Tuesday March 28

Stocks put in a strong day as the Trump trade enjoyed somewhat of a resurgence. The S&P 500 and the Dow Jones each rose 0.7% to 2,358 and 20,701 respectively. The KBW Bank index was up 1.7% while utilities rose 0.1%. Economic data today showed that home prices rose to post the highest annual appreciation in nearly three years. Consumer confidence also rose to a 16 year high. Robert Kaplan spoke today and came across a little dovish saying that interest rates should rise “gradually and patiently.” Stanley Fischer also said that he sees two more rate hikes this year which is again on the dovish side compared to what some investors may be expecting. To explain the resurgence of the Trump trade today, Donald Trump made comments that he is ready to move on to tax reform even in spite of healthcare not passing. Paul Ryan on the other hand countered that idea saying it will be difficult to overhaul the tax code without having repealed and replaced Obamacare. The tax plan may also be less significant than initially planned since they won’t have the savings from Obamacare being cut. In spite of the lingering concerns the Trump trade made a comeback after taking a respite over the last week. The two year Treasury yield rose 5bp to 1.31%. The ten year Treasury yield rose 4bp to 2.42%. 2yr vs 10yr bear flattened 1bp to 1.11%. The dollar was stronger on the day against peers. USD rose 0.5% against EUR to $1.081. USD rose 0.5% against JPY to Y111.18. USD rose 0.9% against GBP to $1.2447. The UK is set to invoke article 50 tomorrow and the Scottish parliament also supported a second independence referendum. Oil prices rose which also provided support for equity markets. WTI rose 1.4% to $48.41. Brent rose 1.1% to $51.32. The VIX eased lower to 11.53.

Treasury bonds have been an attractive bet for international and domestic investors as they have once again become a popular trade. Throughout much of 2016 foreign demand for Treasury bonds was very high as negative rates plagued sovereign markets all over the world. That pushed Treasury yields to notable lows in the 1.30% range at one point. However after Trump’s election that dynamic shifted and investors were net sellers of Treasuries. Based on data from TD Securities in the weeks and months following the election short positions in Treasury futures rose significantly. However in recent weeks short positions have been decreasing fairly quickly and net positions are close to being even between long and short. To coincide with this flows into Treasury focused mutual funds and ETFs have turned positive which suggests demand for Treasuries. Two times since the election the 10 year Treasury rate has tested the 2.60% level only to fall in the subsequent weeks and days. Foreign demand for Treasuries has returned as bearish concerns about Treasuries dissipates for the time being. At a Treasury auction on Monday of 2 year bonds indirect bidding reached 53.6% which was the highest in more than a year. A 10 year auction recently also had high indirect bidding. This comes even as China’s central bank has been selling Treasuries.

Issuers and investment bankers working on debt issuances have to pick their pockets and time the markets correctly for their bond offerings. Last week several issuers had to pull offerings at the last minute due to the volatility and uncertainty. However this week several issuers are set to come back to the market and hope the demand from earlier in the year is still there. Year to date companies have issued $387bn in debt which is the largest quarterly total on record. Last week the total fell by 33% from the prior week to just $18bn as investors stayed on the sidelines. Goldman Sachs and Santander issued debt but had to offer investors higher spreads than anticipated, representing a new issue premium. Now that markets have calmed down and rates have stabilized companies are looking to lock in low rates. Over the last few weeks the 10 year Treasury rate has fallen 25bp to 2.38% as the FOMC meeting and last week’s uncertainty pushed interest rates lower. With $10tn in debt around the world still yielding below zero demand for credit should be strong.

Activist investor David Einhorn is making a play on General Motors through his hedge fund Greenlight Capital. Einhorn wants to split the company’s stock into two classes of shares. The first class would pay a dividend and the second class of shares would be entitled to all earnings including stock buybacks after dividends are paid to the first class shareholders. In doing so Einhorn thinks that demand from new investors who are willing to pay for earnings growth potential could bring the company’s market cap up by $38bn compared to the current $52.2bn. GM criticized the proposal as “unprecedented and untested” and cited significant risks that weren’t in the interests of shareholders. Einhorn is making this proposal because he doesn’t think the company’s value currently incorporates the company’s earnings growth potential. Einhorn cited low gas prices and resurgent demand for higher margin SUVs and pickups as reasons to believe in GM’s earnings growth potential. GM shares currently pay a dividend of $1.52 per share which is in the top 25 in the S&P 500. Since emerging from bankruptcy GM’s shares are only up 6% which is why Einhorn doesn’t think growth is correctly priced in. GM also cited concerns about liquidity and demand uncertainty for each of the share classes. Einhorn in the past has also argued against Lehman Brothers successfully as well as Apple to return money to shareholders.

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Tuesday March 28

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