Monday August 22

Stocks fell today to start the week on a soft note ahead of the Fed’s Jackson Hole meeting. The S&P 500 fell fractionally to 2,182 and the Dow Jones fell 0.1% to 18,529. Transportation shares were down today while utilities and bank indices were not major movers. Today Stanley Fischer of the Fed said that the FOMC was “close to meeting its targets” of full employment and price stability, which hints at a rate rise at some point later this year. Following these comments the term structure flattened. The two year yield was unchanged at 0.75% and the ten year yield fell 4 bp to 1.54% in spite of the hawkish comments. This could be indicative of investors showing low conviction that inflation will hit the Fed’s targets, which would put upward pressure on longer term yields. The spread between 10s and 2s fell to 80bp. Markets will be on edge for signs of Janet Yellen echoing these comments by Fischer, as well as hawkish comments made last week by Bill Dudley. As of now the probability of a Fed move by December is at 51%. The dollar rose 0.1% against JPY to Y100.30. The dollar move fractionally against EUR to close at $1.1324. The pound rose 0.45% against USD to $1.3134. Oil prices fell today as energy stocks were the worst performing of the day. WTI fell 3.5% to $46.81 and Brent lost 3.42% to $49.14.

Investment banks and European corporations have been working together on private placements of debt that are sold directly to the ECB. Over the last year the ECB has been purchasing corporate debt either in secondary markets or at issuance, which reduces the number of bonds available for institutional investors. This new shift may be more beneficial from a liquidity perspective from the standpoint of investors, and it represents banks and companies adapting to suit the demands of central banks. Similarly the BoJ last year indicated that it would buy ETFs of companies that fit certain criteria, and in response fund managers created ETFs to fit that profile. Currently high demand from central banks is coming at the expense of investors, such as insurance companies and pension funds, who need high returns to meet obligations to customers. Low returns as a result of high demand from central banks badly damages the business models of these companies which may have negative economic impacts down the road. Credit spreads for companies eligible for ECB bond purchases have tightened more than spreads for ineligible bonds, which is indicative of the central bank’s influence over the market. The ECB has been purchasing bonds since 2015, and in March announced it would be purchasing e80bn a month which includes corporate bonds. Through August the ECB has bought e16bn in corporate bonds, mostly through secondary markets. Morgan Stanley has done two private placements that have gone directly to the ECB. Banks have been rushing to improve their coverage of central banks, since it is becoming an increasingly important client.

Demand for yield has pushed emerging market yields down, and as a result risky companies in developing countries have been able to issue bonds at relatively low yields. When Argentina issued $16.5bn in bonds earlier this year for the first time in around 15 years, it opened the door for Argentine companies to do the same. Argentine companies have issued $4bn this year after being out of the market for the last decade. Companies and countries in more obscure corners of the world have been encouraged to raise capital from international markets as yields in developed nations converge to zero. For example Mongolia earlier this year issued bonds at a yield of 10.875%. Corporate bond sales from Argentine countries have had mixed reception so far this year. Some companies have been able to issue at as low as 6% while others have had to price at 9% and others have had to scrap sales altogether. Some companies have been forced to reduce the size of their deals while others have been unable to find buyers even with yields as high as 9%. Part of the ongoing skepticism for emerging markets is the concern for another taper tantrum if the Fed decides to raise rates in the future, which could result in outflows from EM. Another concern is liquidity, which is lower in emerging market bonds. Due to the fact that such a small amount of Argentine bonds are outstanding and they have been relatively inactive over the last 15 years, it is difficult to trade in a down market or with size without sacrificing price.

Online lender LendUp is attempting to break into the credit card space. The company is an online lender that targets less creditworthy consumers for bank loans. LendUp started out by providing short term, small amount loans with exorbitant interest rates to consumers. What separates the startup from predatorial payday lenders is the fact that unpaid debts are not rolled over into new loans, and that borrowers who make payments receive better terms going forward. LendUp now believes that many of these borrowers are being denied credit card applications from traditional sources, and is seeking to fill that void. This comes as banks have been focusing more in recent years on more affluent, less risky borrowers as a result of regulatory conditions. LendUp has raised $47.5mm in equity to finance this new line of business which values the company at a markup relative to its last funding round. The L Card will allow customers to borrow $300-$1000 with an APR of 19% to 29%. LendUp has raised $200mm this year which includes both equity and debt. LendUp will hold the credit card exposure on its balance sheet, unlike other online lenders that have sought to securitize loans.

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Monday August 22

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