Monday May 2

Stocks rise as the US dollar continues to fall against peers. The S&P 500 rose 0.8% to 2,081 and the Dow Jones rose 0.7% to 17,891. The Consumer discretionary companies were the biggest gainers in US markets today. US factory data was interpreted as indicative of growth. The prices paid component rose to 59 from 51.5 in March. Nevertheless the market for Fed funds futures shows just a 15% chance of tightening in June. Japanese yen continued its upward march in the aftermath of the BoJ statement last week. The yen today rose to Y106.41. In turn the Nikkei fell 3.1% on top of last week’s losses. In the US yields rose as investors were more willing to take on risk. The 10 year yield rose 4 basis points to 1.87% and the two year rose 2 basis points to 0.80%. The euro rose against the dollar to $1.1536 as the dollar index fell on the day. Oil prices eased back slightly. WTI fell to $44.92 and Brent fell to $45.91. Gold prices even though the dollar fell.

The Puerto Rican Government Development Bank defaulted on its debt today. The GDB missed a payment of $400mm. This does not bode well for the months ahead, as the commonwealth has more than $2bn due this summer. The country is attempting to restructure in excess of $70bn in debt with Congress. Today’s default may trigger a series of other defaults on other Puerto Rico bonds. General Obligation Puerto Rican bonds fell to around 65 cents on the dollar for a 20 year maturity. The country is struggling to pay for basic items and civil expenditures. This intensifies negotiations between Republicans and Democrats who are trying to resolve the deal. Republicans have been proponents of a federal oversight board for Puerto Rico and access to restructuring courts. The island faces falling employment rates, and a declining population which has decreased the government’s tax base. Puerto Rico’s situation has not had an adverse affect on the broader muni market. Munis had strong performance in April even after the governor announced the island would be suspending some payments. Puerto Rico’s debt default tips the scale for a new record in the Muni market. Municipal borrowers have defaulted on $5.65bn year to date which is the highest total on record. More than $5bn of the YTD total comes from Puerto Rico bonds, including the $3.7bn GDB default today. Excluding Puerto Rico, muni defaults have been low this year. Other than Puerto Rico there have only been 10 muni defaults this year, compared to 29 and 22 in the last two years respectively.

Additionally Atlantic City is also facing issues repaying its debt. The country has $1.8mm due on Sunday and it may not even have enough cash to pay it. The number of casinos in the municipality has decreased by 1/3 over the last few years, and as a result tax revenues have fallen significantly. Additionally the city has the worst credit rating in the country compared to other municipalities. This makes it difficult for the city to refinance or issue more debt, even though investors have high demand for any kind of yield. The city has lost court rulings that have lost it nearly $200mm in revenues. Rating agency S&P said in January that a default was “inevitable” for the CCC rated issuer. Atlantic City carries a Caa3 rating from Moody’s. Revenues have declined by 50% over the last few years, and debt has risen significantly. On a per capita basis the debt in Atlantic city is nearly twice as high as it is in peers such as Chicago and Detroit. Along with that Atlantic City has a far smaller population and a lower median household income. Bond prices have dropped, falling as low at 66 cents on the dollar. At the start of 2015 this was close to 100.

China’s bond market continues to be a source of concern. Yields rose by the most this month as investors were spooked by defaults and excess leverage among other factors. Two SOE’s have defaulted this year, and a third warned it will have difficulty making a payment this month. This concerns investors because in the past the government has intervened and supporting these companies. In the near term this is reversal will put downward pressure on Chinese bond markets. Accordingly corporate issuance fell by half last month. The benchmark five year yield rose to 2.8% last week from 2.47 at the start of April. Spreads have also risen highlighting higher risk. So far analysts are viewing this as a healthy repricing. By allowing international investors access to domestic bond markets, that should put some downward pressure on yields. Of the $7tn in debt outstanding in China only 2% is currently owned by international investors.

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Monday May 2

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