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Category - Fixed Income

Margin Calls Hit Wall Street Like '30 LTCMs Out There' at Once

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

Margin calls are the likely culprit behind a slump in Treasury futures that sunk a popular hedge fund trade in recent weeks. Funds who had been making highly-leveraged bets on price moves between Treasury futures and bonds saw their positions collapse when investors hit with margin calls sold the contracts.

Some of the recent dollar strength may also have been driven by margin demands. South Korean brokerages who hedge their exposure to structured products with dollar-denominated derivatives positions are facing calls, forcing them to scoop up dollars. In gold, investors liquidating bullion holdings to raise cash have been blamed for the metal’s epic slump.

Wild moves reign among risky assets like corporate bonds and oil -- opening up the possibility of more margin stress.

“Half the people we talk to think the current environment is worse than the financial crisis,” the Wells Fargo strategists wrote.



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Email of the day on where private equity sees opportunity:

Thank you for the excellent commentary received daily! A question for your view - PE industry claims $2trillion "dry powder" available for deployment but can this be LP drawdown commitments which still has to be called & will come from liquidating other investments at current market prices or even defaulting on obligations?



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Reduce/ re-orientate equities, raise cash, favour USD, EUR and CHF

Thanks to Iain Little and Bruce Albrecht for this edition of their Global Thematic Investors’ Diary. Here is a section:

The Coronavirus crisis, the most serious event since the Global Financial Crisis (“GFC”) of 2008/2009, has set in motion a series of governmental policies whose unfortunate effect is to choke both demand and supply in the global economy.  These policies - prudential measures taken by governments united in their desire to appear to be “doing something”- are likely to be worse, economically speaking, than the disease itself.  Relief comes only with the passing of time or the finding of an anti-viral remedy, the latter a distant prospect at this stage.

Earnings news, monetary news, fiscal news and pandemic news are all following the disheartening course that we feared.  An emergency Fed meeting last Sunday, slashing rates to near zero, failed to reassure.  The next day, Wall Street produced the second of 2 record points drops in a week, falling -13%.  Equity markets have fallen by an average of about -30% from their January highs.

Equity markets are now oversold and distorted by panic.  The market finds it hard, if not impossible, to “price” risk when an end to the crisis is undefined and earnings unknown. And what discount rate should one use in a global panic when rates are near zero?  Many stocks trade under “fair value” on “normalized” earnings.  But the risks being taken by governments are such that there may be worse to come: bankruptcies in directly affected sectors like leisure, hospitality, airlines, hotels and “bricks and mortar” retail.  There may even be nationalizations in troubled sectors.  On the other hand, other sectors, also hit hard by the same waves of panic selling, may emerge as new long-term leaders in a changing world where personal safety, health fears, depersonalizing technology and e-commerce may enjoy further and more widespread adoption.



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Fed Starts Dollar-Swap Lines With Nine More Central Banks

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

 

The Federal Reserve established temporary dollar liquidity-swap lines with nine additional central banks,
expanding the rapid roll-out of financial-crisis-era programs to combat the economic meltdown from the coronavirus pandemic.

The new facilities total $60 billion for central banks in Australia, Brazil, South Korea, Mexico, Singapore, and Sweden, and $30 billion each for Denmark, Norway, and New Zealand. The swap lines will be in place for at least six months.

The announcement followed the late Wednesday launch of a Fed facility to support money market mutual funds and comes as part of sweeping emergency measures the U.S. central bank has unleashed to support the economy from the coronavirus.

The Fed already has standing swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.



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Europe Bonds Soar as Lagarde Pledges No Limits to ECB Action

This article by Jana Randow and John Ainger for Bloomberg may be of interest to subscribers. Here is a section: 

The Bank of England followed Thursday with its second emergency cut in borrowing costs this month, taking the benchmark rate to a record-low 0.1%. The BOE also announced a boost in its asset-purchase program target to 645 billion pounds ($752 billion), made up mainly of gilts.

The two decisions mark the latest in an escalating global response to an outbreak widely seen driving the economy into recession. ECB President Christine Lagarde reinforced the message that policy makers will do all they can, saying there are “no limits to our commitment to the euro.”

The program brings the total of the ECB’s planned bond purchases this year to 1.1 trillion euros, its biggest annual amount ever.

“The ECB was forced to react quickly,” Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, wrote in a note to clients. “The new envelope of 750 billion euros should help bring in spreads more lastingly, but it is questionable whether this will be the turning point of the broader financial market rout.



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Global Money Notes #28 Lombard Street and Pandemics

Thanks to a subscriber for this edition of Zoltan Pozsar’s report on global money market liquidity. Here is a section:



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Email of the day on the 10-year - 3-month yield curve spread

the 10yr-3mth graph for US Treasury bills....is it available in the Chart Library? What is its Bloomberg symbol? Thanks in advance for any info.



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Rescue Pledge Triggers Biggest Treasury Bond Rout Since 1982

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

The Treasury market buckled Tuesday at the prospect of a flood of U.S. spending to fend off an economic nightmare.

Yields at the long end of the curve shot higher on Treasury Secretary Steve Mnuchin’s proposal for a $1.2 trillion stimulus package. Rates on 10- and 30-year bonds shot up more than 36 basis points, their biggest one-day increases since 1982, while an iShares ETF tracking Treasuries maturing in 20 or more years sank a record 6.7%. The U.S. 10-year yield, the world’s borrowing benchmark, is now more than 70 basis points above the record low set last week.

The surge in yields is in response to the massive supply pressure on the way, rather than any expectations for a recovery in growth or inflation, said Jon Hill, rates strategist at BMO Capital Markets.

“It’s clear there’s a recession coming, and policy makers need to do everything they can to avoid a depression,” Hill said.

Tuesday’s market reaction also follows emergency steps by the Federal Reserve to support commercial-paper markets and pump more liquidity into the system, and Sunday’s surprise interest-rate cut, which took the target policy rate to near-zero. These efforts have amplified the steepening in the yield curve, as the gap between two- and 10-year yields touched its widest point in two years, at 59 basis points.



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Fed Has Acted Yet Dollar Funding Markets Remain Under Pressure

This article by Alexandra Harris for Bloomberg may be of interest to subscribers. Here it is in full:

Over the past week, the Federal Reserve has hit the U.S. dollar funding markets with a barrage of liquidity and tools to ensure they remain lubricated. Yet indicators of funding stress are still showing pressure.

In an emergency action Sunday, the central bank slashed interest rates to zero, adjusted the parameters of global dollar swap lines, in additional to offering trillions of dollars of liquidity via operations for repurchase agreements. Here’s what some of the key metrics have to say about the level of distress in the financial system:

Despite the Fed action, the repo market remains volatile. At one point during Monday’s trading session, the rate for overnight general collateral was around 2.50%, according to ICAP, which is well above the central bank’s new target range for the fed funds rate of 0% to 0.25%. While the bid-ask spread is now around 2%/1.25%, the central bank said it plans to conduct another overnight repo offering of up to $500 billion.

Cross-Currency Basis Swaps
The Fed on Sunday also lowered the rate on its U.S. dollar liquidity swap lines in coordination with other central banks. As a result, the three-month cross-currency basis for dollar yen -- a proxy for how expensive it is to get the greenback -- briefly spiked to its widest on record Monday in Asian trading before pulling back, according to Bloomberg data since 2011. Strategists at Bank of America believe volatility may persist until the Fed fixes the commercial-paper market and there are “more avenues available to secure USD funding.”

Libor-OIS
The gap between the London interbank offered rate and overnight index swaps expanded Monday to the widest level since 2009, led by an increase in Libor’s three-month tenor.

Widening: QuickTake
Rates on three-month commercial paper for non-financial companies reached the highest level since the financial crisis relative to OIS. This suggests companies may be having difficulty selling commercial paper, as they tend to do during times of stress. As a result, Wall Street strategists expect the Fed to announce a resurrection of a crisis-era facility for commercial paper.



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Fed to Widen Treasury Buying, Expand Repo to Ease Market Strain

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

U.S. stocks trimmed staggering losses of more than 8% earlier in the day as investors absorbed the Fed’s muscular decision.

The buying will include coupon-bearing notes and match the maturity composition of the Treasury market, it said. Ten-year U.S. Treasury yields fell sharply to trade around 0.68%.

“The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities,” the New York Fed said.

Term repo operations in large size have also been added to help markets function, it also said. The New York Fed said it would offer $500 billion in a three-month repo operation at 1:30 p.m. and repeat the exercise tomorrow, along with another $500 billion in a one-month operation, and continue on a weekly basis for the rest of the monthly calendar.



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