Stocks fall to start the week as oil prices continue to slide. The S&P500 fell fell 0.3% to 2,066 and the Dow Jones also lost 0.3% to 17,737. Oil prices fell last week after it appeared that a production cut was less likely than had previously been expected. Oil prices rose during March partially on hopes that at the very least a production cap may be implemented however now those expectations are diminishing. Brent fell 2.5% to $37.69 and WTI fell to $35.46, both of which are well off the $40 threshold that was being tested last week. Yields fell as well as the dollar index to indicate that investors still were taking emphasis to Janet Yellen’s dovish comments last week. The dollar fell 0.3% against the yen to Y111.35 and the euro was unchanged at $1.1388. The two year yield fell 2 basis points to 0.74% and the ten year yield also fell 2 basis points to 1.77%. Accordingly, the fed funds futures market implied probability of interest rate hikes has shifted down since last week. Short term yields in Greece spiked 200basis points to 10.41% after investors took attention to a leaked transcript from one of Greece’s bailout meetings.
Zero coupon Treasury bonds have become increasingly popular among investors as they digest the most recent Fed speak. Zero coupon bonds have the highest durations, and therefore are most sensitive to changes in interest rates. As rates have marched lower this year zero coupon bonds have been the biggest beneficiary in the Treasury market. Zero coupon Treasuries have returned 7.3% year to date as yields have fallen consistently throughout the first quarter. Yields were driven lower by the expectation that the Fed is in no rush to raise rates, as well as demand from international investors. Conversely they are the most exposed for price loss in the event that interest rates turn higher. TIPS have become a popular way to hedge against the risk of inflation and rising rates. Similarly very short term debt fulfills a similar purpose since short term rates respond most directly with changes in interest rates. Eric Rosengren today of the Boston Fed indicated that rates may rise faster than futures markets indicate.
The market for distressed debt is experiencing a resurgence as GDP forecasts are being downgraded and default rates are ticking up. GDP forecasts all over the world are being revised downward across the board. Additionally default rates are beginning to pick up as low commodities weigh on many different sectors. The majority of the defaults have taken place in the US, which is ideal for the distressed debt market. Investors are able to buy up these assets at rock bottom prices, and they will benefit as the US economic recovery broadly benefits distressed companies, which are especially exposed to broad economic trends. Sectors that have especially been hit hard are shipping, power, semiconductors, and retail. Low global demand continues to weigh on these companies and provide headwinds in the future.
Indian companies are struggling to find buyers for their debt. These companies seek international creditors in an attempt to make the market for their debt more diversified and liquid. If a company is exposed to a single group of creditors this could create problems if that group chooses to liquidate suddenly. Last year the government of India allowed for the first time Indian companies to issue debt denominated in rupee overseas. The government planned on companies raising around $1.5bn through this method, however companies have been struggling to find demand in the current environment. China made a similar action in 2007 and since then bonds denominated in yuan have raised around $100bn. The fact that rupee bonds have not gained traction is likely explained by the global economic and financial market environment. Investors since the start of the year have become increasingly cautious and have been much more careful when taking risks. Companies in India already have outstanding debt in dollars, and issuing in rupee may be more attractive since it minimizes FX risk for the company. Due to this lack of liquidity and low demand in rupee denominated bonds, the internationally traded bonds will likely trade at a discount to bonds in the domestic market.