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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Borrowers Brave Record Jobless Claims With Bigger, Bolder Sales

    This article by Molly Smith and Hannah Benjamin for Bloomberg may be of interest to subscribers. Here is a section:

    Even as the number of jobless claims soar, companies around the globe are capitalizing on investors’ thirst for debt by moving ahead with larger and riskier bond offerings.

    T-Mobile US Inc. is selling $19 billion of bonds in the year’s second-largest sale, while the high-yield market is coming back to life with three new deals, including one from Tenet Healthcare Corp. T-Mobile and Tenet announced their debt offerings just ahead of what turned out to be 6.6 million more Americans applying for unemployment benefits, double last week’s record. More borrowers like VMware Inc. and Ross Stores Inc. came forward after that, on top of 17 in Europe.

    Issuers are seeing a resurgence in risk appetite, as massive demand for new issues has allowed companies to go bigger and bolder with their debt offerings. Cruise line operator Carnival Corp., though technically investment-grade rated, was able to draw massive demand from high-yield investors for a bond sale that ended up being larger and cheaper than expected. Junk bond funds are expected to see a record inflow this week when Refinitiv Lipper reports data later Thursday, reversing six straight weeks of outflows.

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    Email of the day - on the outlook for banks

    Many thanks for your continuing high-quality service, exemplified by the comprehensive Income ITs spreadsheet you produced yesterday. It will be invaluable for Private Investors such as myself. On a separate topic, do you have any views on the banks in the light of the suspension of dividends? In particular, I see that HSBC shares are approaching chart support from 1997-98 and 2016.

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    'The common enemy'

    Thanks to a subscriber for this credit focused report from Robeco which may be of interest. Here is a section:

    U.K. Virus Aid Package Beats Financial Crisis Stimulus

    This article by Alex Morales, Lucy Meakin and Andrew Atkinson for Bloomberg may be of interest to subscribers. Here is a section:

    The coronavirus crisis has transformed the fiscal landscape at a stroke. Britain was on course for a budget deficit of 55 billion pounds in the fiscal year starting April. Now, according to the Institute for Fiscal Studies, borrowing could be as much as 200 billion pounds as an economy on course to shrink at least 5% this year hammers tax revenue and drives up spending on welfare.

    That could leave the deficit just below the 10% reached in the aftermath of the financial crisis and push up already elevated debt levels.

    The chancellor announced his first economic package to deal with the outbreak when delivering the budget on March 11, unveiling 12 billion pounds of measures to mitigate the effects of the outbreak on the economy.

    As evidence mounted that the crisis was snowballing, he followed up with a 350-billion pound stimulus package comprising government-backed loans as well as 20 billion pounds of grants and tax cuts for struggling companies.

    Then, last Friday, he announced 7 billion pounds of extra welfare spending and said the government would pay 80% of salaried employees’ wages up to a maximum of 2,500 pounds a month -- a plan Bloomberg Economics estimates will cost 17.5 billion pounds.

    Announcing further details of the job-retention program today, the Treasury said the government will also cover employers for the National Insurance and minimum auto-enrolment pension contributions of furloughed workers, saving firms 300 pounds a month per employee on average.

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    The Fed's Cure Risks Being Worse Than the Disease

    This article by Jim Bianco for Bloomberg may be of interest to subscribers. Here is a section:

    But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

    CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
    PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
    TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
    SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
    MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

    To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

    So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

    In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

    This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump.

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    Fed Set to Launch Multitrillion Dollar Helicopter Credit Drop

    This article by Rich Miller for Bloomberg may be of interest to subscribers. Here is a section:

    “The Fed has effectively shifted from lender of last resort for banks to a commercial banker of last resort for the broader economy,” said JPMorgan Chase & Co. chief U.S. economist Michael Feroli.

    The coming rain of credit -- historic in both size and scope -- will be made possible by $454 billion set aside in the aid package for Treasury to backstop lending by the Fed. That’s money the central bank can leverage to provide massive amounts of financing to a broad swathe of U.S. borrowers.

    “Effectively one dollar of loss absorption of backstop from Treasury is enough to support $10 worth of loans.” Fed Chairman Jerome Powell said in in a rare nationally-televised interview early Thursday morning. “When it comes to this lending we’re not going to run out of ammunition.”

    He told NBC’s “Today” show that the Fed was trying to create a bridge over what may well be a substantial decline in the economy in the second quarter, to a resumption of growth sometime in the latter half of the year.

    “It’s very hard to say precisely when that will be,” he said. “It will really depend on the spread of the virus. The virus is going to dictate the timetable here.”

    While the Fed can help by keeping interest rates low and ensuring the flow of credit, “the immediate relief” for Americans will come from the Congressional aid package, Powell said. The bill includes direct payments to lower- and middle-income Americans of $1,200 for each adult and $500 for each child.

    Combined with an unlimited quantitative easing program, the Fed’s souped-up lending facilities are set to push the central bank’s balance sheet up sharply from an already record high $4.7 trillion, with some analyst saying it could peak at $9-to-$10 trillion.

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    The Great Leverage Unwind

    This note from Guggenheim may be of interest to subscribers. Here is a section:

    In addition to Troubled Asset Relief Program (TARP)-like programs to assist companies and industries, there is no other choice but for the Fed to step up to keep markets functioning. That’s why I’ve been saying that we would need to see about $4.5 trillion of quantitative easing (QE) before everything was resolved. This is in addition to emergency lending through the discount window, dealer repo operations, central bank liquidity swaps, and the Commercial Paper Funding Facility, Primary Dealer Credit Facility, and Money Market Mutual Fund Liquidity Facility. That would take the Fed’s balance sheet to at least $9 trillion, or about 40 percent of last year’s gross domestic product (GDP). That might sound like an alarmingly big number, but to put it in perspective the Bank of Japan’s balance sheet is the equivalent of 105 percent of GDP. So, the United States is a piker on QE.

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    Canceled Stock Buybacks Mount, and They May Not Return for Years

    This article by Phil Serafino, Kasper Viita and Sarah Ponczek for Bloomberg may be of interest to subscribers. Here is a section:

    The comment suggested his distaste for the practice predates the coronavirus outbreak and echoed criticism from Democratic presidential candidates who have long viewed buybacks as a waste and social ill.

    “When we did a big tax cut and when they took the money and did buybacks, that’s not building a hangar, that’s not buying aircraft, that’s not doing the kind of things that I want them to do,” Trump said on Friday. “We didn’t think we would have had to restrict it because we thought they would have known better. But they didn’t know better, in some cases.”

    Trump said he would support a prohibition on buybacks for companies that receive government aid. The five biggest U.S. airlines -- prime targets for bailout funds -- spent 96% of their free cash flow on repurchases over the last decade, money that could have been used to build rainy-day funds. Overall
    buybacks started to slow in the first couple of months of the year in the U.S., when they were $122 billion in January and February, down 46% from a year earlier in the slowest start to the year since 2009.

    While some viewed share repurchases as one of the driving forces behind the bull market, the practice was constantly criticized, particularly in populist circles. Companies were simply inflating their stock prices inorganically, using cheap money in the process, so the argument went, exacerbating wealth inequality as the ultra-rich cashed out.

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    Near-Zero Liquidity in S&P Futures Means 'Slippage' Risk Is High

    This article by Sarah Ponczek for Bloomberg may be of interest to subscribers. Here it is full:

    Liquidity is vanishing for U.S. equity futures. Traders of S&P 500 e-minis are now only offering to buy or sell a few contracts at a time -- often numbering in the single digits -- compared with an average of more than 1,000 just a month ago, data from Deutsche Bank Asset Allocation show.

    Drastically thin markets are alarming because they can fuel outsize price swings. With futures markets being halted almost every day in the wake of wild swings, the lack of liquidity is so severe now that it’s fueling concern even among the pros who’ve lived through the worst market crashes in history.

    “There’s no liquidity in any market,” said Rick Bensignor, the founder of Bensignor Group and a former strategist for Morgan Stanley, who has traded the futures market for 40 years. “When you’re talking about restructuring a portfolio too, you have to think about the potential slippage that’s involved to get anything done.”

    Of course it’s no surprise that markets would thin out when investors, strategists, and economists alike are unsure of the ultimate impact of the coronavirus pandemic. And it’s not clear if the low liquidity may be feeding upon itself -- i.e., are traders staying away because liquidity is so horrible, or is it just a natural side effect caused by all the uncertainty?

    “‘Thinly traded’ now an understatement considering how much liquidity in futures market has collapsed,” tweeted Liz Ann Sonders, the chief investment strategist at Charles Schwab. U.S. contracts hit exchange-mandated halts for the ninth time in 10 days overnight Sunday, before an announcement of unlimited quantitative easing from the Federal Reserve ignited gains that lasted just 20 minutes before turning negative again.

    Strategists at JPMorgan Chase & Co. have estimated liquidity in U.S. futures markets is seven times worse than the poorest levels during the financial crisis. According to Bensignor, typically when it comes to size, anywhere from 200 to 500 blocks trade on both the bid and offer side of a wager at every tick. Watching his screen Monday morning, there were fewer than 10.

    “You are going to have to deal as you restructure portfolios,” he said in an interview on Bloomberg Television. “You’re also going to have to realize that doing so is going to cost a lot of money compared to what you had to do in the past, where you could basically just do it for no cost because of the liquidity.”

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