Email of the day on quantitative tightening
What is your opinion on the latest figures of the Fed's policy of quantitative tightening?
David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income
JPMorgan Sees 'Vicious Cycle' as Top China Trust Misses Payment
This article from Bloomberg may be of interest. Here is a section:
Missed payments on multiple high-yield investment products by a major Chinese shadow lender may trigger a “vicious cycle” for property developers’ financing and more delinquencies for trust products, JPMorgan Chase & Co. warns.
Liquidity stress is intensifying for indebted developers and their non-bank creditors after a unit of Zhongzhi Enterprise Group Co., one of China’s largest private wealth managers, failed to deliver on-time payments for multiple products, the US bank’s analysts including Katherine Lei wrote in a report Monday.
About 2.8 trillion yuan ($386 billion), or 13% of China’s total trust assets, may see rising default risks, given their exposure to the property industry and local government debt, the report says. Up to 80% of local government financing vehicles may not be able to repay their debt principals, JPMorgan estimated.
“The trust defaults may set off a vicious cycle on POE (privately-owned enterprise) developers’ onshore debt,” the analysts wrote. “This follows that rising concern of developer defaults weakens investment sentiment and, as a result, trust companies may not be able or willing to roll over existing real estate-related products.”
UBS Ends $10 Billion State Backstop That Helped Seal Merger
This article from Bloomberg may be of interest. Here is a section:
The decision offers reassurance on “the health of the Credit Suisse non-core portfolio,” Citigroup analysts said in a note. “The early voluntary repayment could potentially also help in other matters, such as negotiating the retention of the Credit Suisse Swiss business.”
The fate of the Swiss bank has been widely watched as Swiss-based companies and politicians have voiced concerns over the market power that the combined bank would exercise. UBS plans to make a decision in the third quarter on whether it will fully integrate it with its own Swiss unit or seek another option such as spinning it off or listing it publicly.
WeWork's "Substantial Doubt" Over Future Marks Stunning Fall
For the past four years, WeWork Inc. has been trying to deliver a turnaround story — one in which the rowdy co-working startup transforms into a stable, profitable public company. It sloughed off Adam Neumann, its rambunctious co-founder and former chief executive officer, and replaced him with an industry veteran boasting a reputation of saving troubled real estate companies.
WeWork was not saved, and the co-working company now says there’s “substantial doubt” it will even be able to stay in business.
The New York-based company is bleeding cash, and customers of its office rentals are canceling their memberships in droves, WeWork said in a statement Tuesday. Its shares fell 26% in the first minutes of trading Wednesday morning.
Borrowers Flock to Bonds as Fed's Anti-Inflation Vow Hits Loans
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The high-yield bond market is becoming a favorite of companies that once raised cash using leveraged loans, luring borrowers with lower costs and a wealth of investor demand.
US firms have sold $55 billion of secured notes in the junk-bond market so far in 2023, marking a 17% year-over-year increase, according to CreditSights data. It’s the biggest issuance jump in more than a decade — and an indication that companies are replacing floating-rate debt in the wake of the Federal Reserve’s most-aggressive monetary tightening cycle in decades.
“It’s a good way to balance each of these markets off each other, and honestly, a better cost of capital,” said John Cokinos, global head of leveraged finance at RBC Capital Markets. “You can hedge naturally by just having fixed-rate debt.”
UK House Price Declines Deepen as Borrowing Costs Cut Demand
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British home prices fell further last month as borrowing costs held back demand, one of the largest mortgage lenders said, although the rate of decline showed a chance that the market could yet avoid a hard landing.
The Nationwide Building Society said prices fell 3.8% in its July survey from a year ago, quicker than a 3.5% drop in the previous month. While economists expected a slightly larger decline of 4%, it was the third straight month that prices had fallen at their fastest pace since the global financial crisis
in 2009.
The first hard data about July home prices indicate the 13 interest-rate increases from the Bank of England since the end of 2021 have strained consumer’s ability to pay for properties. Values based on Nationwide’s data have fallen about 4.5% since they peaked in August and now average £260,828 ($334,000).
Still, prices have so far avoided the collapse that appeared possible last autumn, when then-Prime Minister Liz Truss’s ill-fated budget sent borrowing costs soaring to 14-year highs. In November, Nationwide warned of a potential 30% drop in prices in a worst-case scenario.
Chile fires the starting gun on EM easing cycle
This article from Schroders may be of interest. Here is a section:
The decision by policymakers to cut rates by a consensus-busting 100bp to 10.25% on Friday made Chile the first major EM to lower its key policy rate since the aggressive post-pandemic tightening cycle across the emerging world. With the economy struggling, a marked improvement in the outlook for inflation encouraged policymakers to get on with the job of reversing past hikes that saw Chile’s policy rate climb from just 0.5% in mid-2021 to a peak of 11.25% in late-2022.
As we noted earlier this year, further steep declines in inflation, led by food, should make space for additional easing in the months ahead.
Who’s next?
Attention now turns to which EM central banks are likely to be the next to start cutting rates. Prior to lowering rates on Friday, the CBC was one of a handful of EM central banks that had already been on pause for longer than usual. Others in that category include Brazil and the Czech Republic, where monetary policy announcements are due this week on Wednesday and Thursday respectively.
Sunak Suffers Twin Election Blows in Effort to Revive Tory Hopes
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Sunak and his team had downplayed their chances in the three special elections in very different districts, arguing that even winning one would represent a victory given governments are often given a kicking in mid-term votes. The prime minister is eyeing holding the next national vote in November 2024 to allow Britain’s ailing economy as much time as possible to recover, a person familiar with his thinking told Bloomberg.
Economic data has begun to turn this week with a bigger-than-expected inflation drop, while figures published Friday show government borrowing undershot official forecasts — potentially giving Chancellor of the Exchequer Jeremy Hunt room for tax cuts.
The prime minister told reporters in Uxbridge the Conservatives will take encouragement from the result there, arguing it shows the outcome of the general election “is not a done deal.”
In London, New York and Paris, a Giant Office Bet Goes Wrong
This article from Bloomberg may be of interest to subscribers. Here is a section:
Investors have also been shielded slightly by Europe’s approach to real-estate valuations, which doesn’t take market sentiment into account. With sales largely frozen, there have been few deals to measure the true decline in values. Inflation-linked rent increases have helped as well.
Nonetheless, opportunists are circling, ready to offer expensive new debt to refinance buildings whose owners can’t inject capital. Oaktree and other alternative-finance providers have held talks with Korean asset managers about large loan facilities to let landlords restructure investments, according to a person familiar with the discussions. Oaktree declined to comment.
Funds under pressure to extend the maturity of their borrowings are looking to inject more capital or inviting mezzanine investment rather than dumping assets on the cheap, says Yoon at Savills, who adds that a few have pulled sales. Increasingly, however, owners are following No. 1 Poultry’s path and having another crack at selling after several failed attempts last year — as seen with the rush for the exit in London.
In Seoul, meanwhile, there’s deepening unease about how the endgame will play out for domestic investors. “With overseas commercial real-estate assets declining, there are significant concerns about distress,” says Oh.
Inflation at 3% Flags End of Emergency, Turning Point for Fed
This article from Bloomberg may be of interest to subscribers. Here is a section:
None of this means it’s game over in the fight against price pressures — especially for the Fed, which is widely reckoned to be locked-in to another interest-rate increase later this month. Still, there’s now a better-than-even chance that a July 26 hike, which would take the benchmark US rate to 5.5%, could be the last in quite a while.
That’s the way markets were betting after Wednesday’s data. Yields on short-term Treasury yields plunged, stocks rose, and the dollar was headed to the lowest in more than a year by one measure – all in anticipation that the Fed might ease up.
‘Coming to End’
“The new data could give the Fed reason to debate whether any further rate hikes after this month are needed,” wrote Ryan Sweet, chief US economist at Oxford Economics. “This tightening cycle by the Fed is likely coming to an end.”