Week ending April 24, 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 7:35 a.m. PDT
to Date (12/31/14 -4/24/15)
Jones Industrial Avg
|DJ STOXX Europe
|MSCI EM Index
to Date (12/31/14 -4/16/15)
High Yield Index
Morgan EMBI Global Diversified
||(US) Existing Home Sales
||Existing home sales elevated after slowing through the winter. Existing home inventories have stabilized over the last year and remain low compared to history
||(UK) Retail Sales Incl. Auto YoY
||Retail sales in the UK remained strong, despite some headline weakness driven by lower automotive fuel spending
||(US) New Home Sales
||New home sales fell on the month, finishing an overall strong quarter for new home sales. Net revisions increased past monthly readings by 35,000
||(US) Durable Goods Orders
||Core capital goods orders fell 0.5% (vs. consensus +0.3%) and were revised down in February. Orders for machinery, metal products and electrical equipment were all soft on the month. Most GDP forecasts were unchanged at 1.1-1.2%
Central banks moved global markets again this week. The big story was the People's Bank of China (PBoC), which slashed its key policy rate by 100 basis points, the largest cut since 2008, in an effort to boost the faltering economy. Economic growth as measured by real gross domestic product (GDP) fell below a 7.5% annual growth rate for the first time in 15 years. What is more, a key measure of manufacturing activity slumped in March, suggesting the goods-producing sector of the economy contracted.
The Bank of England released minutes from the Monetary Policy Committee's last meeting on Wednesday. The record of the March meeting showed a unanimous vote to leave the key policy rate unchanged. However, policymakers saw upside risks to inflation and wages due to a stronger economy and a tighter labor market. On the day UK gilt yields rose the most since 2013.
In Australia, the Consumer Price Index (CPI) printed lower at 1.3% compared to 1.7% last quarter, on a year-on-year basis. The low reading comes on the heels of a 25 basis point policy rate cut by the Reserve Bank of Australia (RBA) in February. RBA Governor Stevens suggested the policy rate could be moved below its current 2.25% level, stating that a future cut â€œhas to be on tableâ€ given low consumer price inflation.
The Treasury curve bear steepened over the week as the technical breakdown in Gilts and Bunds on Wednesday led Treasuries to breakout of their recent micro range in sympathy. Some stop outs were triggered in all three major developed markets leading to an extra 2 to 3 basis point selloff.
Bunds held an important 17 basis point level (briefly drifting higher before finding support) as the market watches for a potential range break which could add pressure to the Treasury curve. Adding to the weakness in the domestic rates market was uniformly positive housing data and large investment grade corporate bond deals that exacerbated moves seen throughout the session. Treasuries found support to end the week after core Durable Goods data came in down and lower than expectations. Volume in cash picked up this week with Wednesday's breakout of the recent micro range helped fuel the busiest trading session in months with total broker volumes hitting 229% of the 20-day average.
TIPS saw solid demand throughout the week as commodity prices rebounded and news articles reported record inflows into TIPS ETFs. The $18 billion 5-year TIPS auction had solid participation from indirect bidders and the dealer takedown was relatively low. Overall, TIPS held in well even with supply size that is a multiple of average daily volume.
The U.S. Equity Market rallied for the third time in four weeks on strong corporate earnings results. Despite the ongoing saga in Greece, favorable U.S. corporate quarterly earnings reports have provided a sense of relief to risk sentiment. The S&P 500 index set new record highs this week after posting gains in four out of the last five trading days.
Stabilizing oil and commodity prices and the Fed rate hike not expected until later this year have calmed investors' fears as suggested by intra-day volatility falling to lows of the year. The S&P 500 index closed the week approximately 1.7% higher, while the Dow Jones Industrial Average climbed 1.3%. The tech-focused NASDAQ Composite has so far benefited the most from the current earnings season after surging 2.9% higher for the week. Large-cap stocks outperformed small-cap stocks. In terms of style, large-cap growth stocks outperformed large-cap value stocks. The best performing sectors were telecom and info tech, while the worst performing sectors were energy and consumer staples.
A busy week of earnings this week after approximately 30% of the companies in the S&P 500 index announced quarterly results. So far, companies have surprised on the upside with 76% of earnings releases beating street estimates. However, only 48% of revenues results have topped estimates which have tempered investor sentiment. Highlighting this week's earnings beats include IBM, Verizon, Boeing, AT&T, Facebook, Amazon and Microsoft. Conversely, McDonald's and Qualcomm were the biggest disappointments after missing earnings estimates.
In fund flow news, Lipper reported that U.S. based equity mutual funds continued to be out of favor after investors redeemed $1.77 billion for the week, its 12th consecutive week of redemptions. However, non-domestic equity mutual funds continued to be in demand after taking in $3.79 billion for the week, its 10th week of subscriptions out of the last 11.
Investment grade primary issuance exceeded expectations, reaching nearly $38 billion versus $15-$20 billion anticipated new issuance. The earnings season is in full swing, and new issue has been slow all month while companies wait for their numbers to be announced. This week, however, issuance picked up. One interesting new deal this week was issued by Citigroup on Wednesday. The $5 billion deal was issued across three tranches with a relatively flat curve between the three and ten year tranches, which priced at a spread to Treasuries of 90 and 132, respectively. This 42 basis points spread differential is tighter than the average for the Corporate Credit index, where the average ten year is 61 basis points wide of three year bonds.
In the secondary market, spreads held in as the search for spread product continues. The Corporate Index Option-Adjusted Spread (OAS) finished the week at +126, one basis point better. Overall, Senior Financials were one tighter, Sub Financials also tightened by two. Metals/Mining tightened by one and energy tightened by 10 on the back of oil stabilizing over the last two weeks. Industrials and utilities were one tighter.
With yields edging higher, agency mortgages outperformed Treasuries on good appetite for risk products. Implied volatility declined and supply was constrained despite a slight pickup in mortgage activity. The primary versus secondary mortgage rate narrowed five basis points with 30-year fixed quoted at 3.67%.
Ginnie Mae MBS outperformed conventionals as price spreads widened on lower coupons as foreign demand picked up. In commercial MBS, conduit issuance was steady with long cash flow conduit 10-year AAA-rated bonds hovering in the mid 80s versus swaps. In single family rental (SFR) MBS, spreads compressed five basis points on AAA-rated bonds to 1-month Libor plus 120 basis points. The eighth single borrower SFR issuer announced a deal, Tricon American Homes which owns 6,500+ properties across the U.S.
For the week, the thirty-year current coupon mortgage versus the ten-year Treasury spread held steady at 69 basis points. According to Freddie Mac, the thirty-year mortgage rate offered to borrowers edged lower to 3.65%.
There were a handful of ABS deals in the market this week, one prime auto deal and the rest were credit cards. The issuers were Ford, Chase, Discover and Bank of America. The deals were able to get done quickly, especially the credit card deals which all upsized from initial amounts to accommodate the demand and oversubscribed books. We have not heard much as to the new issue calendar next week.
There are also a couple of CLO deals in the market right now as well. We have CIFC and Credit Suisse asset management (CSAM) bringing the CLOs. CIFC is expected to launch on Friday and CSAM expected sometime next week. All the tranches are seeing good demand and are well oversubscribed.
The municipal market was modestly weaker across the yield curve against a backdrop of higher treasury yields and a torrent of new issue supply. All-in-all, municipals outperformed their taxable counterparts as the municipal to treasury relationship is still quite attractive, particularly in the longer maturity range.
In fact, the ten year AAA benchmark municipal yield is at parity with the ten year treasury yield at close to 2%. This week's new issue stands at $9 billion, well above the weekly average over the past year. Leading the new issue charge are $1.1 billion state of California general obligation, $887 Energy Northwest ($400 million taxable) and $250 State of Connecticut Green Bonds.
Due to the choppy nature of the treasury market, most municipal new issues were priced quite attractively to capture investor attention from a myriad of alternative deals. Investor interest remains quite strong due to compelling valuations and consistent money flowing into municipal bond funds. Secondary market bid wanted activity is quite orderly while the street is able to provide adequate liquidity. Next week's new issue supply slows down considerably to $4 billion, one of the lightest of the year. The largest negotiated deals include $209 million Grossmont CA Healthcare (AA2/NR) and $169 million Nebraska Power Generation agency (A2/BBB+).
High-yield inched higher this week despite some outflows and an active calendar. The BofA Merrill Lynch BB/B cash pay constrained index was up 0.04% week-over-week as spreads cinched tighter by seven basis points to an option-adjusted-spread of 384 basis points. The BofA Merrill Lynch index BB/B index which excludes utilities and energy was unchanged and tightened by six basis points over the same period for an OAS of 356. The BofA Merrill Lynch Euro BB/B constrained index underperformed its U.S. equivalent this week and was down 0.23% as it widened by five basis points to an OAS of 338.
The high-yield asset class experienced its first weekly outflow in five weeks as AMG reported a negative flow of $162 million. $3.30 billion in positive flows has come into high-yield since the FOMC meeting in mid-March as the dovish tone of central banks and the resultant low global yields have supported the case for high-yield debt. Leveraged loans continue to see retail investor interest as that asset class is expected to see a second consecutive week of inflows after last week's inflow of $530 million that followed outflows in forty-nine of the prior fifty-three weeks. High-yield new issuance has been steady and busier than average for the month of April as $32.60 billion has priced MTD. The demand from investors for new paper has led to tightening of price talk and strong performance in the secondary market. The largest and best performing new issue of the week was the upsized secured note issued by Fortescue Metals Group with use of proceeds to redeem unsecured debt.
The Australian-based iron ore producer priced the $2.3 billion Ba1/BB+ rated seven-year note with a coupon of 9.75% and an original-issue-discount of 97.608 to yield 10.25%. The company had originally come to market last month with a similarly structured deal but balked at the clearing level for the deal which at the time was 9.00%. The company had hoped to come back to market and price a deal closer to 8.50%, but the weakness in iron ore prices instead pushed the yield demanded by investors higher. The new deal saw strong demand with the bulk of the bonds going to a handful of anchor orders and the new notes rallied over four points when freed to trade.
Global Bonds and Currencies
Developed government bond markets sustained some losses this week as rising oil prices and ongoing extreme monetary accommodation around the world bolstered investor sentiment and equity markets. In Europe, Friday's Eurozone finance ministers' summit in Riga failed to gain hoped-for progress in talks between the Greek government and its creditors. With the deadline for Greece to unlock further bailout funds fast approaching and a default looking increasingly likely, core European government bond yields rose on a safe haven bid.
Ten-year Bund yields finished the week 8 basis points higher, having touched a new record low of just 0.07% on Monday. Despite Greece's ongoing travails, spreads on other peripheral European sovereign bonds over Bunds tightened. In the UK, the latest Bank of England (BoE) policy meeting minutes suggested that Committee members might be moving to a more hawkish stance and government bonds sold off across the board. Ten-year Gilt yields finished the week 9 basis points higher, underperforming German bunds slightly.
In currency markets, the US dollar weakened against the euro and sterling for a second consecutive week. The single currency rose on optimism ahead of Friday's Eurozone Finance Ministers meeting, although it lost some of these gains when the meeting failed to reach a deal with Greece. Sterling firmed after the release of the latest BoE minutes. The greenback was little changed against the yen on the week. However, it was significantly firmer against the New Zealand dollar after comments by the Assistant Governor of the New Zealand central bank reduced expectations of an interest rate hike in the near future.
Emerging market dollar-pay spreads tightened 8 basis points to 346 over US Treasuries, while local yields widened 7 basis points to 6.40%. Emerging market currencies showed mixed performance against the dollar; the Brazilian real (+1.9%), Polish zloty (+1.3%) and Hungarian forint (+1.2%) gained. Meanwhile, the Russian ruble (-1.7%), Indian rupee (-1.5%) and South African rand (-1.4%) declined.
The People's Bank of China lowered the Required Reserve Ratio by 100 basis points to 18.5%. The easing measure is expected to inject roughly $200 billion into the economy. While the timing of the cut is not a surprise, the magnitude is higher than market expectations. Monetary easing comes after China released Q1 GDP, where growth slowed to 7.0% y/y from 7.3% in Q4 2014. Growth aside, policymakers are particularly concerned about deflation given the level of debt in the economy.
In Eastern Europe, Hungary lowered rates by 15 basis points to 1.8%, matching expectations.
This is the second consecutive rate cut after the central bank began the easing cycle last month. Monetary easing will continue in the near term to maintain the inflation target. The Central Bank of Turkey (CBRT) held rates at 10.75%, in line with expectations. Although growth has been slowing, the underperformance in the currency warrants a more cautionary stance from the CBRT.
The corruption scandal surrounding Brazilian oil company Petrobras found some reprieve as the company released its long-awaited 2014 audited financial statements. The company recorded an impairment charge of about $15.2 billion, of which $2.1 billion was attributed to corruption.
Emerging markets debt saw inflows of $0.6 billion, skewed toward local currency funds.
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||(UK) GDP YoY
||(US) S&P/CS Composite-20 YoY
||(EC) M3 3-month average
||(US) GDP Annualized QoQ
||(US) FOMC Rate Decision (Upper Bound)
||(US) PCE Core YoY
||(JN) Natl CPI YoY
||(US) ISM Manufacturing
||(US) U. of Mich. Sentiment