April 30. As US borrowing needs fall, the Fed will taper QE

–Just a few disparate pieces of news: First, from a few days ago, Sallie Mae had to cancel a bond offering due to lack of investor interest at a 3.5% coupon. Second, Deutsche Bank raised €5B through new stock issuance.  Third, the US announced that it’s paying down $35B in Apr-Jun quarter.  All relating to investor flows and behavior.
–Starting with the last item, the US is going to pay down debt this quarter.  Last year’s same quarter the US borrowed $172B.  As recently as Feb, the estimate was for a borrowing need of $103B.  As Peter Orzag mentioned on BBG tv, there has been a short-term (-sighted?) combination of increased taxes and the sequester.  Over the next qtr borrowing needs are expected at only $223B.  According to OMB the deficit for FY 2013 was projected $973B, but I saw another article, perhaps reflecting this new info, of an estimate of $845B, and at $972 the % of GDP was expected to fall from 7 to 6.  These are LARGE improvements. The Fed’s current QE is for $45B/month of longer term treasuries, or $540B/yr.  I believe the Fed has to modify (taper) their buying program simply because they will be monetizing nearly ALL issuance.  No wonder yields are down, supply will be withdrawn while the US gov’t is being restrictive regarding fiscal policy, perhaps contributing to an economic slowdown in general (as data misses indicate).
–But on a global stage DB easily raised €5b, diluting existing shareholders, yet the comfort of bringing capital ratios up caused the stock to surge nearly 8% after an initial swoon.  A piece on ZeroHedge said that DB has the largest derivatives book of all banks at $73 TRILLION.  Now I am not anti derivatives, but I do know that €5B is a drop in the ocean compared to that portfolio.  Further, DB raised capital because the ratings agencies were concerned about DB’s balance sheet.  If the new model is for depositors to “bail-in” banks, should they be worried about a gargantuan derivatives book?  A little far fetched I am sure, given DB’s tbtf status… (But depositors in Slovenia, which may need to tap funds, perhaps have a more visceral concern).
–On to Sallie Mae, which pulled a $225 million offering because investors have trepidations about the 90-day delinquency rate of 39%.  The US government guarantees many of the student loans that SLM grants; I am not sure of the amount.  I have read that student loans are the biggest “asset” of the US gov’t though.  The stock has gone from 17 to 20.50 this year; it was nearly unchanged yesterday.
–On the equity side, there seems to be little concern about quasi government institutions like SLM and DB; both have implied gov’t backing.  So did FNM and FRE…  And, the Fed is driving a fool’s quest for yield through risk.  For example Dow Jones Utilities are up 23% from mid-November.  But the pulled SLM bond deal shows there are limits.

–News today includes ECI expected +0.5.  Chicago PMI expected 52.4 same as last.  Consumer Confidence expected to bounce to 62.  Auction announcement tomorrow, possible cut back?  ISM and FOMC also tomorrow.
–Yesterday’s data included more fodder for bond bulls as PCE yoy was only 1.0%.

Posted on April 30, 2013 at 5:33 am by alexmanzara · Permalink
In: Eurodollar Options

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