Week ending May 15, 2015
A weekly newsletter
providing a synopsis of the latest market and economic
news and releases and a recap
of the securities markets. Find commentary for a wide range of
sectors: US equities, US Treasury, corporate, mortgage,
municipal and high-yield bonds,
global bonds and currencies, and emerging-market bonds.
|1 Yr Ago
|MSCI EM Index
|US$ / Euro
|US$ / British
|Yen / US$
as of 7:58 a.m. PDT
to Date (12/31/14 -5/15/15)
Jones Industrial Avg
|DJ STOXX Europe
|MSCI EM Index
to Date (12/31/14 -5/14/15)
High Yield Index
Morgan EMBI Global Diversified
||(UK) Bank of England Bank Rate
||The Bank of England left monetary policy unchanged, keeping bank rate at 0.5% and the asset purchase facility at GBP375 billion
||(US) Labor Market Conditions Index Change
||A decline in the broad based, recently created, FOMC labor market conditions index worried some. However strength in other labor market indices (like KC Fed) and in nonfarm payroll, unemployment and initial claims data suggest the jobs market is just fine
||(UK) Industrial Production YoY
||Industrial production came in stronger than expected as manufacturing outputâ€”led by a boom in pharmaceutical productsâ€”jumped 0.4% MoM
||(US) JOLTS Job Openings
||Job openings and labor turnover continued to improve in March as total hiring increased. The total quits rate rose to 2%, marking once again a post-recession high
||(UK) ILO Unemployment Rate 3Mths
||The unemployment rate fell further in the UK and wage growth picked up faster than expected (2.2%), to the highest growth rate since January 2011
||(EC) GDP SA YoY
||Preliminary readings for euro area growth were positive, showing output rose 0.4% QoQ. Italy and France in particular surprised to the upside, with France marking its largest growth spurt since 2011
||(US) Retail Sales Advance MoM
||Consumer spending has been off to a slow start in 2015 by rising only 1.9% in 1Q15, down from 4.4% and 3.2% in the prior two quarters
||(US) PPI Final Demand YoY
||Producer prices rose slower than expected, as the goods component (driven by food and energy) declined for the fifth consecutive month
This week, the Greek government successfully funded a €750 million payment to the International Monetary Fund (IMF). As the latest episode in the endless saga of Greek worries, investors must remember first that a Greece default does not mean a "Grexit," second that it is not in anyone's interest for Greece to leave the eurosystem and third, that the factors which made Lehman Brothers the capstone of a crisis do not apply to today's sovereign soap opera.
First and most important, Greece could default on its loans and not exit the eurosystem. There is no stipulation in the Maastricht treaty which stipulates that countries who don't pay their debts must leave, thus there is no necessary relationship between default and departure.
Second, it is in nearly no one's best interest for Greece to leave the eurosystem. After the 2012 debt restructuring, most of the Greek government debt is held by public institutions like the European Financial Stability Fund, the ECB, and the IMF. Citibank estimates from the end of 2014 suggest that well over 3/4 of Greece's total debt of €314 billion is in public hands. If Greece doesn't pay it isn't private creditors who stand to lose much.
Also, the Greeks have little latitude to venture out of the euro. Imagine, the Greek government tomorrow issues a "new Drachma," and pegs its exchange rate to the euro. Would you want to hold a brand new, untested liability of the Greek government? Would you feel certain about the stability of its value? Probably not. Ask Argentineans from the 1980s: they saw a new peso created in 1983 as a result of elevated inflation. Within two years, the value of the new currency plummeted. No one wanted to hold it. Finally came a dollar peg. That didn't work either. Currency works because people willingly use it to exchange. If the market assigns it no value, substitutes--like the dollar, the euro, gold, bitcoin--circulate instead.
Finally, for those who think that a "Grexit" would precipitate a financial market meltdown, à la Lehman Brothers, think again. Lehman Brothers was a financial intermediary who issued short-term liabilities to fund an enormously leveraged balance sheet. Overnight Lehman liabilities traded in the market as money-like instruments. This is not true for Greece and its debt.
What is more, Lehman was a massive surprise to many in the market. Many market participants assumed that because the Federal Reserve oversaw a shotgun sale of Bear Sterns to JP Morgan, the central bank would do the same for Lehman. This assumption proved false. The "no bailout" surprise exacerbated the market panic. Greece may be the most well telegraphed crisis of all time. Since 2010, the market has worried and wondered how the Greek government would find the cash to meet its financial obligations.
Here we are now five years later, once again staring at the prospect of a "Grexit:" the creditors are different, but the song remains the same.
The treasury curve steepened this week with the long end (30-year) underperforming. The 5s/30s curve steepened from a low of 120 basis points in mid-April to a high of 156 basis points on Thursday. Corporate issuance as well as treasury supply weighed on the markets along with volatile European markets. The German 10-year bund moved to new yield highs of 77 basis points, off the lows of a couple of weeks ago of 4.3 basis points. The violent moves were best reflected in the bund futures and options complex with record volumes and spikes in implied volatilities. US dollar weakness along with commodity strength also pressured fixed income markets.
Technicals came into play as the US 30-year yield broke through a long term trend line resistance of 2.87% to trade up to 3.11%. Ten year yields moved from a low of 1.90% 2 weeks ago to a high of 2.31% intraday which also corresponds to a long term yield resistance level. Positioning in cash Treasuries leaned short as the 3y, 10y and 30y all traded special in the repo market before the auctions. Spec futures positioning also leaned short with the highest positioning in 10 year futures contracts since September 2014. Most economic data leaned toward the weaker/less growth and inflation side with retail sales, PPi and Michigan sentiment all on the low end. Initial claims continued their strength with the 4 week average at the lowest level since 2000. Markets did get a relief pop on Friday with bund yields stabilizing and corporate issuance and treasury supply behind us.
Next week's main focus will be on housing data, CPI and the April FOMC minutes. Volumes will most likely taper off towards the end of the week with the Memorial day holiday approaching on Monday.
The U.S. Equity Market closed the week modestly higher in a relative light week of macro headlines. A disappointing retail sales report and a rapid reversal in the recent strength in global bond prices weighed heavily on risk sentiment. However, investors' sentiment quickly recovered on Thursday as the S&P 500 index raced back to record highs, posting its second consecutive up week. The S&P 500 and Dow Jones Industrial Average indices both closed the week up approximately 0.3%, while the tech-focused NASDAQ Composite jumped 0.8%. The higher beta small-cap stocks outperformed large-cap stocks. In terms of style, large-cap growth stocks outperformed large-cap value stocks. The best performing sectors were health care and consumer staples, while the worst performing sectors were energy and materials.
In fund flow news, Lipper reported that U.S. based equity mutual funds continued to see outflows after investors redeemed $2.16 billion for the week, its 15th consecutive week of redemptions. However, non-domestic equity mutual funds continued to be in demand after taking in $665 million for the week, its 13th week of subscriptions out of the last 14.
Investment grade primary issuance came in at the low end of expectations, barely hitting $35 billion versus an anticipated $35-$40 billion. One notable deal was issued by Qualcomm on Wednesday. The technology company issued $10 billion in its first deal ever, with tranches spanning from 3-30 year maturities. Most deals this size start at relatively "cheap" levels, attracting high investor demand that ultimately causes pricing to come much tighter. In this deal, that was not really the case. The 30-year tightened just five basis points and the 20-year tranche did not tighten at all from price talk. The deal is trading roughly flat to issuance since Wednesday.
As Treasuries and government bonds around the world sold off, the market environment was not conducive to strong new issue bond performance. Multiple issuers put planned deals on hold to wait for sunnier times to come to market. Meanwhile in the secondary market, corporates were mostly unchanged. The Corporate Index Option-Adjusted Spread (OAS) finished the week at +128, one tighter on the week. Overall, Senior Financials were two tighter, Sub Financials were three tighter. Metals/Mining tightened by nine and energy tightened by five as oil hovered around $59 all week. Industrials and utilities were two wider.
Agency mortgages kept pace with Treasuries as yields moved higher in volatile trading sessions. The breakout of the micro range led to mixed results of pass-throughs and the mortgage basis. Spreads compressed for higher coupons but were slightly wider for 3s and 3.5s. Conventionals lagged GNMA mortgages as prepayment expectations converged. As typical in bear-steepeners, 15-year product outperformed 30-year MBS.
ABS demand is still outpacing ABS supply as a heavy week of new issuance was easily absorbed with most deals upsizing and pricing at the tighter end of initial price guidance. Next week is going to be busy as well. The CLO market remains active too with many 2012 vintage deals refinancing, and significant BB-rated interest as spreads tightened 18 basis points on the week.
U.S. household debt rose $201 billion year-over-year to $11.85 trillion at the end of the first quarter according to the NY Fed's Household Debt and Credit report. Mortgage debt is by far the largest component at $8.17 trillion, followed by student loan and auto debt at $1.19 trillion and $968 billion respectively. Borrowers continue to shy away from credit card debt as balances fell by $16 billion in the quarter to $684 billion.
The municipal market continued its laggard tendencies this week as the AAA benchmark curve outperformed in the Treasury selloff on Monday, only to give most of it up in the following two trading sessions. Relative muni performance week over week was mixed. At mid-week, the 3, 5, 10, and 30-year Muni/Treasury ratios were 100%, 90%, 90%, and 105%.
This week's calendar is a heavy $10 billion, higher than the $8.5 billion full week average for the year. The largest deals this week were $833 million Salt River Agriculture District, $500 million State of Connecticut, and $500 million Pennsylvania Turnpike. Municipal fund flows turned negative last week with all muni funds seeing $211 million in net outflows. Year to date, municipal bond funds have seen $5.5 billion in inflows with 4 weeks of outflows.
New issue deals this week have continued to see strong demand with heavy oversubscriptions and modest re-pricing. Secondary volume has been muted as muni investors appear willing to see where the soft and volatile Treasury market will lead municipal yields.
Headlines over the past week have focused on the Supreme Court ruling delivered last Friday that struck down attempted pension reform legislation in Illinois. This ruling was followed up by multi-notch downgrades to Chicago-related-credits to below investment grade. This downgrade has spurred a whirlwind of activity and supply in Chicago-related-debt as it triggered IG rating violations. It should be noted that both S&P and Fitch maintain A+ and A- ratings on Chicago General Obligation debt, respectively. We will be putting out a piece to address this issue as well as our exposure and outlook.
The US high-yield market was slightly lower this week as markets continue to adjust to rising rates. The BofA Merrill Lynch BB/B cash pay constrained index was down 0.10% week-over-week as spreads were unchanged at an option-adjusted-spread of 379 basis points. The BofA Merrill Lynch index BB/B index which excludes utilities and energy was down 0.15% with spreads also unchanged for an OAS of 357. The BofA Merrill Lynch Euro BB/B constrained index was up 0.06% for the week as it tightened by nine basis points to an OAS of 325.
High-yield trading was choppy the first part of this week after the nonfarm payroll-fueled relief rally on Friday. Tuesday's price action stood out as the most volatile trading day as the early morning tone was heavy with ETFs and dealers pushing levels lower. The liquid, large cap benchmark structures underperformed as those bonds are used by many as a way to get long or short the high-yield market quickly. High-yield did finish lower on the day, but it was well off the lows of the morning as treasuries and equities stabilized. Actively-managed funds have not seen the large outflows that ETFs have been experiencing the past few weeks, and with reported healthy cash balances and a light calendar so far this week these funds have been better buyers on market weakness.
Fund flows for the week were a net negative $89 million as ETFs took in $26 million against actively-managed funds losing $115 million. Flows were positive late last week and early this week as a net $713 million flowed back into high-yield on the heels of the in-line nonfarm payrolls report early Friday morning. This is a 20% reversal of the net $3.4 billion that had left high-yield over the past three weeks with ETFs accounting for the bulk of those negative flows. Tuesday saw a relatively light outflow of $157 million despite the heaviness of Tuesday morning's trading session.
$6.09 billion has priced across 13 tranches so far this week with the lion's share of the week's deals pricing on Thursday. The largest single tranche priced this week was a $1.25 first-lien Ba3/B+ rated senior secured seven-year note from Burger King /Tim Hortons. The new notes priced at the tight end of price guidance to yield 4.625% at a spread of 266 basis points. Proceeds from the new notes will be used to pay down a portion of the fast-food chain's term loan. The remaining portion of the term loan is repricing to a lower rate as well as the company takes advantage strong demand for secured floating rate paper from both CLO's and mutual funds.
Global Bonds and Currencies
Major non-US government bond markets were mixed this week as the recent sell-off eased, although volatility remained elevated. The small rebound in European government bonds observed at the end of the previous week proved short-lived as further selling pressure, driven this time by developments in the US Treasury market, emerged in the first half of the past week.
European government bond yield curves generally steepened on the week, as yields at the long-end pushed higher. The yield on the 10-year German Bund finished the week 5 basis points higher, while peripheral European yield spreads over Germany tightened slightly. In the UK, the Bank of England cut its economic growth forecast for 2015 and 2016 on Wednesday in its latest Inflation Report. Gilt markets, however, shrugged off the news and yields remained largely unchanged on the week.
In currency markets, the US Dollar continued to weaken as US economic data disappointed investors, while Sterling reached new year-to-date highs, supported by the result of the previous week's General Election, which saw the governing Conservative Party return with an unexpected outright majority. In the Euro area, the Euro rose as negotiations between Greece and its creditors made some progress, with Greece meeting its latest debt repayment. The Swedish Krona was softer after a lower than expected inflation figure increased expectations that the Riksbank might take further accommodative measures in the coming week.
Emerging market dollar-pay spreads were flat at 334 basis points over US Treasuries, while local debt yields fell 4 basis points to 6.53%. Currencies were broadly stronger against the US dollar, led by the Turkish lira (+4.5%), Russian ruble (+2.3%) and Romanian leu (+1.9%)
China continued monetary easing ahead of weak economic data releases. The central bank cut deposit and lending rates by 25 basis points each to 2.25% and 5.1%, respectively. Meanwhile, April industrial production was less than expected at 5.9% year-over-year (y/y), fixed asset investment slowed, and credit extension contracted. The property sector was a silver lining, however, with stronger sales activity and falling supply.
In other central bank meetings, officials in the Philippines maintained a 4% policy rate, citing comfort with the current path of strong growth and modest inflation. Chile's central bank held rates steady at 3% as officials attempt to contain elevated inflation. In Peru, the benchmark rate was held at 3.25%, though policymakers are using tools such as lower reserve requirements to help stimulate growth.
First quarter 2015 GDP data in Central Europe showed steady results. Poland registered above consensus growth at 3.5% y/y, while Romania's growth reached 4.3% y/y, significantly ahead of forecasts. Hungary's quarter-on-quarter growth slowed to 0.6%, though on an annual basis growth remained sound at 3.4%.
Oil producing countries saw mixed first quarter growth. While Russia printed its first contraction since the global financial crisis, the -1.9% y/y result materially beat expectations. Malaysia reported resilient 5.6% y/y growth driven by domestic demand, while Nigeria slowed to 4% y/y on energy and manufacturing sector weakness.
Pre-election polls incorrectly assessed Poland's first round presidential vote as the main opposition candidate, Andrzej Duda, surprised by finishing ahead of incumbent Bronislaw Komorowsi. The presidential election will go to a second round on May 24. A victory for Duda could signal a turn towards less EU-friendly policy, though much will hinge on parliamentary elections later in 2015.
Emerging markets debt saw inflows of $0.1 billion, driven by hard currency funds.
Visit the Weekly Market Update archives page to browse past editions of the publication.
||(UK) CPI YoY
||(UK) CPI Core YoY
||(EC) CPI YoY
||(US) Housing Starts
||(US) Housing Starts MoM
||(US) Building Permits
||(US) Building Permits MoM
||(JN) GDP Annualized SA QoQ
||(UK) Retail Sales Inc Auto Fuel YoY
||(US) Initial Jobless Claims
||(US) Markit US Manufacturing PMI
||(US) Existing Home Sales
||(US) Existing Home Sales MoM
||(US) Leading Index
||(US) CPI YoY
||(US) CPI Ex Food and Energy YoY