Friday May 12

Stocks fell to end the week with weak momentum. The S&P 500 fell 0.2% to 2,390 and the Dow Jones fell 0.1% to 20,896. Over the course of the week the S&P 500 and the Dow Jones were 0.3% and 0.5% lower respectively. The KBW Bank index fell 0.5% while utilities rose by 0.5%. CPI data showed that headline consumer prices rose 0.2% and 2.2% on a monthly and annual basis. Core numbers missed consensus by 0.1%. Data also showed that retail sales rose 0.4% last month but that fell short of expectations by 0.2%. Core numbers also missed the mark there as well. That backdrop along with continued fallout from the decision to fire Comey contributed to the negative sentiment in markets today. Following the weak data the market for Fed funds futures adjusted to reflect a 74% chance of higher rates in June which is a fairly significant decline in one day. On that backdrop the two year Treasury yield fell 4bp to 1.30%. The ten year Treasury yield fell 6bp to 2.33%. Accordingly 2yr vs 10yr bull flattened to 1.03%. Over the course of the week the 2 and 10 year were each 2 bp lower. The dollar was weaker for the most part against peers corresponding with soft data and the rally in rates. USD fell 0.6% against EUR to $1.0932. USD fell 0.5% against JPY to Y113.35. USD was unchanged against GBP at $1.2887.

The Treasury is in the process of deciding whether or not it is worth issuing 50 and 100 year debt. Given the fact that interest rates are at historic lows it seems an attractive idea to lock in a low borrowing cost for a very long period of time. However the question remains would investors buy these bonds, and if so what yields would they require. A survey of economists from the WSJ suggested that 40, 50, and 100 year bonds would price at 3.4%, 3.5%, and 4% respectively. For the 100 year bond that is 100bp higher than the current 30 year Treasury yield. Based off the feedback from the survey economists seem to believe that 40 and 50 year bonds are more viable than a 100 bond. While insurers and pension funds may have some long term liabilities they can match with a 40 or 50 year Treasury, there isn’t as much demand for a 100 bond. Some studies done in the past have shown that instead of small, irregular issuances of ultra-long debt, larger more regular issuances of 30 year debt is better. Last week the Treasury Borrowing Advisory Committee advised against ultra-long bonds. The Treasury is considering this to lock in low borrowing costs, however given the risk and uncertainty investors could demand higher yields that would make the whole thing not worth it.

In spite of the volatility in China’s financial markets the yuan has been surprisingly stable. Regulatory authorities in China have been trying to curb excessive speculation in financial markets as well as the excessive use of leverage throughout the system. It is particularly trying to prohibit financial leverage and risky off balance sheet investments in debt markets. However  its credit crackdown is not expected to spread to household and corporate debt, as growth in those areas is needed in order to keep GDP growth high. As they try to crack down on those activities volatility has rippled across equity, commodity, and debt markets. Over the last two weeks the Shanghai composite is down 2.2%, iron ore is down 11%, and the yield on China’s 10 year generic government bond has risen 27bp. This comes as the government has dramatically raised short term interest rates to the point where the yield curve is  inverted. The five year bond currently yields slightly higher than the ten year bond. However in spite of that USDCNY has only moved 0.02% over the last two weeks to Rmb6.8995. That can be attributed to the fact that volatility in those other markets is due to regulatory actions as opposed to fundamental economic conditions. USDCNY would be more driven by fundamental economic conditions and those have not materially changed as the growth is expected to hold around the current 6.9%. That has sent implied volatility in USDCNY down from 7.5% at the start of the year approaching 2% currently. Another reason why the PBoC might be hesitant for weakening USDCNY is that President Trump  is more critical of exchange rate manipulation than other presidents have been.

Commodity trading firm Noble Group has had a rough couple of days following guidance that it might not turn a profit until 2019. Share prices fell 23% down to S$0.67 (singapore dollars) which is the lowest since 2002. Today’s 23% drop follows a 32% drop yesterday. It is changing its CEO in an attempt to revive the business, but it struggling from what it calls a “challenging” operating environment for commodity trading as well as dislocations in certain markets it trades in. Bond prices are also doing terribly. Noble bonds due in 2022 were trading at $97.708 and today they changed hands at $42.166. Those bonds were recently issued and are already trading at a deep discount to par bringing the yield to 27%. Upcoming liquidity events for Noble include a $379mm bond due next March and an unsecured term loan of $1.1bn due in June of next year. It is in the process of securing credit lines to be able to make those payments.

Friday May 12

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