1. No category

INSIDE DEBT
PRODUCED BY REUTERS IN PARTNERSHIP WITH ICAP
Thursday, October 23, 2014
CHART OF THE DAY
U.S. MARKETS TODAY
U.S. jobless claims
TODAY’S TOP STORY: Euro zone businesses performed much better
than forecasters expected this month and China's vast factory sector grew
a shade faster, but U.S. manufacturing activity sputtered to its slowest
since July, underscoring the uneven nature of the post-crisis global economy. For more please click here
Click on the chart for full-size image
Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 283,000 for
the week ended Oct. 18, the Labor Department said.
TODAY’S TOP NEWS
 Business activity improves in China, euro zone but
U.S. slips
 U.S. jobless claims data point to firming labor market
 Europe's banks face moment of truth from ECB review
 China's capital outflows not a risk, in line with reforms
 EU seeks clarification on Italy's breach of debtcutting goals
 UK's rebounding economy sees slowing industrial
orders, retail sales
 BoE's Broadbent: market outlook for 'neutral' rates
broadly right
 Bank of Italy sees Q3 GDP contracting slightly
 Spanish unemployment falls again, but economic
outlook less bright
ECON WATCH
FOR FRIDAY OCTOBER 24
ET
02:00
04:30
10:00
10:00
Indicators
DE
GB
US
US
Unit Reuters Prior
GfK Consumer Sentiment ind
GDP Prelim YY
pct
New Home Sls-Units MM mln
New Home Sls Chg MM
pct
8
3
0.47
-
8.3
3.2
0.504
18
TREASURIES: Treasury yields rose to their highest levels in nearly two
weeks as stronger overseas data on business activity reduced jitters
about a year-end slowdown in the global economy, sparking a rally in
stocks and paring safehaven demand for bonds.
 Benchmark 10-year notes were 13/32 lower to yield 2.27 pct.
 The 30-year bond traded down 29/32 for a yield of 3.05 pct.
 The Treasury Department auctioned $7 billion in 30-year Treasury Inflation-Protected Security at a high yield of 0.985 pct. The bid-to-cover
ratio came in at 2.29, which was the weakest level since 2001, analysts
said. The Treasury will sell $93 billion in fixed-rate debt and $15 billion
in two-year floating-rate notes next week.
FOREX: The dollar rallied as investors plowed cash back into riskier asset classes, with an underpinning of promising data from the United
States and better-than-expected manufacturing data in Europe and
China.
 The dollar was up 0.11 pct against a basket of major currencies, trading
at 85.836. It rose 0.94 pct to 108.15 yen.
 The euro climbed 0.97 pct to 136.83 yen.
CORPORATES: Corporate bond spreads tightened after report showing
U.S initial claims suggested firming labor market and separate data
showed improving business activity in China and Eurozone.
 The CDX-IG.22 index tightened by 2 bps to 66 bps.
 New issuers include Fresenius Medical Care, Textron, Sociedad
Quimica and Central Nippon Expressway.
STOCKS: Corporate earnings including Caterpillar's drove Wall Street
higher but stocks pared gains late in the session after reports that a New
York City hospital is running Ebola tests on a healthcare worker who
treated infected patients in West Africa.
 Caterpillar was up 4.97 pct, 3M added 4.4 pct and the S&P industrial
sector climbed 2.18 pct to 458.38.
 AT&T fell 2.4 pct and Yelp slumped 18.6 pct.
 The Dow rose 216.58 points, or 1.32 pct, to 16,677.9, the S&P 500
gained 23.71 points, or 1.23 pct, to 1,950.82 and the Nasdaq added
69.95 points, or 1.6 pct, to 4,452.79.
C & E: Brent jumped after an industry source said Saudi Arabia cut output in September following the summer's tumble in prices.
 In the September world oil supply report of the Organization of the Petroleum Exporting Countries, Saudi Arabia said it pumped 9.7 million
barrels per day, up from around 9.6 million bpd in August.
 U.S. crude gained 1.74 pct to $81.92 per barrel.
 Brent jumped 2.51 pct to $86.86 per barrel.
 Gold was down 0.66 pct at $1232.41 an ounce.
 Reuters-Jefferies index was up 0.77 pct at 273.09.
 For EYE ON ASIA click here
 For MARKET SNAPSHOT click here
 For MARKET SNAPSHOT on Asia click here
 For NEXT UP click here
 For EYE ON LATAM click here
 For DEEP DIVE click here
INSIDE DEBT
October 23, 2014
MARKET SNAPSHOT as of 3:20 pm EST
REPURCHASE AGREEMENTS
G/C
MORTGAGE REPOS
O/N
0.120
O/N
0.140
2-Week
0.130
2-Week
0.150
1-Month
0.110
1-Month
0.140
3-Month
0.120
3-Month
0.170
AGENCY REPOS
i-REPOSM INDEX
O/N
0.140
10:00 AM
0.120
2-Week
0.140
3:00 PM
0.117
1-Month
0.140
3-Month
TREASURIES <5> <500>
BID
ASK
1-Mo Bill
0.015
0.01
3-Mo Bill
0.005
-0.005
6-Mo Bill
0.050
0.045
1-Year
0.100
0.090
2-Year
100.195 100.234
3-Year
100.148 100.188
5-Year
101.188 101.234
7-Year
101.148 101.195
10-Year 100.859 100.922
30-Year 101.625 101.688
YIELD CHANGE
0.015
-0.017
0.005
-0.018
0.051
-0.006
0.101
0.002
0.399
-0.055
0.824
-0.133
1.499
-0.316
1.947
-0.430
2.277
-0.500
3.042
-0.984
IR SWAPS <19901>
SPREAD
2-Year
23.50
27.50
3-Year
20.75
24.75
5-Year
16.00
20.00
7-Year
9.50
13.50
10-Year
12.00
16.00
30-Year
-3.75
0.25
RATE
0.62
0.65
1.03
1.05
1.65
1.67
2.04
2.05
2.39
2.40
3.00
3.00
EQUITIES
U.S. Interest rate swap—yield curve
O/N
1-Month
3-Month
6-Month
12-Month
BID
-
ASK
0.100
0.150
0.200
0.310
0.170
0.240
0.360
0.430
0.082
0.082
0.142
0.092
0.092
-
0.152
10-Year
30-Year
MATURITY
9/27/2017
9/12/2019
-
230.18
71.09
24.97
COMMODITIES
NYMEX
BRENT
SPOT GOLD
PALLADIUM
SILVER
PRICE
CHANGE
82.0
86.8
1230.9
775.5
17.2
1.5
2.1
-9.7
8.0
0.1
EURODOLLAR FUTURES
Nov-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
CLOSE
CHANGE
99.765
99.735
99.450
99.735
98.525
99.005
0.000
-0.005
-0.015
-0.005
-0.060
-0.040
PRICE
120.57
125.23
131.81
CHANGE
0.09
0.16
0.50
CURRENCIES
BID
EBS PRECIOUS METALS
Bid
Ask
SPOT GOLD 1231.26 1232.03
PALLADIUM 1252.49
1260
SILVER
17.2
17.24
ACTIVE FANNIE MAE AGENCIES
TERM COUPON
3-Year
1
5-Year
1.75
7-Year
-
CHANGE
CBOT 5 yr
CBOT 10 yr
CBOT 30 yr
EURODOLLAR DEPOSITS & OIS STRIPS
(ASKED)
ASK
0.100
INDEX
16691.50
4453.93
1952.08
FUTURES
0.130
BID
0.080
DJIA
NASDAQ
S&P 500
FED FUNDS
Open 0.0700
High 0.2300
Low
0.0700
Euro
1.2653
Sterling
1.6025
JP Yen
108.1100
Swiss Franc
0.95
Can Dollar
1.1233
Mexico
13.5377
ASK
1.2656
1.6026
108.1400
0.95
1.1234
13.5398
ACTIVE FREDDIE MAC AGENCIES
YIELD-SPREAD
11.75
8.75
17.75
14.75
-
YIELD
0.935
1.672
-
-
-
-
-
6.625
11/15/2030
6
3
3.1
TERM COUPON
3-Year
0.875
5-Year
0.875
7-Year
1.375
10-Year
2.375
30-Year
6.25
MATURITY
2/22/2017
3/7/2018
05/1/2020
1/13/2022
7/15/2032
YIELD-SPREAD
-10
-13
-23.25
-26.25
-16
-19
1.25
-1.75
13
10
Wrightson ICAPSM Chart of the Day
Active MBS 15YR
CPN
FNMA
2.5
FHLMC
2.5
BID
101.2550
101.2350
ASK
101.2610
101.2410
YIELD
2.113
2.132
Active MBS 30YR
CPN
FNMA
2.5
FHLMC
2.5
GNMA
2.5
BID
96.2130
96.1330
98.0210
ASK
96.2170
96.1370
98.0250
YIELD
2.907
3.654
3.096
2
YIELD
0.9
1.223
2.089
3.033
3.17
INSIDE DEBT
October 23, 2014
TODAY’S TOP NEWS
Business activity improves in China, euro zone but U.S.
slips
U.S. jobless claims data point to firming labor market
New claims for unemployment benefits held below 300,000 for a
sixth straight week last week, suggesting the labor market was
shrugging off jitters over a slowing global economy.
Initial claims for state unemployment benefits increased 17,000
to a seasonally adjusted 283,000 for the week ended Oct. 18,
the Labor Department said. That followed three straight weeks
of declines, which had pushed claims to levels last seen in
2000.
The jobless claims data covered the week during which the government surveys businesses for its monthly reading on nonfarm
payrolls.
The four-week average of new claims fell 18,750 between the
September and October survey periods, pointing to another
month of relatively strong employment growth after nonfarm
payrolls increased by 248,000 in September.
Another report showed a gauge of U.S. economic activity rebounded solidly in September after a flat reading in August. The
Conference Board said that its Leading Economic Index increased 0.8 percent last month after being flat in August.
Euro zone businesses performed much better than forecasters
expected this month and China's vast factory sector grew a
shade faster, but U.S. manufacturing activity sputtered to its
slowest since July, underscoring the uneven nature of the postcrisis global economy.
In China, manufacturers booked more foreign and domestic
orders but activity remained weak.
Markit's Eurozone Composite Flash PMI rose to 52.2 from September's headline reading of 52. While Germany's private sector
saw faster growth this month, France's business slump deepened, with business activity hitting an eight-month low. The
composite output price index slumped to 47.1 from 48.5.
China's flash HSBC/Markit manufacturing PMI edged up to a
three-month high of 50.4 from a final reading of 50.2 in September. In its U.S. report, Markit said manufacturing slowed to its
lowest rate of growth in three months and its gauge of new orders hit its lowest level since January. The "flash" PMI fell to
56.2 from September's final reading of 57.5.
Also, the Markit/JMMA flash Japan Manufacturing PMI rose to a
seasonally adjusted 52.8 in October from a final reading of 51.7
in September.
China's capital outflows not a risk, in line with reforms
China's foreign currency regulator is not concerned by signs of
forex outflows as the economy slows, the country's foreign exchange regulator said, saying a recent decline in forex reserves
is in line with Beijing's policy goals.
China is closely monitoring the impact of any changes in U.S.
monetary policy, amid signs of greater volatility in cross-border
flows, said Guan Tao, head of the department of international
payments at State Administration of Foreign Exchange.
China's foreign exchange reserves, the world's largest, fell by
about $100 billion in the third quarter to $3.89 trillion at the end
of September, central bank data showed.
Some analysts said the decline suggested speculative "hot
money" outflows from China amid increased market jitters about
whether the world's second-largest economy may be at risk of a
sharper slowdown. Guan said the decline in reserves was
mainly caused by a recent rise in the U.S. dollar against other
major currencies, which reduces the dollar value of the proportion of the reserves held in other currencies. "The slowdown in
growth of foreign exchange reserves will become a new normal
and is in line with the direction of reforms," he said.
Europe's banks face moment of truth from ECB review
The euro zone's 130 biggest banks received the European Central Bank's final verdict on their finances after a review aimed at
drawing a line under persistent doubts about the health of the
region's banking sector.
Most lenders already had a good idea of how they had fared in
the region's most comprehensive-ever bank tests before the
results landed around noon, after getting "partial and preliminary" figures from the ECB in recent weeks. But the final numbers were only agreed by senior regulators and supervisors late
on Wednesday. They will not be made public until 1100 GMT on
Sunday, and the ECB has asked banks not to make any disclosures until this point. Reuters reported that Greece's Alpha Bank
had passed the test, and Bloomberg said that Ireland's AIB,
Bank of Ireland and Ulster Bank had passed while Permanent
TSB had failed. The banks have strengthened their balance
sheets by almost 203 billion euros since mid 2013, the ECB
says, which implies that several banks which failed are likely to
have already raised cash to deal with any shortfall.
UK's rebounding economy sees slowing industrial orders,
retail sales
EU seeks clarification on Italy's breach of debt-cutting
goals
Britain's brisk economic recovery is showing more signs of cooling after shoppers bought less, exporters took a hit from
Europe's slump and banks approved the fewest mortgages in
more than a year.
Some of the fall in retail sales was caused by mild weather leading shoppers to put off buying winter clothes, which means
sales may rebound in October. Retail sales volumes fell 0.3
percent on the month, their weakest performance since January, to show growth of 2.7 percent on the year, the Office for
National Statistics said. Industry data showed mortgage approvals in Britain fell in September to their lowest level since July
last year, standing almost 10 percent lower than a year ago.
In a third set of figures, factory export orders in the three
months to October fell to their lowest level since the start of last
year as Europe's slowdown took its toll on British manufacturers. The CBI's quarterly industrial trends survey showed its balance for the volume of export orders fell to -7 in October from a
reading of zero in July.
The European Commission has asked Italy to explain why its
draft budget for next year will breach debt-reduction goals it
promised the European Union, a step that may lead to demands
from Brussels for changes to the spending package.
Italy's 2015 budget proposal showed a "significant deviation"
from its previous plan for achieving a balanced budget in structural terms, or adjusted for the effects of the business cycle,
according to a letter from incoming Jobs and Growth Commissioner Jyrki Katainen released. In the letter to Economy Minister
Pier Carlo Padoan and published on the ministry's web site,
Katainen also said he wanted "to know how Italy could ensure
full compliance with its budgetary policy obligations" in next
year's budget.
In the letter, Katainen, who is a member of both the old and new
commission, said he is seeking "a constructive dialogue with
Italy with the view to come to a final assessment", and requested a response to his queries as soon as Friday.
3
INSIDE DEBT
October 23, 2014
TODAY’S TOP NEWS
(continued)
BoE's Broadbent: market outlook for 'neutral' rates broadly
right
business confidence, seen at the end of last year, stalled in the
summer."
A revision of the first quarter data to show a flat reading rather
than a 0.1 percent drop meant that in narrow, technical terms
Italy avoided recession, normally defined as two consecutive
quarters of negative growth. But the slump remains the most
serious since the Great Depression of the 1930s.
The central bank said that Italy faced a high risk of a prolonged
period of low inflation, posing a risk to efforts to cut its public
debt, the second highest in the euro zone in relation to gross
domestic product.
Market expectations for the levels of interest rates needed to
stabilise Britain's economy seem reasonable, Bank of England
Deputy Governor Ben Broadbent said.
Broadbent said at an economics conference in London that the
so-called 'neutral' interest rate - which affect investment returns
and BoE policy decisions - were likely to stay low for some time
but then eventually to rise.
Asked if the neutral interest rate was currently positive, Broadbent said it was probably negative when adjusted for inflation,
though he declined to put a figure on it. Broadbent reiterated the
BoE's existing position that it would not reduce its 375 billion
pounds of bond holdings until it had raised interest rates some
way above their current record-low level.
Meanwhile the Bank of England said in its blueprint for avoiding
taxpayer bailouts in future financial crises, top managers of a
failed bank would be replaced immediately and creditors told
within two days the losses they will bear.
The lender's top executive management would be fired on the
spot and the bank's liabilities used to pay off losses and recapitalise in a bid to restore confidence and avoid a run. The new
regime comes into effect in January 2015.
Spanish unemployment falls again, but economic outlook
less bright
Spain's unemployment rate fell to its lowest in almost three
years in the third quarter as the services and construction sectors expanded, though the central bank warned weakness
abroad could weigh on the country's economic recovery.
The headline jobless rate fell to 23.7 percent, data from the National Statistics Institute showed.
Spain registered employment growth in three out of four key
sectors, with jobs rising by 108,800 in services, 71,800 in industry and 43,500 in construction, while they fell 73,100 in agriculture, INE said.
The government projects unemployment of 24.2 percent at the
end of this year and by 22.2 percent by the end of 2015.
In seasonally adjusted terms, employment rose 0.36 percent
from a quarter earlier while unemployment fell by 2.1 percent,
INE said.
Separately, the Bank of Spain said it expected growth to have
slowed to 0.5 percent quarter on quarter between July and September, from 0.6 percent a quarter earlier.
It also warned that forecasts of growth of 1.3 percent this year
and 2 percent in 2015 were increasingly under threat.
Bank of Italy sees Q3 GDP contracting slightly
Italy's economy is expected to have contracted in the third quarter of the year as international tensions hit the outlook for exports and household and business confidence dimmed, the
Bank of Italy said.
"According to the indicators available so far, GDP in the third
quarter is likely to have fallen slightly," the central bank said in
its latest economic bulletin for October.
"The outlook for external demand has become more uncertain,
reflecting geopolitical tensions. A recovery in household and
NEXT UP
German industry body cuts 2014 growth forecast to 1.2-1.4
pct
reflected in German export figures, this had, until now, been
more than offset by shipping more to other countries.
It said that if the conflict escalated again and caused disruption
to oil and gas deliveries from Russia, this could have serious
consequences for the German economy.
"The economic prospects have worsened," BDI managing director Markus Kerber said, adding that the economy was primarily
suffering from a lack of investment. He said high unemployment
and weak growth in the euro zone were weakening the investment climate, as were crises in Ukraine and the Middle East.
"Low interest rates and good financing conditions alone are not
currently a guarantee for more investment in Germany," he said.
The German government has also sharply cut its growth forecasts to 1.2 percent for this year and 1.3 percent for next year.
Germany's main industry lobby trimmed its 2014 growth forecast
for Europe's largest economy to between 1.2 and 1.4 percent
but said it did not expect the country to slip into a much-feared
recession.
That compares with the BDI group's September growth prediction of 1.5 percent. At the start of the year, the association had
estimated the economy would grow by 2 percent this year.
The economy had a strong start to the year but contracted in the
second quarter and some economists have cautioned that a
recession could be on the cards. The BDI said the European
Union's sanctions against Russia were partly to blame for its
more downbeat assessment but added that while these were
4
INSIDE DEBT
October 23, 2014
EYE ON ASIA
POLL & PREVIEW
EVENTS
Philippine c.bank keeps rates steady, lowers inflation forecasts
CHINA
 China house prices (yy) for September: Prior 0.5 pct
The Philippine central bank left policy rates unchanged after five
consecutive tightening moves, but it left the door open for more
such steps if risks of higher inflation emerge.
The policy-making monetary board kept the benchmark interest
rate and the rate on its short-term special deposit accounts
steady at 4.0 percent and 2.5 percent, respectively, after it lowered its inflation forecasts for this year up to 2016. It now expects average inflation this year to reach 4.4 percent, and 3.7
percent in 2015. The central bank also sees inflation in 2016 to
be at 2.8 percent.
SINGAPORE
 Manufacturing output (yy) for September: Expected 0.1 pct
Prior 4.2 pct
For Oct 24
POLL & PREVIEW
(continued)
RBNZ governor says high Asian exchange rates hurt
economies
Rises in exchange rates in recent years have hurt Asian economies, but capital controls are not the solution to the problem, the
head of the New Zealand central bank said.
Reserve Bank of New Zealand Governor Graeme Wheeler said
financial links across international borders present challenges
for central bankers setting monetary policy. They cause exaggerated shifts in exchange rates and persistent, damaging deviations from economic fundamentals, he said.
He said the best approach to reducing such pressure was to
increase domestic savings, rather than change the exchange
rate regime or impose capital controls.
Asia FX sentiment improves as fed rate hike views ease,
rupee bets near 5-month high
Sentiment towards emerging Asian currencies improved in the
past two weeks with long positions in the Indian rupee near a
five-month high, a Reuters poll showed, amid views that the
U.S. Federal Reserve will hold off on interest rate hikes for a
longer time.
Bullish bets on the rupee grew to the largest since early June,
according to the survey of 15 currency analysts, as capital inflows were spurred by hopes the new government would be
able to push through more economic reforms. View on the
South Korean won, the Singapore dollar, the Philippine peso
and the Thai baht turned bullish for the first time in about two
months.
Australia cenbank chief says lending standards need to be
carefully watched
Australia's central bank is keeping a close eye on the build up of
credits to housing investors and is still talking to the financial
regulator over what can be done to tighten lending standards,
the head of the Reserve Bank said.
Answering a question after giving a speech titled "Issues in payments systems", Glenn Stevens also said lending standards
need to be closely watched at a time when house prices are
rising quickly and lending competition is increasing.
MARKET SNAPSHOT as of 3:20 pm EST
GOVERNMENT BOND BENCHMARKS
5-Year
Bid
Yield
Australia
99.461
2.867
Japan
99.829
0.135
China
101.875 3.577
Hong Kong 101.410 1.200
Singapore 101.100 1.394
10-Year
Bid
Yield
95.334 3.328
100.141 0.485
102.574 3.815
101.430 1.807
106.560 2.254
INTEREST RATE SWAPS
<SWAPS>
5-Year
10-Year
Bid
Ask
Bid
Ask
3.125
3.185 3.6175 3.6775
AUD
JPY
0.2075 0.2675 0.5875 0.6475
CNY
3.9
4.1
HKD
1.56
1.64
2.18
2.26
TWD
1.58
1.61
INR
KRW
SGD
2.28
1.565
2.32
1.58
7.08
2.535
2.29
FORWARDS 3 months <FORWARDS>
ASIA FUTURES
7.38
2.575
2.315
Close
Change
Bid
Ask
SGX Nikkei 225
15445.00
300.00
JPY
-11.91
-11.71
SGX MSCI Taiwan
326.40
7150.00
365.00
3.10
30.00
0.80
AUD
NZD
HKD
-57.43
-70.9
-5
-56.93
-70.4
-2
8046.00
472.68
13.00
-1.16
SGD
THB
0.15
13.75
0.3
13.9
SGX FTSE China
SGX MSCI Singapore
SGX CNX Nifty
SGX AC ASIA P xJP
DEPOSITS 3 months
<DEPOS>
Bid
0
4.35
2.75
3.75
0.25
0.3125
JPY
CNY
AUD
NZD
HKD
SGD
5
NDF’s 3 months
Bid
<NDFS>
Ask
CNY
0.0158
0.0188
TWD
KRW
INR
-0.086
1059.4
62.09
-0.066
1060.6
62.19
MYR
3.302
3.305
PHP
IDR
44.87
12360
44.91
12410
INSIDE DEBT
October 23, 2014
EYE ON LATAM
LATAM TOP STORIES
LATAM MARKETS TODAY
Brazil's jobless rate drops to 4.9 pct in September
TREASURIES
Mexican 30-Year
Brazil's jobless rate fell slightly in September, setting a new
record for the month and helping President Dilma Rousseff in a
closely fought election campaign just days before the vote.
Brazil's non-seasonally adjusted jobless rate fell to 4.9 percent
in September from a six-month high of 5.0 percent in August,
statistics agency IBGE said. It was the lowest rate for September since 2002. The jobless rate stood at 5.4 percent in September 2013.
The number of Brazilians with jobs remained unchanged from
August and from September last year at 23.1 million. The number of people who failed to find a job was unchanged from August, dropping 10.9 percent from September 2013 to 1.2 million.
Inflation-adjusted wages rose 1.5 percent from September 2013
to an average of 2,067.10 real a month.
Separately, commercial banks in Brazil want the central bank to
ease a reserve requirement before a plan forcing them to boost
the amount of liquid assets on their balance sheets takes effect,
daily newspaper Valor Econômico reported.
According to Valor, which did not say how it got the information,
commercial banks are proposing that 386 billion real parked in
the central bank's coffers as reserve requirements be used to
build up liquidity coverage ratios. Starting in April, lenders will
have to create a minimum reserve of high-liquidity assets to
mitigate the risk of a cash crunch during times of stress in financial markets.
Mexican10-Year
5.92
5 /32
Brazilian10-Year
12.23
-205 /32
Brazilian 5-Year
12.40
-358 /32
Chilean 30-Year
1.16
-15 /32
Chilean 10-Year
0.47
-7 /32
Venezuela 20-Year
16.95
13 /32
Venezuela 15-Year
17.23
12 /32
Venezuela PDVSA 30 year
13.60
27 /36
Venezuela PDVSA 20 year
15.65
-29 /35
Citigroup to return to U.S. court Dec. 2 over Argentine bond
payments
A U.S. judge has scheduled a Dec. 2 hearing to weigh arguments over whether Citigroup Inc should be allowed to process
an expected interest payment by Argentina on bonds issued
under its local laws following its 2002 default.
The hearing before U.S. District Judge Thomas Griesa in Manhattan, set out in an order issued late Wednesday, would come
less than a month before a Dec. 31 interest payment by Argentina on the bonds is due.
Citigroup has said it faces regulatory and criminal sanctions by
Argentina if it cannot process the country's interest payments on
U.S. dollar-denominated bonds issued under Argentine law.
Yield
6.82
Price
-2 /32
EQUITY
MSCI Latin American Index
Close
2973.65
Pct Change
-2.11
Brazil's Bovespa Index
50713.26
-3.24
Mexico's IPC Index
43691.06
0.55
Chile's IPSA Index
3816.88
0.22
Banco do Brasil
24.95
-9.11
Petrobras
15.41
-7.22
Alfa
41.25
3.36
Cemex
16.21
3.18
CURRENCIES
Last
Brazilian Real
2.4976
0.47
Mexican Peso
13.549
-0.03
Chile Peso
583.9
-0.21
Columbian Peso
2056.6
0.18
Peru Sol
2.906
-0.03
LATAM TOP STORIES
Pct Change
(continued)
Argentina says august primary budget surplus 868.7 mln
pesos
Argentina had a primary budget surplus of 868.7 million pesos
in August versus 912.4 million pesos in August 2013, the government said.
In July the surplus was 767.9 million pesos.
Separately, Argentina's economic activity index slumped 1.2
percent in August compared with the same month a year earlier, official data showed, underscoring a slowdown.
The median forecast in a Reuters poll of seven economists had
been for a fall of 0.5 percent in the monthly EMAE economic
activity index. Activity fell 0.9 percent on the month in August,
the data from the INDEC statistics agency showed.
Mexico inflation hits 9-month high in early October
Mexican annual inflation surged early in October to a ninemonth high, further above the central bank's tolerance ceiling,
though the spike was expected to be temporary and wasn't expected to boost borrowing costs.
Mexican inflation for the 12 months through the first half of October was 4.32 percent, data from the national statistics institute
showed. Consumer prices rose 0.50 percent in the first half of
October. Core consumer prices reached 0.12 percent.
Venezuela says to avoid costly foreign borrowing
President Nicolas Maduro said on Wednesday that the South
American OPEC member would avoid more borrowing on international markets because of rising costs as a result of worsening credit risk perceptions.
Maduro, who said there was a "sort of financial, credit, international blockade" on the socialist-run country, repeated earlier
statements that Venezuela was prepared for volatility on global
energy markets.
6
INSIDE DEBT
October 23, 2014
DEEP DIVE Commentary and Analysis
Bond funds stock up on Treasuries in prep for market
shock
LIQUIDITY A WORRY
One trouble is that it's become harder than ever to buy and sell
corporate bonds in the secondary market as new regulations
and capital requirements since the financial crisis forced Wall
Street banks to slash their inventories. That has left a vacuum in
matching buyers and sellers, and bond managers say they don't
want to get caught holding too much of it in a rout.
"Everyone sees the lack of liquidity as a potential risk in the
corporate bond market," said Sumit Desai, the lead analyst for
corporate credit funds at research firm Morningstar Inc. "But
there hasn't been a major event to test the market."
The value of corporate bonds held by U.S. mutual funds has
more than doubled since 2007 to about $1.7 trillion. Corporate
bond issuance during the first nine months of 2014, driven by
rock bottom interest rates, was $954 billion, compared with
$1.08 trillion in the year-ago period, according to the Financial
Industry Regulatory Authority.
Still, trading volumes have stayed about the same, according to
research from BlackRock Inc, the world's largest asset manager.
"Liquidity stinks," Toms said of corporate bonds.
Last week, sales surged of 10-year Treasury notes in a flight to
safety caused by weak signals from the U.S. economy. The
yield on the benchmark note fell below 2 percent as the stock
market gyrated.
Loomis Sayles portfolio manager Matt Eagan said his $19 billion
Strategic Income Fund is close to having a record level of reserves, largely in the form of government bonds. U.S. Treasuries account for about 16 percent of the portfolio, a four-fold increase since the end of 2013, he said.
He said the fund has also cut exposure to the lowest rated corporate junk bonds because he doesn't believe he was getting
paid for the risk he was taking.
"We're giving up some yield to preserve the ability to be flexible," Eagan said.
But he is still hunting for home runs. For a more aggressive
investment strategy, the bond fund manager said he bought
shares from the IPO of Chinese commerce company Alibaba
Group Holding Ltd at $68 and then sold them at $91, for a quick
34 percent gain.
"It definitely added to our performance," said Eagan, who
bought the shares for the Loomis Sayles Strategic Alpha Fund,
which has a mandate to invest in a wide range of fixed income
and stock holdings.
At Fidelity's $10.5 billion Capital & Income Fund, portfolio manager Mark Notkin made a similar play, adding Alibaba to a subportfolio of stocks that make up about 20 percent of the fund's
overall assets. In the third quarter, the fund's stocks outperformed the junk bonds. Alibaba's stock was a top 10 holding in
the fund at the end of September, fund disclosures show.
By Tim McLaughlin
U.S. corporate bond funds this year are adding Treasuries to
their holdings at more than twice the rate of corporate debt amid
concern that the struggling European economy and potential
changes in Federal Reserve policy will drag down profits at U.S.
corporations.
Through September, corporate bond portfolios boosted their
holdings of U.S. government debt by 15 percent, compared with
a 6.5 percent increase in corporate bonds during the same period, according to Lipper Inc data. The funds now hold about
$13 billion in Treasuries, 15 percent more than the $11.3 billion
they held at the end of 2013.
Corporate bond funds typically invest in a range of debt that
includes mortgage-backed securities, U.S. Treasuries and
bonds backed by student loans, credit cards and auto loans.
Some corporate junk bond funds have guidelines that allow
them to buy individual stocks. The move to buy Treasuries,
which are more easily traded than most corporate bonds, show
that managers anticipate market turmoil that could lead to redemption demands from investors.
Matt Toms, head of fixed income at New York-based Voya Investment Management, said he has cut exposure to corporate
bonds in favor of mortgage-backed securities, for example. In
particular, he has reduced corporate debt issued by U.S. financial companies because of their exposure to the weak European
economy. He sees mortgage-backed bonds as more U.S.centric because they are backed by the ability of American
homeowners to make good on their monthly mortgage payments.
"The volatility in Europe could translate more quickly through the
corporate debt issued by U.S. banks," Toms said.
A year ago, the Voya Intermediate Bond Fund's top 10 holdings
included debt issued by Morgan Stanley, JPMorgan Chase & Co
and Goldman Sachs. But more recently, none of those banks'
debt cracked the top 10 holdings of the fund, disclosures show.
Toms, who runs the $1.9 billion Voya Intermediate Bond Fund,
said nearly two-thirds of the portfolio's assets are in government
bonds or government-related securities.
"That's a highly liquid pool," he said.
Michael Salm, co-head of about $60 billion in fixed-income assets at Putnam Investments, said slumping energy prices could
also increase the rate of corporate defaults among junk-rated
energy companies. He also said he sees subtle deterioration on
the balance sheets of corporations outside the financial sector.
He didn't talk about any specific energy companies on the cusp
of default and said company policy prohibits him from talking
about individual securities.
"They're starting to use leverage more, they're starting to do
things that are less bondholder-friendly," said Salm, whose $1.7
billion Putnam Income Fund generated a 6.88 percent return
during the 1-year period that ended Sept. 30. That was fifth best
among core bond funds, according to Lipper.
Some corporations have been issuing new debt to repurchase
more of their own stock, which is viewed as a negative for bondholders. In June Fitch downgraded Monsanto's issuer default
rating to "A-" from "A" after the company announced a new two
year $10 billion share repurchase program. Bond fund managers would rather see the money be invested in activities that
boost cash flow and growth, for example.
To be sure, the average amount of corporate debt in corporate
bond funds rose to 52 percent of current assets from 48.6 percent at the end of last year, according to Lipper, Inc, a unit of
Thomson Reuters.
Fresh turbulence tests post-crisis financial markets
By Lionel Laurent
A dramatic upswing in volatility is putting post-crisis financial
markets to the test, as curbs on banks' ability to take risks and
an increase in technology-driven trading expose potential new
cracks in the system.
While investors and traders say markets have become safer
since the 2008 financial crisis - there is less leverage in the system and banks are better able to withstand shocks - they worry
that the post-crisis rule book has reduced the market's ability to
absorb sharp spikes in buying and selling.
Case in point: last week's sell-off in stocks and lower-rated
bonds, which was attributed to a confluence of factors such as
disappointing data, fears over global growth and anxiety over
7
INSIDE DEBT
October 23, 2014
DEEP DIVE Commentary and Analysis
(continued)
the impact of an eventual rise in U.S. interest rates. It was worsened by a lack of banks and market-makers able to step in and
buy assets that were being dumped.
These worries were most keenly felt in the corporate bond market, which has been a virtual magnet over the past five years for
investors in search of yield at a time of rock-bottom interest
rates.
With the Federal Reserve laying the ground for higher rates,
making parts of the bond market vulnerable to an investor stampede for the exits, volatile price swings are being exacerbated
by the diminished ability of banks to carry securities on their
balance sheet for trading.
So while post-crisis rules designed to make future taxpayerfunded bailouts less likely have limited banks' ability to make
risky bets on their own account, they have also constrained the
basic market-making that can help cushion dramatic price
moves.
"Banks and dealers don't have the risk appetite or the ability to
commit more capital. ... If everyone tries to get out (sell) at the
same time, there could be a bottleneck that develops," said
Constantinos Antoniades, head of fixed income at trading platform Liquidnet.
"The volatility that we saw last week, I suspect, was just the tip
of the iceberg."
the trading environment for corporate bonds was "broken" and
called for a greater variety of trading venues and product types.
"Liquidity has dried up, especially when you're looking at the
fixed income market," said Matthew Coupe, director of regulation and market structure at NICE Actimize.
In the U.S. high-yield bond market, daily trading volume averaged $6.9 billion in 2014 through the end of September, up 23.3
percent from last year's pace, according to the Securities Industry and Financial Markets Association.
Meanwhile, junk bond inventory at U.S. primary dealers has
averaged just over $7 billion over the last 18 months, New York
Federal Reserve data shows, and briefly dropped below $5 billion earlier this summer.
"The major money center banks, which were the major market
makers in high-grade and high-yield bonds, now with their new
capital rules are no longer supporting bond transactions the way
they did in the past," said James Swanson, chief investment
strategist at MFS Investment Management in Boston. "So as the
market is rising, it works pretty well, but if there is a major influx
of sell orders, it is really going to test the market."
Structural issues have also been flagged in other markets, such
as equities, where trading is more automated than in bonds and
where technology has stepped in to fill the gap left by traditional
market-makers.
The rise of high-speed electronic traders and of numerous
anonymous trading venues known as "dark pools" - partly due
to regulations designed to increase competition among exchanges and lower trading costs - have brought their own problems. Analysts cite a lack of transparency and the fragmentation
of trading across several venues that has added to complexity.
"It's not the post-crisis market structure that is triggering these
price movements, but on the other hand it can make them
worse," said Frederic Ponzo, managing partner at consultancy
GreySparks Partners. To read more, click here.
ISSUES MASKED
The problem has been exacerbated by a surge in investor demand for high-yielding assets since 2009.
While banks and brokers' holdings of U.S. corporate debt for
market-making has slumped to 0.89 percent of total outstanding
assets in 2014 from 2.5 percent in 2004, according to TABB
Group data, the market itself has ballooned some 53 percent
since 2008, to around $10 trillion.
Asset-management firm BlackRock warned in September that
INSIDE DEBT is produced by Reuters in partnership with ICAP.
Edited and compiled by Bodhisattya Chakraborty and Subramani Palanichamy in
Bangalore.
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