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Sat, 27th May 2017

Anirudh Sethi Report

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Archives of “Bond” Tag

US Student Debt Soars to $1.3 Trln, Hurting Household Purchasing Power

US student loans, having boomed in the past 8 years, surged to their all-time highest at an aggregated $1.3 trln, representing roughly 11 percent of total outstanding household debt in the US, with over 7 mln borrowers unable to serve their obligations.

The situation is significantly holding back the improvements in consumer sentiment, offsetting recent improvements in the labour market, and limiting the prospects of US economic growth.

With some 72 percent of the US GDP driven by consumer purchases, the mounting concerns over student loans, especially non-performing loans (NPLs), are becoming an increasingly prominent factor is assessing the prospects of any further economic acceleration. Particularly so, as the Federal Reserve is normalising the US monetary conditions with borrowing costs going up, the issuance of the debt and refinancing of existing loans is now more expensive, and the downside risks of the monetary policy are increasingly prominent in the projected dynamics of the broader GDP expansion.

According to the Federal Reserve Bank of New York, during the past 15 years, the burden of student loans in the US economy has increased from just 3.3 percent of overall household indebtedness in 2003 at $240.7 bln to the current $1.3 trln, or 10.6 percent of total household debt. About 44 mln Americans currently have a student loan to service, and about every sixth borrower has defaulted on their obligations.

Japan’s 10Y Yield Drops Below Zero Again: All Eyes On The BOJ

With every other asset class roundtripping the November election outcome, it was only a matter of time before Japan’s 10Y JGB – which on February 2 briefly peaked above the BOJ’s “yield curve controlling” 0.10% yield ceiling, rising as high as 0.15% to the shock of a market ready to declare that Japan had finally lost control of its bond market – retraced the entire “reflationary” move from 0.0% to 0.1%. And, sure enough, following today’s violent deflationary capitulation moments ago Japan’s JGB 0.1% of 2027 once again dipped back under 0%, sliding as low as -0.003% on Wednesday morning in Japan.

What happens next?

According to traders, focus will turn to whether the BOJ, in pursuing “yield curve control”, will reduce the amount of JGBs it monetizes.  “Amid favorable environment for bonds, focus is on BOJ as whether there will be a reduction in purchase amounts will test the bank’s tolerance for 10-year yield falling into negative,” Katsutoshi Inadome, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, wrote in note according to Bloomberg.

As a reminder, in the BOJ’s latest “rinban” or open market operation, it bought around 280bn yen of 1-to-3, 350bn yen of 3-to-5 and 450bn yen of 5- to-10-year maturities at previous operation. And material declines from these amounts may lead result in the market roiling again, on fears the BOJ is being forced into an involuntary taper by external deflationary forces.

Meanwhile, the USDJPY continues to track treasury yields tick for tick, and as Yujiro Goto, senior FX strategist at Nomura in London said, the “dollar/yen remains top-heavy with yields falling and weak U.S. economic data. It’s hard to take risk aggressively ahead of the French election, keeping it in 108-109 range.”

Which means that while continued declines in Japanese yields are virtually assured all else equal, it will be up to the BOJ to telegraph to the market just how low it will let the 10Y drop. Should Kuroda unveil another “taper”, the result may be the uncoordinated move in global bond markets, leading to a negative feedback loop of JGB selling and TSY bond buying, which incidentally is the worst case scenario for global central bankers whose primary intention over the past year has been to achieve as much rate coordination as possible.

China steel company fails to make interest payment on bond

via Reuters:

China’s Dongbei Special Steel fails to make interest payment on 5-year bond due April 12 – FX trading platform operator

No further details at this stage
earlier in April was this:
  • State-owned Dongbei Special Steel Group Co Ltd said it faces “uncertainties” about paying interest on medium-term notes
  • Owned by the Liaoning provincial government in the country’s “rustbelt” northeast, Dongbei formally entered into a bankruptcy restructuring process in October aimed at recovering a reported $10 billion in debt
  • The company has been at the heart of troubles in China’s debt market, defaulting on nine separate bonds last year, and the province is home to other struggling state steel mills such the Anshan Group and the Benxi Iron and Steel Group.

In First Week Of ECB “Taper”, Draghi Ramps Up Purchases Of Corporate Bonds

In previewing today’s newsflows, Deutsche Bank’s Jim Reid this morning said that “perhaps the most interesting stat today will be the ECB CSPP number which will include 3 days worth (out of 5) of settled secondary purchases under the new tapering regime. A big debate has been as to whether they taper CSPP in line with the PSPP or leave it running at a similar pace. Obviously the latter would be very good for credit technicals.”

Reid said that “for choice I think they do taper CSPP” and added that “we won’t know for sure today but we’ll perhaps get some clues in the size of the purchases. The last two weeks have seen daily numbers of EU335m and 308m respectively down from the average of 365m since the program started so there’s a little clue here that they have been scaling back a touch. We also have to adjust for the slightly below 20% of primary in the number which due to longer settlement periods won’t be under the new regime in today’s number. So an interesting release to follow this afternoon.”

Moments ago the ECB disclosed its “anticipated” first stub week of bond purchases under the tapered regime, when it disclosed that it as of April 7 it held €77.87BN in corporate bonds.

Swiss reserves swell again to new record

With the reliability of a finely-tuned watch, the latest release of foreign-currency reserves held at the Swiss National Bank has shown yet another record, in a sign the central bank continues to swim against the tide.

Reserves swelled to SFr683.2bn ($SFr679.3bn) in March, up by nearly SFr15bn on the previous month.

The euro now trades at SFr1.07. Deutsche Bank thinks the Swiss currency will climb much further from here, taking that rate to parity.

Among the reasons, it says the Swiss authorities may feel some pressure from the US:

The US Treasury looms large, as it is due to release its latest report on the FX policies of US trading partners sometime this month. As argued elsewhere, Switzerland is already closest to meeting all three criteria of currency manipulation. Its current account surplus runs well above 3% of GDP, and the SNB has intervened well in excess of 2% over the past year. In the past, the Treasury acknowledged the constraints on domestic asset purchases given the limits of the Swiss bond market; but such subtleties could fall by the wayside under the Trump administration. Free trade with the US is too important for Switzerland to be risked by continued FX intervention.

In addition, inflation is picking up, and the German bank disputes the idea that the franc is overvalued.

Moody’s places South Africa’s Baa2 ratings on review for downgrade

Moody’s Investors Service has today placed the Baa2 long-term issuer and senior unsecured bond ratings of the government of South Africa on review for downgrade.

The decision to initiate a review for downgrade was prompted by the abrupt change in leadership of key government institutions. That action has raised questions regarding:

– progress on reforms previously identified as essential to sustain South Africa’s fiscal and economic strength, and the effectiveness of South Africa’s policymaking institutions; and

– the more immediate implications for growth and public debt given the potentially negative impact on fragile domestic and external investor confidence.

The review will allow Moody’s to assess these risks and if the changes in leadership signal a weakening in the country’s institutional, economic and fiscal strength.

South Africa’s (P)Baa2 Senior Unsecured Shelf and MTN program ratings were also placed under review for downgrade, as was the (P)P-2 Senior Unsecured Short-Term rating.

Emerging Markets: An Update

  • Former Korean President Park was arrested.
  • Hungary’s central bank was more dovish than expected.
  • South African President Zuma finally fired Finance Minister Gordhan.
  • Brazil’s meat industry may have seen the worst of the scandal.
  • Banco de Mexico slowed the pace of tightening.
In the EM equity space as measured by MSCI, Colombia (+2.0%), Brazil (+2.0%), and Singapore (+1.2%) have outperformed this week, while Egypt (-1.5%), Turkey (-1.3%), and Poland (-1.2%) have underperformed.  To put this in better context, MSCI EM fell -0.6% this week while MSCI DM rose 0.6%.
 
In the EM local currency bond space, the Philippines (10-year yield -23 bp), India (-16 bp), and Hungary (-11 bp) have outperformed this week, while Turkey (10-year yield +21 bp), the South Africa (+14 bp), and Malaysia (+7 bp) have underperformed.  To put this in better context, the 10-year UST yield was flat at 2.41%.
 
In the EM FX space, RUB (+1.5% vs. USD), PLN (+1.2% vs. EUR), and INR (+0.9% vs. USD) have outperformed this week, while ZAR (-7.9% vs. USD), BRL (-1.4% vs. USD), and TRY (-1.1% vs. USD) have underperformed.

David Stockman Offers “More Proof Of Janet Yellen’s Idiocy”

During the last 129 months, the Fed has held 86 meetings. On 83 of those occasions it either cut rates or left them unchanged.

So you can perhaps understand why Wednesday’s completely expected (for the last three weeks!) 25 bips left the day traders nonplussed. The Dow rallied over 100 points that day.

Traders understandably believe that this monetary farce can continue indefinitely, and that our Keynesian school marm’s post-meeting presser was evidence that the Fed is still their friend.

No it isn’t!

Our monetary politburo has expanded its balance sheet by a lunatic 22X during the last three decades and in the process has systematically falsified financial asset prices and birthed a mutant debt-fueled of simulacrum of prosperity.

But once it begins to withdraw substantial amounts of cash from the canyons of Wall Street as per its newly reaffirmed “normalization” policy, the whole house of cards is destined to collapse.

There will be a stock market implosion soon, and that will in turn generate panic in the C-suites as the value of stock options vanish. Like in the fall of 2008 — except on an even more sweeping and long-lasting scale — corporate America will desperately unload inventories, workers and assets to appease the robo-machines of Wall Street.

But there is nothing left to brake the casino’s fall.

Norway’s oil fund up 6.9% in 2016

The world’s largest sovereign wealth fund overcame sluggish markets at the start of last year to deliver a return of 6.9 per cent in 2016.

Norway’s $905bn oil fund was boosted by strong stock markets in the second half of the year with equity investments returning 8.7 per cent. Fixed income returned 4.3 per cent in 2016.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, the manager of the fund, said:

The fund had 62.5 per cent of assets invested in equities at the end of the year but is expected this spring to be given permission to increase that to 70 per cent. Fixed income assets accounted for 34.3 per cent and real estate 3.2 per cent.

Greece : Banks worry over sudden bad loan spike in January

Nonperforming loans last month posted a major spike of almost 1 billion euros, reversing the downward course set in the last few months of 2016. This has generated major concerns among local lenders regarding the achievement of targets for reducing bad loans, as agreed with the Single Supervisory Mechanism (SSM) of the European Central Bank for the first quarter of this year.

Bank sources say that after several months of stabilization and of a negative growth rate in new nonperforming exposure,the picture deteriorated rapidly in January, as new bad loans estimated at 800 million euros in total were created.

This increase in a period of just one month is considered particularly high, and is a trend that appears to be continuing this month as well. Bank officials attribute the phenomenon to uncertainty from the government’s inability to complete the second bailout review, fears for a rekindling of the crisis and mainly the expectations of borrowers for extrajudicial settlements of bad loans.

Senior bank officials note that a large number of borrowers will not cooperate with their lenders in reaching an agreement for the restructuring of their debts, in the hope that the introduction by the government of the extrajudicial compromise could lead to better terms and possibly even to a debt haircut