While China is bracing for what may be a historic D-Day event on December 9, when the "unprecedented" default of state-owned, commodity-trading conglomerate Tewoo with $38 billion in assets may take place, it has already been a banner year for Chinese bankruptcies.
According to Bloomberg data, China is set to hit another dismal milestone in 2019 when a record amount of onshore bonds are set to default, confirming that something is indeed cracking in China's financial system and "testing the government’s ability to keep financial markets stable as the economy slows and companies struggle to cope with unprecedented levels of debt."
After a brief lull in the third quarter, a burst of at least 15 new defaults since the start of November have sent the year’s total to 120.4 billion yuan ($17.1 billion), and set to eclipse the 121.9 billion yuan annual record in 2018.
The good news is that this number still represents a tiny fraction of China’s $4.4 trillion onshore corporate bond market; the bad news is that the rapidly rising number is approaching a tipping point that could unleash a default cascade, and in the process fueling concerns of potential contagion as investors struggle to gauge which companies have Beijing’s support. As Bloomberg notes, policy makers have been walking a tightrope as they try to roll back the implicit guarantees that have long distorted Chinese debt markets, without dragging down an economy already weakened by the trade war and tepid global growth.
"The authorities have found it hard to rescue all the companies," said Wang Ying, a Shanghai-based analyst at Fitch Ratings, perhaps envisioning at least two banks that have experienced depositor runs in the month of November in the aftermath of an unprecedented succession of bank failures earlier in the year.
It's not just banks however: this year’s debt woes have spread to a broad array of industries, from property developers and steelmakers to new-energy firms and software makers. The types of borrowers facing repayment difficulties has also expanded from private companies and local state-run firms to business arms of universities, an obscure and loosely regulated corner of China’s corporate world.
China's two latest defaults involved just such a company; on Monday Peking University Founder Group shocked investors after failing to repay a 2 billion yuan bond. The same day, Tunghsu Optoelectronic Technology, a maker of photoelectric display components, also failed to deliver early repayment on both interest and principal for a 1.7 billion yuan note.
Read the entire article
DAILY BUSINESS REPORT - Financial Updates, International Markets and Business News
Showing posts with label Bonds. Show all posts
Showing posts with label Bonds. Show all posts
November 13, 2019
"Ridiculous": $1 Trillion In Orders For $7 Billion Chinese Bond
In recent years, hardened bond market cynics snickered when insolvent European nations such as Italy or Greece saw 4, 5, or more times demand for their bond offerings than was for sale, whispering to themselves that such oversubscriptions for potentially worthless debt assure a very unhappy ending. Yet not even the biggest cynics were prepared for what just happened in China.
When Shanghai Pudong Development Bank sold $7 billion in convertible bonds last month, investors placed more than $1 trillion worth of orders, making this a 140 times oversubscribed offering, enough to shock even the most seasoned China investor, the FT reports.
That $1 trillion in bids was almost as large as the entire stock-market capitalisation of Apple or Microsoft — the two biggest companies in the world. "It was a ridiculous amount," said Gerry Alfonso, head of research at Shenwan Hongyuan Securities in Shanghai. It is also a testament to how desperate the world has become in chasing yields and return, as well as just how much excess liquidity there is in the market at the moment
While new issue oversubscriptions have become the norm in recent years, this absurd case had several Chinese market unique characteristics, reflecting a surge in issuance of such equity-linked instruments in China — a rise helped by what the FT called "an unusual embrace of the product by policymakers better known for cracking down on financial innovations to ensure stability."
So far this year, Chinese companies have issued a record $40bn in convertible bonds, up more than 80 per cent from the full-year total in 2018, according to Dealogic.
It now appears that converts have become the latest Chinese bubble due to their hybrid characteristics: while they carry a (lower) coupon payment they also offer investors the right to switch them for equity if a company’s shares rise to a certain price. For companies, convertibles offer a way to raise money more cheaply than by issuing regular debt and do not immediately dilute shareholders’ equity.
Ronald Wan, chief executive at Partners Capital in Hong Kong, said Chinese convertibles had become more attractive to investors thanks to this year’s stock rally, while the government was promoting the instruments as a way to rein in financing done off-balance sheet, or through a fragile shadow banking sector. Naturally, Wan cautioned that convertibles’ performance "depends on the quality of the issuer", with investors typically prefering large banks and big blue-chip companies over small and mid-sized issuers, especially in a time when China's smaller banks are either hit by bank runs or outright getting bailed out.
Shenwan's Alfonso meanwhile warned that while large issuers such as Shanghai Pudong have seen ample liquidity in their convertibles after listing, investors in smaller issuers faced the prospect of taking heavy losses in the event of a sell-off.
"The liquidity is bad but there is liquidity,” he said. “The thing is, the price you’re going to get there is pretty horrendous."
That, however, is not preventing every investor scrambling to be allocated a piece of the original bond in hopes of an early pop which can then be sold.
Read the entire article
When Shanghai Pudong Development Bank sold $7 billion in convertible bonds last month, investors placed more than $1 trillion worth of orders, making this a 140 times oversubscribed offering, enough to shock even the most seasoned China investor, the FT reports.
That $1 trillion in bids was almost as large as the entire stock-market capitalisation of Apple or Microsoft — the two biggest companies in the world. "It was a ridiculous amount," said Gerry Alfonso, head of research at Shenwan Hongyuan Securities in Shanghai. It is also a testament to how desperate the world has become in chasing yields and return, as well as just how much excess liquidity there is in the market at the moment
While new issue oversubscriptions have become the norm in recent years, this absurd case had several Chinese market unique characteristics, reflecting a surge in issuance of such equity-linked instruments in China — a rise helped by what the FT called "an unusual embrace of the product by policymakers better known for cracking down on financial innovations to ensure stability."
So far this year, Chinese companies have issued a record $40bn in convertible bonds, up more than 80 per cent from the full-year total in 2018, according to Dealogic.
It now appears that converts have become the latest Chinese bubble due to their hybrid characteristics: while they carry a (lower) coupon payment they also offer investors the right to switch them for equity if a company’s shares rise to a certain price. For companies, convertibles offer a way to raise money more cheaply than by issuing regular debt and do not immediately dilute shareholders’ equity.
Ronald Wan, chief executive at Partners Capital in Hong Kong, said Chinese convertibles had become more attractive to investors thanks to this year’s stock rally, while the government was promoting the instruments as a way to rein in financing done off-balance sheet, or through a fragile shadow banking sector. Naturally, Wan cautioned that convertibles’ performance "depends on the quality of the issuer", with investors typically prefering large banks and big blue-chip companies over small and mid-sized issuers, especially in a time when China's smaller banks are either hit by bank runs or outright getting bailed out.
Shenwan's Alfonso meanwhile warned that while large issuers such as Shanghai Pudong have seen ample liquidity in their convertibles after listing, investors in smaller issuers faced the prospect of taking heavy losses in the event of a sell-off.
"The liquidity is bad but there is liquidity,” he said. “The thing is, the price you’re going to get there is pretty horrendous."
That, however, is not preventing every investor scrambling to be allocated a piece of the original bond in hopes of an early pop which can then be sold.
Read the entire article
October 31, 2019
China's Bond Market Faces Turmoil Amid Maturity Deluge
While the US bond market has had its share of harrowing slumps and vomit-inducing short squeezes in the past year as consensus shifted from one of "the neutral rate is far away" to "here comes NIRP", China's bonds have been a bastion of stability, trading in a tight range between 3% and 3.50% for the past year.
hat may be about to change.
The reason: a wall of bond maturities is about to flood across China’s sovereign-bond market, which in the past three months has already been reeling from a global sell-off and rising inflation.
According to Bloomberg, more than 2 trillion yuan ($283 billion) of local-government notes will mature in 2020, a record and 58% more than this year’s level. This means fresh debt to refinance upcoming maturities will start hitting the market soon, with a the southern province of Guangdong expected to sell notes as early as November.
This is happening as China's 10-year yield rose 3 basis points to 3.31%. the highest since late May, while the cost on 12-month interest rate swaps jumped 5 basis points to 2.92%. The yield on China Development Bank’s 3-year bonds due January 2022 rose 10 basis points to 3.25%.
Despite trading in a narrow range, China’s government bonds have been sliding for nearly two months, starting around the time a "growth shock" hit US rates and sparked the infamous quantastrophe, with the 10-year yield hitting the highest since May as selling momentum accelerated. Naturally, a flood of new supply will only exacerbate the weakness, especially as real, inflation-adjusted yields are barely above zero, a rarity for emerging markets.
Read the entire article
October 18, 2019
HSBC Considers Slashing Equity Desks In London, New York, Germany
A mass exodus could be developing among major financial institutions, who seek to divest their equity sales and trading units.
Deutsche Bank and Nomura have already made it clear that they're reviewing their trading cash equities units because of profitability concerns.
Now HSBC might follow suit, sources told Bloomberg, adding that the bank could exit stock trading in Western markets as part of a significant overhaul program.
HSBC could slash trading units in the U.S., U.K., Germany, and France, in the near term, the source said. The bank's Asian equities operations wouldn't be affected by the overhaul.
HSBC will concentrate on the Greater China region, rather than Western markets in the 2020s, another source explained.
HSBC Chairman Mark Tucker has spent the last several years restructuring the bank. He appointed Noel Quinn, the interim chief executive, in August, as a push to continue strengthening the bank through new, innovative cost-cutting measures.
The strategy by HSBC could cut at least 45 traders in New York.
Read the entire article
Deutsche Bank and Nomura have already made it clear that they're reviewing their trading cash equities units because of profitability concerns.
Now HSBC might follow suit, sources told Bloomberg, adding that the bank could exit stock trading in Western markets as part of a significant overhaul program.
HSBC could slash trading units in the U.S., U.K., Germany, and France, in the near term, the source said. The bank's Asian equities operations wouldn't be affected by the overhaul.
HSBC will concentrate on the Greater China region, rather than Western markets in the 2020s, another source explained.
HSBC Chairman Mark Tucker has spent the last several years restructuring the bank. He appointed Noel Quinn, the interim chief executive, in August, as a push to continue strengthening the bank through new, innovative cost-cutting measures.
The strategy by HSBC could cut at least 45 traders in New York.
Read the entire article
October 9, 2019
The Surge In "Surprise" Medical Bills Bankrupting Americans Can Be Blamed On Private Equity
Surging "surprise" medical bills in the U.S. are private equity's fault, a new FT opinion piece claims.
These "surprise" medical bills continue to be a major talking point in the U.S. and are likely to be a key issue during the upcoming 2020 Presidential race. The term refers to invoices that are generated after a patient is admitted to the hospital and treated, without their knowledge, by someone not in their insurance plan.
And a recent Stanford study shows that these "surprise" bills continue to become more ubiquitous. They are up from about 33% of visits in 2010 to almost 43% in 2016. For inpatient stays, the number is even more alarming: the jump goes from 26% to 42%, with the average cost per patient rising from $804 to $2,040. It's an issue that only adds to the overwhelming debt bubble we have again created in the U.S.
The opinion piece notes that these rising costs come not from hospitals, but rather from the "backwaters of the financial markets":
The prices of junk bonds issued by “physician services companies” have been sliding in the past month as their owners weigh the possibility and costs of political intervention. These point to the real source of the problem: private equity’s silent colonisation of parts of the healthcare profession.
Read the entire article
These "surprise" medical bills continue to be a major talking point in the U.S. and are likely to be a key issue during the upcoming 2020 Presidential race. The term refers to invoices that are generated after a patient is admitted to the hospital and treated, without their knowledge, by someone not in their insurance plan.
And a recent Stanford study shows that these "surprise" bills continue to become more ubiquitous. They are up from about 33% of visits in 2010 to almost 43% in 2016. For inpatient stays, the number is even more alarming: the jump goes from 26% to 42%, with the average cost per patient rising from $804 to $2,040. It's an issue that only adds to the overwhelming debt bubble we have again created in the U.S.
The opinion piece notes that these rising costs come not from hospitals, but rather from the "backwaters of the financial markets":
The prices of junk bonds issued by “physician services companies” have been sliding in the past month as their owners weigh the possibility and costs of political intervention. These point to the real source of the problem: private equity’s silent colonisation of parts of the healthcare profession.
Read the entire article
October 1, 2019
"It’s Almost Impossible To Buy": Japanese Bond Crash, Margin Call Send Shockwaves Around The Globe
For a dramatic preview of what will happen in a flash to all those record low interest rates without the backstop of central banks and ravenous pension fund, look no further than what happened in Japan overnight, where bond futures suffered the biggest one-day crash since August 2, 2016, sliding as much as 0.97 yen to 154.05, and triggering margin calls for investors after the worst 10-year debt auction in three years.
More ominously, once the rout started it quickly spread outside of Japan, because as yields jumped, the sell-off spilled into US Treasuries and European debt.
There were three things behind the swift collapse: the first catalyst was the Bank of Japan’s Monday decision to slash bond purchases in October for the four major maturity buckets in order to steepen the curve and avoid further flattening which Kuroda has repeatedly expressed concern about in the past; the BOJ had indicated it may even stop buying debt of more than 25 years. It also sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October.
"The BOJ is showing its clear intention to correct distortions in the curve through flexible adjustments in market operations,” said Mari Iwashita, chief market economist at Daiwa. "While cutting the lower end of purchases in bonds maturing over 25 years to zero looks shocking, the BOJ will probably cut buying in this zone slowly."
Read the entire article
More ominously, once the rout started it quickly spread outside of Japan, because as yields jumped, the sell-off spilled into US Treasuries and European debt.
There were three things behind the swift collapse: the first catalyst was the Bank of Japan’s Monday decision to slash bond purchases in October for the four major maturity buckets in order to steepen the curve and avoid further flattening which Kuroda has repeatedly expressed concern about in the past; the BOJ had indicated it may even stop buying debt of more than 25 years. It also sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October.
"The BOJ is showing its clear intention to correct distortions in the curve through flexible adjustments in market operations,” said Mari Iwashita, chief market economist at Daiwa. "While cutting the lower end of purchases in bonds maturing over 25 years to zero looks shocking, the BOJ will probably cut buying in this zone slowly."
Read the entire article
September 30, 2019
UK's Metro Bank Teeters after Bond Sale Fails. Shares Collapsed 95%
Hedge-fund manager Steven Cohen and Michael Bloomberg are among those ruing the day they bought the crushed shares of the UK bank touted as a "bargain"...
Even by its own recent standards, Metro Bank has had a torrid week. On Monday, shares of the British retail bank tumbled 5%, on Tuesday, 25%, on Wednesday, 5%, and on Thursday, 4.5%, before staging a brief comeback in the final hours of trading on Friday, to end the week 35% lower. By Friday morning, it was the second most-shorted stock on the FTSE all shares index, behind the collapsed travel & vacation-giant Thomas Cook.
The main trigger for this week’s rout was the bank’s failure on Monday to raise a much-needed £250 million by issuing non-preferred bonds that deeply skeptical investors spurned. Despite trying to lure buyers with an interest rate of 7.5%, double the rate of similar offerings, Metro only attracted £175 million worth of orders, prompting the embattled lender to pull the plug on the bond sale.
“Failure to get enough support for a product that is yielding 7.5% is quite remarkable when you consider how investors are struggling to find generous levels of income in the current market,” said Russ Mould, the investment director of AJ Bell.
“It suggests that investors don’t trust the bank or they believe the 7.5% yield is simply not high enough to compensate for the risks of owning such a product.”
Read the entire article
Even by its own recent standards, Metro Bank has had a torrid week. On Monday, shares of the British retail bank tumbled 5%, on Tuesday, 25%, on Wednesday, 5%, and on Thursday, 4.5%, before staging a brief comeback in the final hours of trading on Friday, to end the week 35% lower. By Friday morning, it was the second most-shorted stock on the FTSE all shares index, behind the collapsed travel & vacation-giant Thomas Cook.
The main trigger for this week’s rout was the bank’s failure on Monday to raise a much-needed £250 million by issuing non-preferred bonds that deeply skeptical investors spurned. Despite trying to lure buyers with an interest rate of 7.5%, double the rate of similar offerings, Metro only attracted £175 million worth of orders, prompting the embattled lender to pull the plug on the bond sale.
“Failure to get enough support for a product that is yielding 7.5% is quite remarkable when you consider how investors are struggling to find generous levels of income in the current market,” said Russ Mould, the investment director of AJ Bell.
“It suggests that investors don’t trust the bank or they believe the 7.5% yield is simply not high enough to compensate for the risks of owning such a product.”
Read the entire article
September 10, 2019
After $74BN Weekly Record, Bond Boom Continues With Another $14 Billion In New Debt Borrowing
Ever since a thunderous start to September's bond calendar, which saw a record 20 companies issue $26 billion in record cheap investment grade debt in a single day, corporate America has been on a historic bond selling spree to lock in ultra-low rates and refi existing debt (making Wall Street i-bankers quite happy in the process). For the entire week, companies borrowed a total of $75 billion in investment-grade paper, the most for any comparable period since records began in 1972. Since Tuesday, corporations including Coca-Cola, Walt Disney, and Apple sold notes as yields have dropped.
The frenzy isn’t letting up. According to Bloomberg and Bank of America, at least another $50 billion is projected for the rest of the month, with the activity expected to spill over to junk bonds and leveraged loans as well, and not even today's Ford downgrade to junk affecting $84 billion in debt, is expected to put a damper on the party.
The reason for the bond issuance frenzy? Rates have never been lower - according to Bloomberg Barclays index data, the average yield on bonds was 2.77% as of last week, effectively at all time lows, and almost 2% lower compared to late November, when that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.
"This is a great time for companies to refinance,” Christian Hoffmann, a portfolio manager at Thornburg Investment Management, told Bloomberg. "Financing costs are near all-time lows, so I would not be surprised to see better high-yield companies coming to market and treating debt capital markets like a cheap buffet."
As we noted last week, borrowers are taking advantage of the recent drop in rates to refinance their outstanding bonds at lower costs. As BofA noted last week, the new issuance "use of proceeds" has shifted from supporting re-leveraging activities to refinancing in the currently low interest rate environment.
Read the entire article
The frenzy isn’t letting up. According to Bloomberg and Bank of America, at least another $50 billion is projected for the rest of the month, with the activity expected to spill over to junk bonds and leveraged loans as well, and not even today's Ford downgrade to junk affecting $84 billion in debt, is expected to put a damper on the party.
The reason for the bond issuance frenzy? Rates have never been lower - according to Bloomberg Barclays index data, the average yield on bonds was 2.77% as of last week, effectively at all time lows, and almost 2% lower compared to late November, when that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.
"This is a great time for companies to refinance,” Christian Hoffmann, a portfolio manager at Thornburg Investment Management, told Bloomberg. "Financing costs are near all-time lows, so I would not be surprised to see better high-yield companies coming to market and treating debt capital markets like a cheap buffet."
As we noted last week, borrowers are taking advantage of the recent drop in rates to refinance their outstanding bonds at lower costs. As BofA noted last week, the new issuance "use of proceeds" has shifted from supporting re-leveraging activities to refinancing in the currently low interest rate environment.
Read the entire article
August 19, 2019
12 Reasons Why Negative Rates Will Devastate The World
It has been a thesis over 20 years in the making, but with every passing day, SocGen's Albert Edwards - who first coined the term "Ice Age" to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity - is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.
Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan's great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a "Japanification" of every major bond market...
... Edwards said that what bond markets are telling us is "that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high."
Needless to say that's not good, not least of all because we now live in a world in which the bond universe with negative yields continues to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion...
Read the entire article
Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan's great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a "Japanification" of every major bond market...
... Edwards said that what bond markets are telling us is "that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high."
Needless to say that's not good, not least of all because we now live in a world in which the bond universe with negative yields continues to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion...
Read the entire article
June 19, 2019
CEO Of Germany's 2nd Largest Bank: In A Few Years We Will Notice The ECB's Experiment Was A Historical Mistake
“The cultural level of a nation is mirrored by its rate of interest: the higher a people’s intelligence and moral strength, the lower the rate of interest.” Thus declared economist Eugen von Böhm Bawerk, according to Richard Sylla and Sidney Homer’s classic tome A History of Interest Rates. By that logic, Europe is the domain of superhumans, as the overnight deposit rate has resided below zero since June 2014 and at negative 40 basis points since March 2016.
The M.D. overseeing Europe’s monetary affairs has his own version of the Hippocratic Oath. Speaking at the ECB’s annual forum at the resort town of Sintra, Portugal today, ECB president Mario Draghi made waves by suggesting the central bank will impose still lower interest rates:
Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. . . Negative rates have proven to be a very important tool in the euro area.
In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.
The implications are clear. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, told Bloomberg: “Draghi is going to finish his tenure [set to end on Oct. 31] with a cut. The door is now open and I don’t see how they can not walk through it.” Mike Riddell, fund manager at Allianz Global Investors, noted: “The ECB has just handed the bond bulls an ammunition dump.”
Read the entire article
The M.D. overseeing Europe’s monetary affairs has his own version of the Hippocratic Oath. Speaking at the ECB’s annual forum at the resort town of Sintra, Portugal today, ECB president Mario Draghi made waves by suggesting the central bank will impose still lower interest rates:
Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. . . Negative rates have proven to be a very important tool in the euro area.
In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.
The implications are clear. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, told Bloomberg: “Draghi is going to finish his tenure [set to end on Oct. 31] with a cut. The door is now open and I don’t see how they can not walk through it.” Mike Riddell, fund manager at Allianz Global Investors, noted: “The ECB has just handed the bond bulls an ammunition dump.”
Read the entire article
June 14, 2019
Risk on, risk off.
One day after traders were greeted by a sea of green - on potential world war news - we are back to the sea of red as global stocks struggled and safe haven bets were back in play on Friday with German bond yields plumbing record lows after the latest dismal Chinese data dump sparked fears about the health of the global economy and concerns of a new U.S.-Iran confrontation intensified (which, by the way, was somehow bullish for risk yesterday).
Beijing May activity reported overnight was very weak and painted a fairly gloomy picture of the world’s second largest economy as the trade war with the United States starts to bite. May industrial output growth slowed to a more than 17-year low, the weakest since since 2002, and well below expectations, while fixed-asset investment also fell short of forecasts. Retail sales growth accelerated and surprised to the upside however.
Industrial Output for May: 5.0%, est. +5.4% (range +5.1% to +6.4%, 35 economists), down from +5.4% last month.
May retail sales +8.6% y/y; est. +8.1% April +7.2%
Jan.-May fixed-asset investment excluding rural households +5.6% y/y; est. +6.1% (range +5.2% to +6.5%, 34 economists). Jan.-April +6.1%
Read the entire article
One day after traders were greeted by a sea of green - on potential world war news - we are back to the sea of red as global stocks struggled and safe haven bets were back in play on Friday with German bond yields plumbing record lows after the latest dismal Chinese data dump sparked fears about the health of the global economy and concerns of a new U.S.-Iran confrontation intensified (which, by the way, was somehow bullish for risk yesterday).
Beijing May activity reported overnight was very weak and painted a fairly gloomy picture of the world’s second largest economy as the trade war with the United States starts to bite. May industrial output growth slowed to a more than 17-year low, the weakest since since 2002, and well below expectations, while fixed-asset investment also fell short of forecasts. Retail sales growth accelerated and surprised to the upside however.
Industrial Output for May: 5.0%, est. +5.4% (range +5.1% to +6.4%, 35 economists), down from +5.4% last month.
May retail sales +8.6% y/y; est. +8.1% April +7.2%
Jan.-May fixed-asset investment excluding rural households +5.6% y/y; est. +6.1% (range +5.2% to +6.5%, 34 economists). Jan.-April +6.1%
Read the entire article
May 30, 2019
Japan Is About To Sell Its First Ever Junk Bond... With A 1% Coupon
While corporate bond yields have been plumbing ever lower lows in the yield-starved "New Normal", prompting even the world's largest bond fund Pimco to warn that this is the riskiest credit market ever, Japan is about to deliver the proverbial "hold my beer" moment to the entire world.
Aiful, the consumer lender which almost went bankrupt a decade ago, is preparing to sell Japan’s first ever yen-denominated "high yield" - and in this case we use the term very, very loosely - in the public markets, showing how desperate for yield local investors are, and how much risk they are willing to take in exchange for virtually no return, as negative interest rates have now become the new normal.
What is most remarkable about the bond sale in the country where the 10Y yield has been trading mostly in negative territory for over half a decade, is that the 18 month yen junk bond is set to price on Friday with a coupon of, wait for it, 1%.
Another unique aspect of the upcoming issuance is that it is taking place in the first place. As Bloomberg notes, the junk bond offering will be historic for Japan's bond market, where companies haven’t felt compelled to sell below investment grade notes as they’ve traditionally had close ties with banks, who tend to be more forgiving than bondholders in tough times.
Read the entire article
Aiful, the consumer lender which almost went bankrupt a decade ago, is preparing to sell Japan’s first ever yen-denominated "high yield" - and in this case we use the term very, very loosely - in the public markets, showing how desperate for yield local investors are, and how much risk they are willing to take in exchange for virtually no return, as negative interest rates have now become the new normal.
What is most remarkable about the bond sale in the country where the 10Y yield has been trading mostly in negative territory for over half a decade, is that the 18 month yen junk bond is set to price on Friday with a coupon of, wait for it, 1%.
Another unique aspect of the upcoming issuance is that it is taking place in the first place. As Bloomberg notes, the junk bond offering will be historic for Japan's bond market, where companies haven’t felt compelled to sell below investment grade notes as they’ve traditionally had close ties with banks, who tend to be more forgiving than bondholders in tough times.
Read the entire article
November 5, 2018
Mortgage Bonds Suffer Worst Month In 2 Years As 'Marginal Buyer' Fed Pulls Out
Mortgage bond investors are about to become reacquainted with 'moral hazard' and its inevitable consequences.
As the Federal Reserve continues to pull out of US Treasury's and mortgage bonds (the Fed entered its "peak" monthly unwind phase in Q4, where it will allow up to $30 billion and $20 billion in MBS to roll off and on Oct. 31 its balance sheet declined by more than $33 billion, the largest one-week drop since the start of QE), holders of housing bonds who had grown accustomed to steady returns in a rigged market endured their biggest shellacking in 2 years, as Bloomberg pointed out in a story published Friday.
And while at least one prominent bond investor pointed out that Bloomberg's warnings about a "bloodbath" in MBS may have been exaggerated...
...the story's central premise that the retreat of the bond market's 'marginal buyer' is creating headaches for complacent bond bulls is certainly valid, as we've said before. It only takes a quick glance at the 10-year-yield vs. the Fed's balance sheet expansion/unwind to spot the dangers that could lie ahead.
Now, as the Fed-generated tidal wave of liquidity slows to a trickle and the central bank looks to unwind some $1.7 trillion in MBS holdings, "savvy" bond bulls are stuck asking themselves: who the hell is going to step in and stop the bleeding once liquidity dries up further and mortgage bonds continue to fall?
The answer isn't immediately clear.
Read the entire article
As the Federal Reserve continues to pull out of US Treasury's and mortgage bonds (the Fed entered its "peak" monthly unwind phase in Q4, where it will allow up to $30 billion and $20 billion in MBS to roll off and on Oct. 31 its balance sheet declined by more than $33 billion, the largest one-week drop since the start of QE), holders of housing bonds who had grown accustomed to steady returns in a rigged market endured their biggest shellacking in 2 years, as Bloomberg pointed out in a story published Friday.
And while at least one prominent bond investor pointed out that Bloomberg's warnings about a "bloodbath" in MBS may have been exaggerated...
...the story's central premise that the retreat of the bond market's 'marginal buyer' is creating headaches for complacent bond bulls is certainly valid, as we've said before. It only takes a quick glance at the 10-year-yield vs. the Fed's balance sheet expansion/unwind to spot the dangers that could lie ahead.
Now, as the Fed-generated tidal wave of liquidity slows to a trickle and the central bank looks to unwind some $1.7 trillion in MBS holdings, "savvy" bond bulls are stuck asking themselves: who the hell is going to step in and stop the bleeding once liquidity dries up further and mortgage bonds continue to fall?
The answer isn't immediately clear.
Read the entire article
October 8, 2018
Italian Stocks, Bonds Collapse After EU Rejects Rome's Budget Plans
Italian stocks tumbled with the FTSE MIB dropping 2.3% - the worst performer among major European markets on Monday - and hitting its lowest level since April 2017, while the country's bonds plunged to the lowest level since February 2014 amid what now appears to be an inevitable showdown between Italy and the EU, after the European Commission said Italy’s budget plans are in breach of common rules.
Over the weekend, the European Commission told Italy it is concerned about its budget deficit plans for the next three years since they breach what the EU asked the country to do in July, but a defiant Rome insisted on Saturday it would “not retreat” from its spending plans.
In a letter to Italy’s Economy Minister Giovanni Tria, the Commission said that with a planned headline deficit of 2.4 percent of GDP in 2019, Italy’s structural deficit, which excludes one-offs and business cycle effects, would rise by 0.8 percent of GDP. Under EU rules Italy, which has a public debt to GDP ratio of 133 percent and the highest debt servicing costs in Europe, should cut the structural deficit every year until balance.
“Italy’s revised budgetary targets appear prima facie to point to a significant deviation from the fiscal path” commonly agreed by European Union governments, EU Commissioners Valdis Dombrovskis and Pierre Moscovici wrote in a letter to Italian Finance Minister Giovanni Tria. “This is therefore a source of serious concern,” the commission’s finance chiefs said in their letter Friday responding to a note sent by Tria the day before.
“We call on the Italian authorities to ensure that the Draft Budgetary Plan will be in compliance with the common fiscal rules,” the letter added at the same time as the council of EU ministers asked Italy in July to reduce that structural deficit by 0.6% of GDP next year, which means the deficit would be 1.4 points off track, Reuters reported.
Read the entire article
Over the weekend, the European Commission told Italy it is concerned about its budget deficit plans for the next three years since they breach what the EU asked the country to do in July, but a defiant Rome insisted on Saturday it would “not retreat” from its spending plans.
In a letter to Italy’s Economy Minister Giovanni Tria, the Commission said that with a planned headline deficit of 2.4 percent of GDP in 2019, Italy’s structural deficit, which excludes one-offs and business cycle effects, would rise by 0.8 percent of GDP. Under EU rules Italy, which has a public debt to GDP ratio of 133 percent and the highest debt servicing costs in Europe, should cut the structural deficit every year until balance.
“Italy’s revised budgetary targets appear prima facie to point to a significant deviation from the fiscal path” commonly agreed by European Union governments, EU Commissioners Valdis Dombrovskis and Pierre Moscovici wrote in a letter to Italian Finance Minister Giovanni Tria. “This is therefore a source of serious concern,” the commission’s finance chiefs said in their letter Friday responding to a note sent by Tria the day before.
“We call on the Italian authorities to ensure that the Draft Budgetary Plan will be in compliance with the common fiscal rules,” the letter added at the same time as the council of EU ministers asked Italy in July to reduce that structural deficit by 0.6% of GDP next year, which means the deficit would be 1.4 points off track, Reuters reported.
Read the entire article
August 28, 2018
Barclays Is First Bank To Sell Commercial Paper Linked To Libor Alternative
One month after Fannie Mae became the first issuer to sell debt linked to the Libor alternative, Barclays became the first commercial bank to issue commercial paper tied to the benchmark which regulators hope will replace the scandal-plagued London Interbank Offered Rate, the so-called secured overnight financing rate, or SOFR.
According to Bloomberg, on Friday the British bank sold $525 million of the short-term debt, linked to SOFR, Bloomberg reported and added that the borrowings took place via its flagship asset-backed commercial paper conduit, Sheffield Receivables Corp.
"Investor response was immediate, and fairly broad across different types of investors," Joe Muscari, head of securitized portfolio management at Barclays, said about the bank’s commercial paper deal. "Our support of SOFR with these issuances is just a recognition that this is the direction the industry is headed."
Commenting on the new bond issues, Barclays managing directors Chris Conetta told Bloomberg that "you should expect to see additional SOFR-linked deals across a broad spectrum of issuers. These will likely include bank issuers as well as other types of borrowers in the short-term debt markets. Both issuers and investors have a vested interest in seeing SOFR become an established and liquid market."
Read the entire article
According to Bloomberg, on Friday the British bank sold $525 million of the short-term debt, linked to SOFR, Bloomberg reported and added that the borrowings took place via its flagship asset-backed commercial paper conduit, Sheffield Receivables Corp.
"Investor response was immediate, and fairly broad across different types of investors," Joe Muscari, head of securitized portfolio management at Barclays, said about the bank’s commercial paper deal. "Our support of SOFR with these issuances is just a recognition that this is the direction the industry is headed."
Commenting on the new bond issues, Barclays managing directors Chris Conetta told Bloomberg that "you should expect to see additional SOFR-linked deals across a broad spectrum of issuers. These will likely include bank issuers as well as other types of borrowers in the short-term debt markets. Both issuers and investors have a vested interest in seeing SOFR become an established and liquid market."
Read the entire article
July 31, 2018
US Treasuries, JGBs Rally As Bank Of Japan Shifts To "More Flexible" Bond-Buying Plan
After a few years of relative apathy, today's Bank of Japan statement is greeted with considerable anticipation as it may well have some significant impacts on global markets, judging by the last two weeks' action after hints at BoJ policy shifts.
But the most-watched item in today's statement will be with regard Yield Curve Control (YCC) as recent source articles have suggested that the BoJ will discuss potential policy changes to its YCC framework on the basis of sustainability, not tightening, of monetary policy which could lead to an adjustment of the yield curve target - where the 10Y JGB trades - to allow a long-term natural rise. This is said to be the cause due to the central bank's admission that it may take even longer to hit the 2% price target, and therefore would need to ensure its policy measures can be sustained, while a policy tweak could also help alleviate some of the side-effects from its prolonged ultra-loose policy which has squeezed banks' profits.
And yet, few expect that the BOJ will make an explicit YCC determination today, as an increase in the JGB yield target appears unlikely at a time when it is expected to revise downward its inflation forecast; instead in consideration of the adverse side effects of its policy, the BoJ will likely declare at the end of its statement that, based on its analysis in its quarterly Outlook Report, that it will maintain its easing policy for an extended period but will conduct financial market operations and asset purchasing operations to address the mounting cumulative side effects.
And in case there is a negative reaction to this apparent 'tightening', one likely easing measure to deal with such side effects will include an overhaul of its JPY6 billion ETF purchasing operations, a shift from Nikkei 225-linked ETF to Topix-linked ETF, which would likely spur investors to follow suit in rebalancing their portfolios should this materialize.
And finally, while 'officially' The Bank of Japan has not shifted its bond-buying program's scope, in practice it has been tapering dramatically... forced by liquidity constraints in the market.
Read the entire article
But the most-watched item in today's statement will be with regard Yield Curve Control (YCC) as recent source articles have suggested that the BoJ will discuss potential policy changes to its YCC framework on the basis of sustainability, not tightening, of monetary policy which could lead to an adjustment of the yield curve target - where the 10Y JGB trades - to allow a long-term natural rise. This is said to be the cause due to the central bank's admission that it may take even longer to hit the 2% price target, and therefore would need to ensure its policy measures can be sustained, while a policy tweak could also help alleviate some of the side-effects from its prolonged ultra-loose policy which has squeezed banks' profits.
And yet, few expect that the BOJ will make an explicit YCC determination today, as an increase in the JGB yield target appears unlikely at a time when it is expected to revise downward its inflation forecast; instead in consideration of the adverse side effects of its policy, the BoJ will likely declare at the end of its statement that, based on its analysis in its quarterly Outlook Report, that it will maintain its easing policy for an extended period but will conduct financial market operations and asset purchasing operations to address the mounting cumulative side effects.
And in case there is a negative reaction to this apparent 'tightening', one likely easing measure to deal with such side effects will include an overhaul of its JPY6 billion ETF purchasing operations, a shift from Nikkei 225-linked ETF to Topix-linked ETF, which would likely spur investors to follow suit in rebalancing their portfolios should this materialize.
And finally, while 'officially' The Bank of Japan has not shifted its bond-buying program's scope, in practice it has been tapering dramatically... forced by liquidity constraints in the market.
Read the entire article
July 27, 2018
BOJ Offers To Buy Unlimited Bonds After Bizarre Delay As Yield Surge
While traders' attentions were as usual focused on the latest developments in China last night, around 9pm ET we pointed out that the real action was taking place in Japan, where the 10Y yield had blown out beyond the BOJ's designated range of 0.00%-0.10%...
... and had even crossed into the range above 0.11% where the BOJ traditionally launches its Fixed Rate Operation, also known as Unlimited Buying of JGBs beyond a given rate, something it did most recently on Monday morning (after a 7 month hiatus) when JGB yields also blew out sharply.
Which is why we were wondering when the BOJ would announce the latest "unlimited buying" operation to defend Japanese bonds from a further rout.
And it wasn't just us: so were all bond traders and central bank watchers, and yet the hours passed and still nothing from Kuroda.
Then, finally, just around 1am ET or 4 hours after the rout had started, the BOJ couldn't take it any more and announced the long overdue fixed-rate operation for the second time in 5 days after the 10-year yield rose to its highest level in more than a year.
While the BOJ's latest intervention resulted in a lot of relieved traders as the lack of any intervention almost convinced markets that Kuroda was willing to let the long end JGBs "slide", there was a difference: this BOJ offered to buy 10-year debt at 0.10% vs 0.11% at its previous operations. And also unlike Monday's operation, today the central bank actually did end up buying some 94BN yen worth of 10-year bonds.
Read the entire article
... and had even crossed into the range above 0.11% where the BOJ traditionally launches its Fixed Rate Operation, also known as Unlimited Buying of JGBs beyond a given rate, something it did most recently on Monday morning (after a 7 month hiatus) when JGB yields also blew out sharply.
Which is why we were wondering when the BOJ would announce the latest "unlimited buying" operation to defend Japanese bonds from a further rout.
And it wasn't just us: so were all bond traders and central bank watchers, and yet the hours passed and still nothing from Kuroda.
Then, finally, just around 1am ET or 4 hours after the rout had started, the BOJ couldn't take it any more and announced the long overdue fixed-rate operation for the second time in 5 days after the 10-year yield rose to its highest level in more than a year.
While the BOJ's latest intervention resulted in a lot of relieved traders as the lack of any intervention almost convinced markets that Kuroda was willing to let the long end JGBs "slide", there was a difference: this BOJ offered to buy 10-year debt at 0.10% vs 0.11% at its previous operations. And also unlike Monday's operation, today the central bank actually did end up buying some 94BN yen worth of 10-year bonds.
Read the entire article
July 19, 2018
China Launches Quasi QE To Support Banks And Sliding Bond Market
With the ECB's QE coming to an end at the end of the year (absent some shock to the market or economy), some traders have already been voicing concerns which central bank will step in and provide a backstop to the global fixed income market, especially once the BOJ joins the global tightening bandwagon (something it will soon have to as Japan is rapidly running out of monetizable securities, and just moments ago the BOJ announced it would trim its purchases of bonds in both the 10-25 and 25+ year bucket).
Today one answer emerged when China’s central bank - three weeks after its latest RRR cut - announced further easing measures, including the introduction of incentives that will boost the liquidity of commercial banks, helping them to expand lending and increase investment in bonds issued by corporates and other entities.
And in a surprising twist, in order to make sure that Chinese banks and financial institutions have ample liquidity, the PBOC appears to have engaged in quasi QE - using monetary policy instruments such as its medium term loan facility (MLF) - to support the local bond market and banks, especially those that have invested in bonds rated AA+ and below. Effectively, China will directly fund banks with ultra cheap liquidity, with one simple instruction: "increase bank lending and bond purchases." And since all Chinese banks are essentially state owned, what Beijing is doing is launching a form of stealthy QE, only one where it is not the central bank, but the country's various commercial banks that do the purchases... using central bank liquidity.
As a reminder, one month ago we noted that the spread between China's AAA and AA- rated bonds has spiked in the past three months, blowing out to levels not seen since August 2016, and an indication of the market's growing fears about the recent surge in Chinese corporate defaults.
Read the entire article
Today one answer emerged when China’s central bank - three weeks after its latest RRR cut - announced further easing measures, including the introduction of incentives that will boost the liquidity of commercial banks, helping them to expand lending and increase investment in bonds issued by corporates and other entities.
And in a surprising twist, in order to make sure that Chinese banks and financial institutions have ample liquidity, the PBOC appears to have engaged in quasi QE - using monetary policy instruments such as its medium term loan facility (MLF) - to support the local bond market and banks, especially those that have invested in bonds rated AA+ and below. Effectively, China will directly fund banks with ultra cheap liquidity, with one simple instruction: "increase bank lending and bond purchases." And since all Chinese banks are essentially state owned, what Beijing is doing is launching a form of stealthy QE, only one where it is not the central bank, but the country's various commercial banks that do the purchases... using central bank liquidity.
As a reminder, one month ago we noted that the spread between China's AAA and AA- rated bonds has spiked in the past three months, blowing out to levels not seen since August 2016, and an indication of the market's growing fears about the recent surge in Chinese corporate defaults.
Read the entire article
June 6, 2018
China Offers $72 Billion MLF "To Ensure Banking Liquidity Remains Stable"
Just hours after we warned that it was time to start worrying about China's debt default avalanche, and shortly after the PBOC lowered its credit quality restrictions for collateral, China offered its Medium-term Lending Facility (MLF) to inject CNY463bn (~$72bn) of liquidity.
As we detailed earlier, the recent blow out in Chinese corporate bond spooked none other than the PBOC, which last last Friday announced that it will accept lower-rated corporate bonds as collateral for a major liquidity management tool in a move that analysts see as designed in part to restore confidence in the country's corporate bond market.
Specifically, the central bank said that it had decided to expand the collateral pool for the medium-term lending facility (MLF) to include corporate bonds rated AA+ or AA by domestic rating agencies. The central bank also added as collateral financial bonds rated AA and above with proceeds to support rural development, small enterprises and green projects, as well as high-quality loans supporting green projects and small enterprises, the PBoC said in a statement posted on its website.
The PBoC said the expansion of collateral would "help alleviate the financing difficulties of small companies and to promote the healthy development of the corporate bond market."
CICC confirmed as much, writing in a note that "the expansion of collateral for MLF, to some extent, is intended to bolster confidence in lower-rated corporate bonds ... and to avoid creating an apparent net financing gap which would impact the real economy."
Translated: the PBOC is providing yet another backdoor bailout to China's latest and greatest distressed sector in hopes of avoiding an avalanche of defaults as credit conditions become increasingly tighter as the PBOC hikes tit for tat with the Fed.
Read the entire article
As we detailed earlier, the recent blow out in Chinese corporate bond spooked none other than the PBOC, which last last Friday announced that it will accept lower-rated corporate bonds as collateral for a major liquidity management tool in a move that analysts see as designed in part to restore confidence in the country's corporate bond market.
Specifically, the central bank said that it had decided to expand the collateral pool for the medium-term lending facility (MLF) to include corporate bonds rated AA+ or AA by domestic rating agencies. The central bank also added as collateral financial bonds rated AA and above with proceeds to support rural development, small enterprises and green projects, as well as high-quality loans supporting green projects and small enterprises, the PBoC said in a statement posted on its website.
The PBoC said the expansion of collateral would "help alleviate the financing difficulties of small companies and to promote the healthy development of the corporate bond market."
CICC confirmed as much, writing in a note that "the expansion of collateral for MLF, to some extent, is intended to bolster confidence in lower-rated corporate bonds ... and to avoid creating an apparent net financing gap which would impact the real economy."
Translated: the PBOC is providing yet another backdoor bailout to China's latest and greatest distressed sector in hopes of avoiding an avalanche of defaults as credit conditions become increasingly tighter as the PBOC hikes tit for tat with the Fed.
Read the entire article
May 3, 2018
Are Russian Bonds Toxic Waste Or Golden Eggs?
One man’s toxic waste is another man’s golden goose. A new round of economic sanctions imposed on Russia last month by the U.S. is creating havoc in investment circles. A recent article by Ben Aris at Russia Insider describes Russian debt assets as ‘toxic waste again.’
That doesn’t mean these Russian debt assets actually are bad investments, just that those who currently hold them have to get rid of them because the rules have changed.
And they are no longer legally allowed to own them.
Because of that what were one minute the darling of the investment world instantly turned into garbage, selling if anyone can find a buyer at discounts even Crazy Eddie would blanche at.
All the previous sanctions imposed on Russian companies had only affected new securities – listings of new shares or bonds. Existing securities were unaffected.
Not now. The Specially Designated Nationals And Blocked Persons List (SDN List) released on April 6 not only sanctions those listed, it bans any investor with US exposure (European banks with US branches count) from doing any business with the sanctioned names. Investors were supposed sell all their stocks, bonds and debt within 30 days – i.e. before May 7.
This has sent the market for Russian securities into the floor.
Read the entire article
That doesn’t mean these Russian debt assets actually are bad investments, just that those who currently hold them have to get rid of them because the rules have changed.
And they are no longer legally allowed to own them.
Because of that what were one minute the darling of the investment world instantly turned into garbage, selling if anyone can find a buyer at discounts even Crazy Eddie would blanche at.
All the previous sanctions imposed on Russian companies had only affected new securities – listings of new shares or bonds. Existing securities were unaffected.
Not now. The Specially Designated Nationals And Blocked Persons List (SDN List) released on April 6 not only sanctions those listed, it bans any investor with US exposure (European banks with US branches count) from doing any business with the sanctioned names. Investors were supposed sell all their stocks, bonds and debt within 30 days – i.e. before May 7.
This has sent the market for Russian securities into the floor.
Read the entire article
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