Week ending June 26, 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 9:41 a.m. PDT
to Date (12/31/14 -6/26/15)
Jones Industrial Avg
|DJ STOXX Europe
|MSCI EM Index
to Date (12/31/14 -6/25/15)
High Yield Index
Morgan EMBI Global Diversified
||(EC) Consumer Confidence
||Consumer confidence stayed at its previous level, despite fears of "Grexit".
||(US) Existing Home Sales
||Existing home sales grew by 5.1%, their fastest pace of growth since November 2009. Strong demand from younger buyers contributed to the improvement.
||(US) Durable Goods Orders
||The volatile measure showed a fall in demand for 3 out of the last 4 months.
||(US) Markit US Manufacturing PMI
||The month of May experienced the slowest rise in new business since January 2014, but still showed strong expansion.
||(US) New Home Sales
||New home sales saw their highest level in 7 years with the Northeast region showing the strongest gains.
||(US) GDP Annualized QoQ
||US Q1 GDP was revised back to consensus levels driven by upward revisions of consumer spending and inventories.
||(US) PCE Core YoY
||Core PCE (the Fed's preferred gauge) showed no pickup in prices.
||(JN) Natl CPI Ex Food, Energy YoY
||CPI stayed positive but deflation fears still exist in Japan.
||(US) U. of Mich. Sentiment
||Consumer sentiment remains strong, rising to a five-month high.
Low interest rates are not just a developed world phenomenon. While the European Central Bank and the Federal Reserve remain at the zero bound, the rest of the world is not far away. Out of the 33 member states of the Organisation for Economic Cooperation and Development, only Iceland, New Zealand, Mexico, Chile, and Australia had policy rates higher than 2% in May 2015. This month alone, Korea, Hungary, India, Mexico, New Zealand, Norway, Russia have cut their key policy rates.
Many attribute low policy rates to the lackluster global recovery. But we would say that in today's world of inflation targeting central banks, low policy rates reflect the lack of inflation around the world. In 1980 only 5% of developed countries had inflation below 3%. Today only 5% of developed countries have inflation above 3%. Even as oil prices stabilize, persistent goods price deflation continues to offset the modest gains in prices consumers pay for services. Bond investors expecting a rapid increase in yields due to elevated inflation might look elsewhere for worries.
Treasuries remained captive to Greece headlines and economic data this week along with 2/5/7 year supply and concerns of heavy corporate issuance this summer. Cash and futures were quite whippy and volatility continued to be the risk but never appeared.
Implied volatility in option space continued to leak lower even with 20 basis points of movement in the belly of the curve. The spread between the 5 year and the 30 year rate steepened back out to recent wides of 150 to end the week a little flatter at 147.
Focus during the holiday shortened week (next week) will be on month end extension (10 year treasury), Greece June 30th payment deadline to IMF, culminating with non-farm payrolls on Thursday (due to the July 4th holiday) with expectations running between 225,000 and 240,000.
The U.S. Equity Market fell for the first time in three weeks as the uncertainty surrounding Greece weighed on risk sentiment. The lack of investor conviction and light trading volume, which is typically seen in the summer months, has put most risk-assets vulnerable to episodes of greater intra-day volatility. However, the broad market weakness was tempered given the better than expected U.S. economic data releases and continued surge in merger & acquisition deals. The S&P 500 and Dow Jones Industrial Average indices both fell approximately -0.3% for the week, while the tech-focused NASDAQ Composite fell -0.5%. The higher beta small-cap stocks modestly outperformed large-cap stocks. In terms of style, large-cap growth stocks performed in line with large-cap value stocks. The best performing sectors were telecom services and consumer discretionary, while the worst performing sectors were utilities and materials.
In fund flow news, the year-to-date trend of domestic equity outflows continued this week as Lipper reported that investors redeemed $2.99 billion from U.S. based equity mutual funds for the week, its 21st consecutive week of redemptions. However, non-domestic equity mutual funds continued its momentum after taking in $912 million for the week, its 19th week of subscriptions out of the last 20.
Investment grade primary issuance came in far below expectations with $13 billion pricing versus an anticipated $20-$25 billion. One interesting deal was brought to market to fund the new Kraft-Heinz merger. Under the Heinz ticker (HNZ), the low-BBB rated company issued $10 billion across seven fixed tranches. There were two points worth highlighting in the deal. First, the issuance was upsized from $8 billion to $10 billion based on huge investor demand. Even after upsizing, demand was nearly four and half times final issuance size. Secondly, there were initially two floating rate tranches but both were dropped on just one and half times demand. This has happened several times this year as floating rate paper has gotten less interest from investors.
In the secondary market, spreads finally held steady after marching one basis point wider on a daily basis for the last week or so. The Corporate Index Option-Adjusted Spread (OAS) finished the week at +141, one wider on the week. Senior and sub financials widened by two. Metals/Mining were two tighter and energy widened by four. Industrials and utilities were both one wider.
Agency mortgages lagged Treasuries as rates rose on heavy volume. Pass-through spreads were three-to-five basis points wider on a pick up volatility as conflicting Greek headlines influenced market behavior. Within the product, Ginnie Mae mortgages bested conventionals on strong appetite from foreign and domestic banks. Fifteen-year mortgages outperformed thirty-year mortgages in the bear steepener and higher coupons trumped lower coupons.
In commercial MBS, spreads widened for the third straight week on supply indigestion. As a benchmark, the AAA-rated 10-year CMBS bond widened six basis points to 95 basis points versus the swap curve. In non-agency MBS, the story was Barclays' exit from secondary trading as market activity wanes with time.
For the week, the thirty-year current coupon mortgage versus the ten-year Treasury spread widened by two basis points to 71 bps. According to Freddie Mac, the thirty-year mortgage rate offered to borrowers edged higher to 4.02%.
Apart from a $137 million first time subprime auto loan issuer Global Lending Services (GLS), the new issue ABS market was dead this week. Year-to-date, ABS new issuance stands at $116 billion, 7% above last year's pace. Secondary trading remains sloppy as dealer inventories remain relatively high going into quarter end. This trend has also appeared in the CLO space as there has been a softening of spreads, especially in the lower rated classes.
With quarter end and the Friday observance of Independence Day, next week should be relatively quiet as well. For the first time in quite a while, spreads appear attractive. With new car sales remaining strong, we can expect more auto ABS supply. Issuance should pick up through October as issuers want to fund themselves before new regulatory reporting kicks in in November.
The municipal market trended modestly softer this week against a backdrop of uncertain world events. At mid-week, the ten year AAA benchmark municipal yield was several basis points higher in yield at 2.32% and nearly 98% of its Treasury counterpart. The municipal to Treasury yield is even more attractive farther out the yield curve on a relative basis, as thirty year municipal yields are 105% of their Treasury counterpart.
New issue supply was slightly larger this week at $8.0 billion compared to $7.3 billion last week. The 2015 weekly average is about $5.7 billion. The largest deal of the week included $1.0 billion State of Massachusetts. New issue supply is higher than last year due to increased refunding volume. Most new issues priced at historically traditional spreads due to the attractiveness of municipals relative to treasuries offset by modest mutual fund outflows. Next week's supply should register at $3 billion. One of the marquee deals next week includes $786 million Texas transportation Commission in addition to $350 million Metropolitan Washington DC Airport.
Competitive deals saw small balances and most negotiated new issues were priced attractively in order to garner buyer's attention. The secondary market weakened somewhat with most trading in-line with the overall market decline. Dealer's bids are quite spotty as the trend is toward higher yield levels with elevated customer selling. The 30 day visible supply is $10 billion, about average for the year. Longer term, municipal bonds should outperform other fixed markets as we enter one of the strongest re-investment periods in July.
The US high-yield market was slightly lower this week despite the inflows into the asset class after dovish comments from the FOMC last week. The BofA Merrill Lynch BB/B cash pay constrained index was down 0.04% this week as spreads tightened by seven basis points to an option-adjusted-spread of 385 basis points. The BofA Merrill Lynch BB/B index which excludes utilities and energy was down 0.01% for an OAS of 364 as that spread also tightened by seven basis points. The BofA Merrill Lynch Euro BB/B constrained index rebounded from its underperformance last week versus its US counterpart and was up 0.89% for the week as the spread of that index tightened by twenty-five basis points for an OAS of 354.
Fund flows for high-yield turned positive last week after the FOMC indicated that the expected rise in rates will be gradual after the initial "lift-off". AMG reported inflows of $621 million as opposed to the prior two weeks which had outflows totaling $5.45 billion. Leveraged loans funds continue to see retail outflows as $174 million left the asset class. The pace of new issue activity has increased as compared to the last two weeks of June as this week's volume of $5.1 billion surpasses the prior two weeks combined volume of $4.98 billion.
The largest deal of the week was an upsized offering of senior eight-year notes issued by Endo Pharmaceuticals. The developer and manufacturer of pharmaceutical and generic drugs priced the $1.635 billion B1/B rated notes at a spread of 372 basis points to yield 6.00% which was at the tight end of price talk. The company also issued $2.80 billion of a seven-year term loan with a 0.75% LIBOR floor and a spread of L+300 with a OID of 99.75 to yield 99.75. Both tranches were well-anticipated and over-subscribed and moved sharply higher when freed to trade. Use of proceeds of the new debt is to help fund the purchase of Par Pharmaceutical from TPG for $8.05 billion and to refinance debt.
Global Bonds and Currencies
With the Federal Open Market Committee meeting out of the way, the focus of European investors this week has been squarely on Greece. On Monday morning, markets were enthused by Athens' seemingly more conciliatory tone over the weekend. However, as the week progressed, it became clear that Greece and its creditors were still no closer to agreeing on a deal. Yields across most developed sovereign bond markets initially rose on Monday but later reversed the trend as the negotiations continued to drag and progress remained slow. The yield on the benchmark 10-year German Bund finished the week 4 basis points higher, outperforming US Treasuries on the week. Peripheral European spreads to German Bunds tightened on expectations that Greece will eventually strike a deal and remain in the Eurozone. In the UK, despite weak manufacturing data, gilts sold off across the curve, with 10-year yields finishing the week 10 basis points higher.
In currency markets, the lack of improvement in the Greek negotiations and the lower than expected IFO business climate survey out of Germany weighed on the Euro, which ended the week as the second worst performing G10 currency. The US Dollar found good support over the past five days and ended the week as the best performing currency. The greenback benefited from a stronger revision to Q1 GDP and from some contraction in risk appetite partly due to the lack of progress in Greece. The Swiss Franc depreciated against all G10 currencies on the back of comments from Swiss National Bank governor Jordan that the currency remained overvalued.
Emerging market dollar-pay spreads tightened ten basis points to 340 basis points over US Treasuries, while local debt yields fell eight basis points to 6.74%. Currencies were broadly weaker against the US dollar, led by the Russian ruble (-2.3%), Brazilian real (-2.2%) and Hungarian forint (-1.3%).
Among monetary policy decisions, the Central Bank of Turkey maintained its benchmark rate at 7.5%, while also keeping the borrowing rate (7.25%) and lending rate (10.75%) corridor unchanged. Officials believe inflation should decline, but have acted cautiously as a coalition government is not yet in place following recent parliamentary elections. In Hungary, monetary authorities delivered an expected 15 basis point rate cut, to 1.5%, but caught markets off guard by indicating that the easing cycle was likely to continue.
Colombia's central bank held the policy rate at 4.5%. Though slower economic growth supports rate cuts, policymakers are concerned about exacerbating the deteriorating current account deficit. The Philippines held rates at 4%; officials revised down their 2015 inflation forecast to 2.1% while remaining sanguine about the country's growth prospects.
The June "flash" indicator of Markit's manufacturing PMI for China registered 49.6, slightly above consensus and an improvement from May. Output and new order sub-indices rose to 50 and 50.3, respectively, indicating expansion, while the employment and price sub-indices fell.
Emerging market debt saw outflows of $0.43 billion, driven by local currency funds.
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||(JN) Industrial Production YoY
||(US) Dallas Fed Manf. Activity
||(GE) Unemployment Rate
||(UK) GDP QoQ
||(EC) Unemployment Rate
||(US) S&P/Case-Shiller US HPI MoM
||(US) Consumer Confidence Index
||(US) ADP Employment Change
||(US) Markit US Manufacturing PMI
||(US) ISM Manufacturing
||(EC) PPI YoY
||(US) Change in Nonfarm Payrolls
||(US) Unemployment Rate
||(US) Average Hourly Earnings YoY
||(CA) RBC Canadian Manufacturing PMI
||(EC) Retail Sales YoY