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Sun, 22nd January 2017

Anirudh Sethi Report

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Archives of “Bond” Tag

Daiwa to launch ‘Trump-related’ mutual fund

Daiwa Asset Management is set to start operating a mutual fund that invests in stocks related to U.S. President-elect Donald Trump’s infrastructure investment policy. Daiwa will launch the product on Tuesday.

The open-end mutual fund — the first of its kind in Japan since Trump’s election victory in November 2016 — is likely to be made available to retail investors by the end of the month.

 The U.S. infrastructure builder equity fund, which invests in U.S. companies, will quantify how much each stock will benefit from Trump’s infrastructure policy, based on criteria such as sales ratio in the U.S. and the degree of obsolescence of the target infrastructure. The details of the portfolio will be determined by how much share prices are undervalued and how competitive the companies are.

The portfolio, comprising 30-50 companies — mostly in the construction, transport and materials sectors — will be adjusted as appropriate as Trump’s policy takes form.

Trump has pledged to spend $1 trillion to overhaul the country’s aging infrastructure over the next decade.

Global Debt Hits 325% Of World GDP, Rises To Record $217 Trillion

While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.

In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers.

Additionally, “a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities,” the IIF warned.

“Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”

For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market’s only concern is just when will the Dow Jones finally crack 20,000. 

Sadly, since we don’t have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.

Yuan Collapse Sends China Physical Gold Premium Soaring To 3-Year Highs

Worse than Lehman…”

The premium that mainland Chinese investors are willing to pay for physical gold has surged to over $40 as the Chinese government seeks to curb illegal capital outflows. Following slowing in Tier 1 home price growth, and a collapse in the China bond market, it appears gold panic-buying is accelerating…

This premium is higher than during the Lehman crisis and as bad as the peak of the Chinese banking system liquidity crisis in 2013 as onshore investors appear to prefer the precious metal to hedge against ongoing Yuan devaluation…

But it’s not just precious metals that are bid as alternatives to their paper money, Bitcoin is bid to its highest since Jan 2014…

40-year JGB issuance set to hit 3tn yen

Japan’s Finance Ministry is set to boost the issuance of 40-year government bonds to a record 3 trillion yen ($26 billion) in fiscal 2017, betting on strong investor demand.

The issuance of two-year and other short- and medium-term bonds with negative yields will decrease due to low demand.

 The JGB issuance plan for fiscal 2017 will be finalized based on opinions the ministry hears at meetings with brokerages, life insurers and other market players. The meetings are scheduled for Friday and Dec. 19. The plan will be announced along with next year’s budget, which will be endorsed by the Cabinet on Dec. 22.
 It will be the first bond issuance since the Bank of Japan adopted a negative interest rate policy in January. The amount of JGBs issued periodically for institutional investors will decrease for the fourth consecutive year due to a decline in refinancing bonds. While the total issuance will decline, the issuance of superlong-term bonds with positive yields will increase.

The issuance of 40-year bonds will increase for the third straight year, rising nearly fourfold from fiscal 2008, when 40-year bonds made their debut. Investor demand for the 40-year bonds, with their relatively high yields, is expected to be strong. The increase in the issuance of superlong-term bonds might also prevent any uptick in demand for refinancing of short- and medium-term bonds.

Overnight US Market :Dow closed +35 points

The Dow and Russell 2000 hit new closing highs Tuesday as stock indexes turned positive in the afternoon and stayed there, helped by shares of telecommunications companies such as Verizon, Sprint and AT&T.

The Dow Jones industrial average gained 35 points, or 0.2%. That’s up about 36 points to 19,251.78, its new all-time closing high.

The Russell 2000 soared 1.1%, up 15 points. Its new closing high: 1,352.67.

Also gaining were the S&P 500 and the Nasdaq composite, ending up 0.3% and 0.5%, respectively.

Sprint and T-Mobile shares climbed sharply after President-elect Donald Trump said in a tweet that Japanese company Softbank, which owns the majority of Sprint, was going to invest $50 billion in the U.S. to create 50,000 jobs over the next four years. However, it’s not clear if Softbank’s announcement is new.

U.S. government bond prices rose slightly. The yield on the 10-year Treasury note fell to 2.39% from 2.40% late Monday. In foreign exchange trading, the dollar rose to 114.06 yen from 113.75 yen. The euro fell to $1.0718 from $1.0770.

Italy’s stock market jumped 4.2%, a day after slipping in the wake of the failure of a constitutional referendum that forced the resignation of that country’s premier. France’s CAC 40 added 1.3%, Britain’s FTSE 100 was up 0.5% and Germany’s DAX rose 0.8%.

Chinese Bond Yields Jump Most In 10 Months On “Liquidity Fears”

It is probably a coincidence that one day after we commented on what is emerging as “the market’s next headache”, namely China’s (not so) stealth tightening, which in the last few weeks has led to a creep higher across the curve, the yield on China’s sovereign 10Y bond jumped 6.5bps to 2.94% on what Bloomberg dubbed were “liquidity fears.” This was the biggest one day spike for the benchmark bond since Jan. 25, according to ChinaBond data.

As a result of the selloff, the most actively traded 10-year govt bond futures were down 0.72%, while five-year futures dropped 0.74%.

The tightening was broad-based, with 1-year rate swaps rising 13bps to 19-month high at 3.17%; additionally the overnight repo rate also rose to 2.31%, the highest level this month.

Quoted by Bloomberg, Wu Sijie, bond trader at China Merchants Bank said “tightening interbank liquidity and the expectation of even higher short-term borrowing costs are driving up swap costs and affecting sentiment on the cash bond market.”

Meanwhile, signalling no change at all in its posture, overnight the PBOC drained funds in open-market operations for the fourth consecutive day, bringing the total withdrawal to 130 billion yuan.

India : Credit and deposit ratios in banks falls to 6-year low at 72.7 per cent

The credit-deposit ratio (CDR) of the banking system, or the proportion of deposits deployed as loans, dropped 155 basis points to 72.7%, the lowest in six years, in the fortnight ended November 11, data released by the Reserve Bank of India (RBI) showed.

The non-food credit growth during the fortnight hit an at least four-year low of 8.25% on a year-on-year basis, while food credit fell 14.3%.

bank

The last time the CDR had seen a sharper drop was during the fortnight ended April 29, when it fell by 1.65% from the fortnight ago to 75.93%.

The sharp fall in the ratio was primarily because of a jump in the denominator, or a sharp increase in deposits with the banking system, which negated a fall in the credit outgo. During the fortnight under review, total deposits with banks rose by Rs 1.3 lakh crore, or 1.3%, whereas bank credit declined 0.8% to Rs 73.53 lakh crore.

The cash in hand with banks rose nearly 275% from the end of the previous fortnight to Rs 2.47 lakh crore, the highest in at least seven years.

The money parked by banks with the RBI through reverse repo operations under the central bank’s liquidity adjustment facility hit a record high of Rs 4.3 lakh crore as on November 22.

Bank of Japan plays trump card early to shock markets straight

The Bank of Japan last week offered to buy bonds at a fixed yield to curb rising interest rates, playing what was seen as an ultimate trump card far earlier than many expected.

The BOJ announced its first-ever fixed-rate purchase operation on the morning of Nov. 17 to counter mounting fears of an upswing in interest rates. Yields on 10-year Japanese government bonds had climbed steadily since the U.S. presidential election, rising as high as 0.035% the day ahead of the move. The fixed-rated option was introduced only two months ago as part of a monetary policy overhaul in late September that set a target of around zero for long-term yields.

 A call went out for two- and five-year JGBs to address the rapid surge in short- and medium-term bond yields, according to the BOJ’s Financial Markets Department. There were no takers: The offered yields were higher than going market rates, meaning the offered prices were lower, sending wise traders elsewhere. But the conditions of the operation sent a strong signal as to how high the central bank will let rates go before stepping in. Yields slid across all maturities after the move was announced.
 Since then, “interest rates’ upward climb has been weakened somewhat,” Takako Masai, a member of the bank’s policy board, told reporters after a speech Monday. “I get the sense that the purpose of fixed-rate operations has been well conveyed to markets.”

FPI outflows hit $3 bn in Nov on cash crisis

Foreign investors have pulled out close to USD 3 billion from the Indian capital market this month so far on lingering concerns over the government’s demonetisation decision and fears of a rate hike by the US Federal Reserve.

According to data, net withdrawal by FPIs from equities stood at Rs 9,841 crore during November 1-18 while the same from the debt market was Rs 9,720 crore during the period under review, translating into a total outflow of Rs 19,561 crore (USD 2.89 billion).

The foreign portfolio investor (FPI) outflow comes following net withdrawal of more than Rs 10,306 crore from the capital markets (equity and debt) last month. Prior to that, the equity market had witnessed an inflow of over Rs 20,000 crore.

So far this year, FPIs have invested a net sum of Rs 37,146 crore in stocks while they have pulled out Rs 13,278 crore from the debt market, resulting in a combined net inflow of Rs 23,868 crore.

Goldman Sachs Top Ten Market Themes for 2017

Chief Credit Strategist Charles Himmelberg says 2017 will be “High growth, higher risk, slightly higher returns”

  1. Slightly higher returns relative to 2016. “Best improvement in the opportunity in global equities is in Asia ex-Japan.”
  2. Fiscal stimulus in the U.S. will help reflate the economy
  3. No imminent trade war on the horizon, any re-negotiation of agreements currently in place (like NAFTA) to focus on attempts to improve the prospects for the U.S. manufacturing
  4. The Emerging Markets risk ‘Trump tantrum’ is temporary
  5. Forecasts ($/CNY at 7.30 in 12 months) a depreciation for yuan well beyond forward market pricing
  6. Monetary policy will increasingly focus on credit creation
  7. 2017 will confirm that the U.S. corporate sector has emerged from its recent ‘revenue recession’
  8. Forecasting large boosts to public spending in Japan, China, the U.S., and Europe, which should fuel inflationary pressures in those economies
  9. Commodity-sensitive segments of the credit market have suffered pain in 2016, there hasn’t been much in the way of contagion… expect more of the same in 2017, with the credit cycle not making a turn for the worse
  10. Conditional on a large fiscal stimulus in 2017, the FOMC will be obliged to respond more aggressively to an easing of financial conditions, all else equal … cautions that it’s no sure bet that financial conditions will ease in the year ahead, noting the recent rise in bond yields and the U.S. dollar