Tuesday September 13

Stocks fall again as realized volatility remains high. The S&P 500 fell 1.5% to 2,127 and the Dow Jones fell 1.4% to 18,066. This marks the third consecutive day of greater than 1% moves in either direction. Oil prices sold off today, rates sold off and the dollar strengthened all of which were conducive to lower equity prices. The VIX remained elevated at 18.41 which is higher from yesterday’s session. Oil prices fell today after the IEA said that oversupply in the oil market should last into 2017 which was longer than previously expected. Following this statement WTI fell 2.8% to $44.99 and brent lost 2.5% to $47.13. Accordingly energy shares underperformed indices led by 7-8% falls in some oil companies. The 2 year Treasury yield rose 2bp to 0.80% and the 10 year Treasury yield rose 5bp to 1.72%. The spread between 10s and 2s bear steepened to 92bp. The US dollar had a strong day, as the WSJ dollar index rose 0.7% to 86.83. USD rose 0.2% against EUR to $1.1216. USD rose 0.8% against JPY to Y102.62. USD rose 1.1% against GBP to $1.3193. Also contributing to the selloff in rates and the stronger dollar was data that showed median household income rose 5.2% between 2014 and 2015.

Long-term Treasury bonds have been one of biggest victims over the last few days as rates sold off. Investors poured money into high duration bonds in search for yield. Those bonds have more exposure to interest rates compared to shorter duration bonds, and therefore investors have suffered as the term structure has bear steepened over the last week. According to a survey from BAML more than 50% of fund managers believe that both stock markets and bonds are overvalued. Paul Singer believes that bonds are in a big bubble, and that the risk-return dynamic is very skewed to the downside. These ideas may start to be taking grip among investors. In an auction of 30 year Treasuries today demand was low with a bid/cover of 2.13. Dealers took down a large portion of the debt as international demand was the lowest of the year.

Australia is set to capitalize on the international search for yield by issuing a 30 year bond for the first time. Both yields and spreads relative to UST have tightened so now is a good time to take advantage of the macro environment since demand will likely be high. The spread has tightened from around 100bp earlier this year to just 42bp today. South Korea made a similar move recently as well. With $13tn of sovereign bonds around the world carrying a negative yield, Australian officials are confident that there will be sufficient demand for its first ever 30 year bond. One risk to this strategy is that if rates start to rise in the US, outflows from emerging markets may lead to a selloff in AUD debt. Additionally the country’s AAA credit rating has a negative outlook from S&P which may be cut if Australia issues a large deal at a longer maturity. Many countries, both emerging market and developed market, have been taking advantage of issuing longer term debt. For example the UK is selling 50 year debt, Belgium and Ireland have sold 100 year debt, and Japan and Indonesia have been thinking about 50 year debt.

Shipping companies have been suffering as global cargo volumes have fallen. Another casualty is German investors, both institutional and retail, who were heavily invested in the sector. Nearly 29% of the global container-ship capacity is owned by German investors who as of last year had invested $17.5bn in shipping companies. German funds own over 2,000 ships and nearly 20% of those are insolvent. Banks are exposed since they provide funds that invest in these assets with leverage to boost investor returns. Shipping funds sold in Germany to investors raise capital from investors, get leverage from banks, then buy hard assets in the shipping and container industry. Cargo rates have dropped significantly around the world as the global economy has slowed down which reduces returns to shareholders.

Tuesday September 13

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