Thursday June 29

Stocks fell today as volatility across markets driven by monetary policy comments continues. The S&P 500 fell 0.9% to 2,419 and the Dow Jones fell 0.8% to 21,287. The KBW Bank index rose 1.3% as interest rates continues to rise and utilities lost 0.8% for that same reason. James Bullard spoke today and said that he supported the current trajectory of interest rates which calls for one more hike in 2017. In Europe investors focused on similar comments from officials as well as data in Germany which showed that inflation is picking up. The 10 year bund yield rose 8bp to 0.45% and the 10 year gilt yield rose 9bp to 1.25%. In the US weak performances from the technology sector weighed on sentiment and drove prices lower, along with the concerns about higher rates. The 2 year Treasury yield was unchanged at 1.36%. The 10 year Treasury yield rose 5bp to 2.27%. Accordingly 2yr vs 10yr bear steepened 4bp to 0.91%. The dollar continues to weaken against peers. USD fell 0.5% against EUR to $1.1442. USD fell 0.2% against JPY to Y112.10. USD fell 0.6% against GBP to $1.3007 breaking the $1.30 technical level. Oil prices rose for the third consecutive day. WTI rose 0.3% to $44.87. Brent rose 0.2% to $47.39.

The selloff in government bonds continued for the third consecutive day following hawkish comments made this week by officials at the BoE, the ECB, and the Bank of Canada. Government bond yields in the US, Europe, and the UK have risen and for the most part those currencies have strengthened against the dollar. The comment that triggered the selloff earlier this week came on Tuesday from Mario Draghi who commented on the “strengthening and broadening” economic recovery in Europe. This is a quick reversal of sentiment from just Monday of this week when the 10 year Treasury yield fell to 2.13% on the expectation that rates would stay low for longer. Across financial markets rising government bond yields will have implications for equities particularly utilities and financials, currencies, as well as riskier fixed income investments. Some analysts point to certain structural factors at play in the market that will prevent yields from rising too much too quickly. With aging populations around the world, pension funds have to be putting money to work and insurance companies as well for life insurance portfolios. That along with the global search for yields leads analysts to believe that there are many large institutional investors out there with money to put to work and ready to buy the dip. Regardless in the near term this could lead to some volatility in fixed income and currency markets. That is a welcome development for funds and traders since it provides them with more investment opportunities compared to a not volatile market.

The World Bank is offering pandemic bonds for the first time, which resemble an insurance linked security that is intended to combat the spread of illnesses around the world. The idea for these bonds came from the spread of the Ebola outbreak a few years ago in which 11,000 people mostly in West Africa died. $7bn in donations were made to fight the disease, however analysts believe that if there was more funding earlier in the fight agains Ebola many of those lives would have been saved. Investors will purchase the bonds and in return they will receive a healthy rate of return. If there is a pandemic that meets certain criteria, some of their coupon payments or capital will be diverted from them to fight the outbreak of the disease. The bond raised $322mm and the World Bank also offered $100mm in swaps that offer protection from pandemics, which perhaps gives the investors a way to hedge their risks. They issued two types of bonds. One of the bonds covers pandemic influenza and coronaviruses which priced at 6.5% over Libor. The other bond covers filoviruses and yields 11.1% over Libor. Triggers determined by the World Health Organization related to the number of cases and deaths, growth rate of the disease, and geographical spread will determine whether or not the bonds redirect money from investors towards an outbreak. The World Bank in the past has been active in been issuing insurance linked securities designed to address natural disasters and other catastrophe bonds. Swiss Re, Munich Re, and GC Securities worked on the deal which was 2x oversubscribed but still priced below the original estimate.


Thursday June 29

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