Feb 23. An – B A N G ! !

–BIG story this morning is China’s takeover of Anbang Insurance Group. (A couple of BBG links at bottom). There have been many stories about China taking steps to deal with bad debt and malinvestment, and this is a HUGE concrete example.  What happens when debts become unwieldy and debt service costs are met by piling on more debt?  Assets are sold.  Liquidated.  I have no idea how much this will ultimately reverberate through the markets, but it comes on the heels of HNA, another large Chinese company, saying it would sell $4B in US assets as the financing noose tightens.   At the margin, this means tighter credit conditions, certainly in China but likely everywhere.  It probably also means a tilt towards protectionism, which could feed into inflation.  I don’t know how many times I’ve read that China has a huge debt problem, but that the state was big enough to deal with it.  We’ll find out now. My bet is that it’ll turn messy.

–Not many people were familiar with AIG until the US financial crisis.  Same with Anbang.  Is this China getting in front of the problem?  Or is it the first step in a deluge of asset sales.  When ‘assets’ aren’t covering debt service costs and are put on the selling block, it often comes as a shock how little they are actually worth.  This is bad for China’s growth, and likely a negative for global growth.
–My first inclination is to buy short dated treasuries; look for the curve to steepen.  In the near term it should throw questions on the idea of constant Fed hikes.  Is this why someone bought 50k FFJ the other day at 9834.5/35?  Does this news account for the relative strength in the front end yesterday?  As of this writing it doesn’t seem to have much of an impact on US stocks or bonds (ESH 2717 and TYH 120-16).  March treasury options expire today, and I would certainly look to buy some high gamma treasury calls.  While the March Fed hike might not be derailed, June comes into question. This is BAD for risk.

–In terms of yesterday’s action, yields fell a bit as the treasury concluded the 7 year auction.  I obviously think some of yesterday’s buying was from those in the know about today’s news.  Eurodollar strip was +3 to +4.5 across the strip. FF/ED spreads came in a couple of bps, for example, EDM8/FFN8 settled 40 vs a high close of 42 on Wed.  EDZ8/FFF9 closed -3 at 37.5, retreating from the high of the move set Wednesday of 40.5.  Though a decent amount of trades went through, I will note buying of EDZ9 9800 and 9825 calls (paid 10 in strip vs 9712 in 20k and paid 4 for another 15k of 9825 vs 9714).  These buys appear to be covers, but I will once again note that EDZ9 open interest is most on the board at just under 2 million, was up 50k yesterday.

 

https://www.bloomberg.com/news/articles/2018-02-23/china-regulators-to-take-control-of-anbang-insurance-for-1-year-jdz9l5fp
https://www.bloomberg.com/news/articles/2018-02-23/xi-s-debt-crackdown-goes-into-hyperdrive-with-anbang-takeover
CDX Investment Grade…  financing conditions are going to tighten.

Posted on February 23, 2018 at 4:08 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply