why is the HF industry continuing to attract large amounts of capital [$18.2bn in Q1 up from $3.6bn in the previous quarter] despite disappointing performance? This puzzle is also reflected in HF surveys such as those conducted by Preqin. The performance of HFs has lagged institutional investors’ expectations for every single year since the Lehman crisis with the exception of 2013. At the same time institutional investors reported that they intend to increase rather than decrease HF allocations over the next 12 months.

Steady demand for convexity since the Lehman crisis is clearly one reason behind the inflows into HFs. But we believe there is another reason, which is the quest by investors for alternatives to bonds. Successive QE programs by G4 central banks have withdrawn $8tr of bond securities since the Lehman crisis and have made bonds very expensive as an asset class, inducing institutional investors to seek higher yielding alternatives to bonds even as these alternatives entail illiquidity risk. And HFs have to an extent become an alternative to bonds as the collapse in HF volatility has made HFs look a lot more like bonds rather than equities in recent years. This is shown in Figure 1 where the volatility of monthly HF returns has collapsed to that of the US Aggregate bond index over the past three years. In other words, with an annualized volatility of only 3.2%, HFs are equivalent to a bond rather than equity investment in terms of their second moment.

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SOE you’ve actually defaulted?

Alternatively: SOE, do we have credit pricing in China?

Click for the (Mandarin) notice sent by Baoding Tianwei on Tuesday, informing bondholders that it would be missing a $14m interest payment and thus making it a rare Chinese corporate default. Like Kaisa. But not like Kaisa. Because Baoding’s also part of a state-owned company, China South Industries. Read more

The credit clock tolls for (some of) thee

From RBS’s Alberto Gallo and team:

Gallo is, selectively, very bearish (not on India though, natch) for the obvious reasons: Read more

Your updated sovereign-bank loop

Last week we got a Draghi-backed report by the ESRB which challenged the risk-free treatment of sovereigns by banks.

It included such insights as “the evidence presented in the report illustrates, however, that sovereign risk is not a novel concept” and “If sovereign exposures are in fact subject to default risk, consistency with a risk-focused approach to prudential regulation and supervision requires that this default risk is taken into account”. Which, you know, makes sense.

Thing is though, it doesn’t seem like the bank-sovereign nexus is going anywhere fast. As Gary Jenkins put it:

The tone suggests that the ESRB would like to see a change in the regulatory regime although it is clearly a case of ‘Give me chastity, just not yet,’ as this is also the week that the ECB began its QE programme without differentiating on risk between 3 year or 30 year bonds. They have set a yield of -0.2% as where they are prepared to buy anything. Thus technically holders of 30 year bunds could say that is the level they are prepared to sell at.

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Swimming with sharks

A great piece on the US bond market by Tracy Alloway and Mike Mackenzie has plenty to consider on Monday. Some will be familiar to those in the market — there have been a ton of inflows and liquidity has dried up — but ponder also some of the behaviour described when it comes to allocating bond sales.

Because rules for bond allocations are not set in stone, most bankers and fund managers do not believe they are doing anything illegal, though some expressed misgivings about a practice they describe as more art than science.

A long boom, insatiable demand for what banks are selling, possible different treatment of the large and the small buyer. Any of it starting to sound familiar? Read more

Behind the post-crisis rich-world bond market boom

Here’s an arresting chart from CreditSights, which shows the face value of all dollar and euro corporate debt outstanding:

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Coming to terms with bond prices

Finance, particularly the fixed income variety, lends itself to maths which suggest neatness — messy human hopes and satisfactions captured in a price, shifting but true for any particular moment in time.

There tends to be a number in any financial calculation, however, where neatness is that of a carpet under which dust and junk has been swept. In corporate valuation models it might be the discount rate used to put imagined future cash in present day terms. For stock markets it is the equity risk premium, and for bonds it is something called the term premium.

We’ll lift the carpet below, but the reason for doing so is HSBC, which thinks there isn’t enough term premia in bond prices (they are too high and so must fall). Read more

This is nuts. Who wants some eBonds?

Over in Mac McQuown’s Sonoma Valley workshop, courtesy of Bloomberg Markets

McQuown says his eBond will enable investors to jettison their credit risk because the swap, which is essentially a form of insurance, will cover their losses should the debtor fail. To garner such protection now, an investor must purchase a swap separately to cover a bond. Read more

The one chart bear case for US stocks [Update]

Jeffrey Gundlach, founder and head of the LA based bond management shop DoubleLine, was talking about infinite quantitative easing years ago and is one of the most prominent bears on the investment scene, correctly predicting last year’s fall in bond yields.

Tuesday’s presentation was a variation on that theme, with the investor warning that while lower oil prices help the US economy, watch out for the impact of the shale boom deflating. A few choice slides below, starting with one to keep in mind on the US stock market.

We always hesitate to use the word unprecedented.* Still, another year of gains for US stocks would be the seventh in a row and, well… Read more

“Duration!” — the ditty of the bond bull

Whilst strolling on a beach in southern California over the holidays, we were inspired to try our hand at songwriting. (The topic may or may not have been partly inspired by our location.) After toying around with our initial idea for a while we managed to produce a few verses and a refrain. Feel free to suggest additional lyrics in the comments. To the tune of Jingle Bells:

Rolling down the curve
With my Eurodollar strips
Making tons of money
‘til the Fed hikes 50 bps! Read more

Syriza in the bond market

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