Two views on corporate debt

May 30, 2019

–While yields fell and near eurodollar calendar spreads continued to make new lows, buying pressure subsided near the end of the day and contracts closed well off early morning highs.  Tens ended the day (3:00pm mark) at 2.234%, down 2.8 bps.  EDM9/EDM0 settled -59 bps, -3.75, and EDZ9/EDZ0 settled -40.5, down 1.  As the reds continue to lead, some of the more deferred spreads are making new recent highs.  For example, red/blue pack spread edged to a new high of 12.625, up 1.25 on the day.  German bund made a new all time low of -17.9 bps.–Some late profit taking came after a relatively weak 7 year auction which featured low bid-to-cover of only 2.3.  Not too surprising given that foreign central banks, which are less sensitive to price, are less of a factor, and private buyers may have sticker shock given the recent decline in yields.

–New buyer of 100k EDQ 9787.5/9800 call spread for 1.25.  Settled there ref EDU9 9764.0s.  Apart from the trade war, the budget ceiling battle may also be in full swing by August, and with it a lack of t-bill supply.  Of course, Fed ease odds continue to rise.  FFF0 posted a new high settlement price of 9799, +3 on the day and just shy of 2%.

–There were two interesting notes yesterday concerning the corporate bond market, which featured rather different conclusions.  First, the NY Fed’s Liberty economics blog showed that while corp debt is a record of GDP, earnings are at record highs as well.  When taking earnings into account, debt burdens don’t appear onerous.  Second, this note showed that debt was mostly being funneled into acquisitions and buybacks rather than capex.  It’s well worth checking the link, if just for the charts.
https://libertystreeteconomics.newyorkfed.org/2019/05/is-there-too-much-business-debt.htmlOn the opposite side was a BBG interview with Pimco which featured Scott Mather.  “We have probably the riskiest credit market that we have ever had in terms of size, duration, and quality aspects.”  He essentially said that central banks have run out of ammo in terms of supporting asset prices; the US was the only central bank to ‘normalize’ and that high quality treasuries are the only place to hedge risky assets.  This interview followed the Pimco outlook piece: Dealing with Disruption.
https://www.pimco.com/en-us/insights/economic-and-market-commentary/secular-outlook/2019/economic-outlook-2019And it was also nicely summarized in a ZeroHedge piecehttps://www.zerohedge.com/news/2019-05-29/pimco-riskiest-credit-market-ever-central-banks-control-over-markets-coming-end

The point is, high levels of debt are currently being serviced, but if rates rise, or if a slowdown further endangers earnings, that may change in a hurry.  Like everything else, it’s all in the timing.  By the way, 30 year bond yields fell to important support levels of 2017.  If there was ever a place to take a shot at selling the long end (Ultra bonds) this is probably it.

30 year bond yield
Posted on May 30, 2019 at 5:09 am by alexmanzara · Permalink
In: Eurodollar Options

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