Monday December 28

Stock markets return from the long weekend with modest losses. The S&P500 fell 0.2% to 2,056 while the Dow Jones lost 0.1% to 17,528. The Shanghai composite fell by 3% which brought nervousness to markets. China’s losses came after data showed that industrial profits fell for the sixth consecutive month. This weighs on sentiment across markets especially commodities. Absent of other news and headlines to provide direction to prices, indices fell as volume was low. In the US energy stocks were the largest drag on indices. Brent fell 3.6% to $36.52 while WTI lost 3.7% to $36.71. The 10 year yield fell 1 basis point to 2.23% and the 2 year yield was flat on the day. The dollar index gained 0.1%.

The two year yield stands at 1.02% and is at the highest level since April of 2010. Long term yields have been either flat or lower since the Fed raised rates. This is a result of the lack of evident inflation and the haven status of Treasuries. Short term interest rates have increased in response to the Fed raising rates earlier this month. This has resulted in a flattening yield curve. Demand for short term Treasuries is low as measured through the bid/ cover ratio of today’s two year Treasury auction. The bid/ cover shows the dollar amount of bids received for every dollar offered. The bid/ cover of 2.8 shows that there were $2.80 in bids received for every $1 offered, which is the lowest level since 2009 for this issuance. It’s possible that low demand is a result of investors scared of a sharp increase in interest rates if the Fed follows through on its planned rate hikes this year.

JP Morgan will raise the deposit rate that it pays big companies for holding cash with the bank. This is an early move compared to most banks. Banks are being paid more on funds that are held at the Fed in light of the Fed’s move earlier this month. Some banks are choosing to keep interest rates low for customers while receiving higher rates from the Fed. JP Morgan is passing on higher interest rates for its big deposit holders. This shows the ripple effects of the Fed raising the overnight rate. Other banks are opting to take the benefits to net interest income of the first rate hike since margins have been so low over the past few years. Interest rates on loans are expected to rise faster than the interest rates that are paid on deposits.

The Puerto Rico Electric Power Authority (Prepa) comes to an agreement with its creditors regarding its $9bn debt pile. 70% of creditors were represented in the agreement, and their debt repayments will be reduced by nearly 50% each year over the next five years. This could save Prepa $700mm over that same time span. The bonds that debt holders will receive in the swap will be safer and possibly carry an investment grade rating. Bondholders accepted losses of around 15% under this agreement. The deal is yet to pass legislation. Prepa has $200mm due on January 1, however creditors agree to forego $115mm of this total if the deal is accepted.

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Monday December 28

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