Thursday May 11

Stocks fell back after trading around record territory the last few days. The S&P 500 fell 0.2% to 2,394 and the Dow Jones fell 0.1% to 20,919. The KBW Bank index lost 0.8% while utilities were flat. Economic data showed that jobless claims came in below consensus for the second straight week. The PPI beat expectations both on headline and core measures and the headline Y/Y number increased to 2.5%. Political fallout from Comey’s firing still could be weighing on sentiment in the US. In the UK the BoE meeting came across as slightly hawkish, as the central bank noted that “monetary policy could need to be tightened by a somewhat greater extent” than what investors are expecting currently. In the US rates fell slightly. The two year Treasury yield fell 1bp to 1.34%. The ten year Treasury yield fell 2bp to 2.39%. Accordingly 2yr vs 10yr bull flattened to 1.05%. The dollar was mixed on the day against peers. USD rose less than 0.1% against EUR to $1.0864. USD fell 0.4% against JPY to Y113.87. USD rose 0.4% against GBP to $1.2889. Oil prices also found support again today. WTI rose 1.0% to $47.82. Brent rose 1.1% to $50.76.

The new head of the Office of the Comptroller of the Currency seems to be a big proponent of financial deregulation. Keith Noreika is a former lawyer that represented large banks on regulatory and compliance issues. Noreika spoke out against the Volcker Rule, aspects of Glass-Steagall, as well as Dodd-Frank in general. One of his main goals when he is in office will be to streamline financial regulation. He will have the job of discerning what aspects of regulation are necessary and worthwhile and what aspects were piled on to punish banks unnecessarily. The Volcker Rule was notably added onto Dodd Frank late in the legislation process. The issue with the Volcker Rule as Noreika sees it is that prop trading is very hard to define, and that current regulations don’t do a good job at showing what constitutes prop trading. From his perspective if a piece of legislation doesn’t add much value, costs the banks a lot to implement, and isn’t helping the safety of the institution then it probably needs to be streamlined. Many regulations due to their high cost to implement also inhibit financial activity since the funds can’t be used elsewhere. The Volcker Rule also requires reporting to five different regulatory agencies. He also said that by keeping commercial and investment banks together it could in fact make the system safer since more diversified businesses are more stable. Additionally he said that part of his job will be to regulate banks such that banks can be allowed to fail, however Dodd-Frank fails to do that since it makes it more attractive to be a large bank due to the regulatory cost burden it imposes on small banks.


Demand for yield in European markets is best evidenced by very speculative grade issuers that have previously been shunned by investors who are currently looking to issue bonds. Arms manufacturer Heckler & Koch is a prime example of this. The company has previously had arms deals blocked by the German government, and in 2009 it was sued by bondholders as the head of the company used proceeds of a loan for personal expenditures. Now that rates are at record lows money managers need to find return somewhere and they are going to great lengths to find it. The company current has a CCC rating however it is looking to get a single B rating before the issuance. Single B issuance has been notoriously low recently so the technicals are in place for this bond to attract a lot of bids. The euro area single B index currently yields just over 3%. The company would be issuing bonds to refinance a EUR 220mm 9.5% bond that’s currently outstanding. And with what little there has been in new single B supply, a lot of it has been for refinancing purposes which doesn’t have a big impact on net supply. Companies are also increasingly looking to the leveraged loan market which has reduced supply as well. According to S&P in the first quarter there was just EUR 6.6bn in single B issance in Europe which is down from 2015, 2014, and 2013 numbers. Netflix last month issued a single B bond in Europe with a yield of just 3.625%. Morgan Stanley marketed a deal for a Spanish pharma company called Grifols which priced with a coupon of 3.2% which is close to a record low. In order to convince investors to buy the bond and improve the credit rating, some analysts believe that current owners of the privately held H&K might inject more capital into the business to help leverage ratios come across better.

Thursday May 11

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