Wednesday May 4

Stocks fall for the second straight day after economic data disappoints. The S&P 500 and the Dow Jones both fell 0.6% to 2,051 and 17,651 respectively. Economic data from the US showed that only 156,000 jobs were added last month, which fell short of expectations. As a result analysts are now expecting the non-farm payroll’s report on Friday to come in weaker than expected. Data also showed that the non-manufacturing ISM report rose to 55.7 from 54.5. The employment component of this report rose to 53 from 50.3 last month, which contradicts the ADP data. Also on the optimistic side of things, US factory goods data showed that orders rose 1.1% last month compared to a 1.7% drop in March. The dollar was little changed on the day. The dollar rose 0.3% against the yen to Y106.95 and was flat against the euro at $1.1492. The dollar index rose 0.3%. The dollar gained 2.5%, 1.5%, and 3.8% against the rand, ringgit, and lira respectively. The two year and the ten year yield both fell two basis points to 0.74% and 1.78%. Investors digested the ADP data, and likely anticipate a weaker report on Friday, therefore they are pricing down the Fed. Banking shares in particular suffered today. FInancials are exposed to both the downside of weak economic data as well as the downside of the Fed holding off from raising interest rates.

Low and negative rates in many parts of the world are creating issues for investors with long term obligations, such as pension funds and insurance companies. These investors rely on yield from sovereign debt, and low and negative rates are costing investors around $24bn each year according to Fitch. This results in deficits in the business model of insurance companies and pensions. These institutions make money from the difference between investing insurance premiums and the obligations they must pay out. Lower yields lower these margins. Private pension funds face deficits of $520bn this year in the US and the UK and public sector pensions have a deficit of $78tn. Even far out on the yield curve returns are small. 30 year yields in Japan, USA, Germany and the UK are currently 0.26, 2.64, 0.91, and 2.34% respectively. Of the $9.9tn of the bonds that are negative yielding $3.1tn is short term and $6.8tn is longer term. The average negative yield for sovereign bonds is 0.24% compared for 1.23% five years ago. As a result investors as a whole are now losing $24bn annually versus a gain of $123bn five years ago.

To combat the issue of low yields, investors have been turning to longer maturity debts. For example, two private placements this year in the Eurozone have been for 100 year debt. Ireland sold e100mm in 100 year debt at 2.35%. Belgium then followed with a e100mm private placement of its own. Both bonds were arranged by Goldman Sachs and Nomura. The Ireland bond in particular priced at a yield that was lower than the 30 year US Treasury yield. An insurance company that has long dated liabilities may be an ideal buyer for that type of debt. Other issuers who have sold 100 year debt in the past include Mexico, the Philippines, and Petrobas of Brazil. This could be an indication that investors are expecting inflation and growth to remain low for an extended period of time. Similarly Italy just issued a 50 year bond that attracted significant demand. Investors are taking high duration risk in purchasing these bonds, however they may have a specific need to match a liability at that time. The alternative for that specific demand is a downcast view on the Eurozone recovery over the next 100 years.

The Treasury is debating swapping out a significant amount of older Treasury bonds with newer bonds. This is an attempt to boost liquidity and ease of trading in the massive market. Older Treasuries have different features such as coupon amounts and other differences. As a result of these differences off the run Treasuries are much less liquid than on the run Treasuries. This can cause price discrepancies between the two. The Treasury seeks to reduce these trading issues by trying to standardize the Treasury bonds outstanding.

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Wednesday May 4

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