June 2. Paper claims…wealth, until a spark starts a fire

–Rate futures came under heavy selling pressure Monday though volume was light.  Active corporate issuance schedule combined with better than expected ISM was the main factor.  Though Core PCE deflator was just +1.2% yoy, ISM prices were 49.5 vs expected 43.  In addition Fischer’s speech about lessons learned in financial crises had this snippet, “…it is not clear that there are sufficiently strong macroprudential tools to deal with all financial instability problems, and it would make sense not to rule out the possible use of the interest rate for this purpose, particularly when other tools appear to be lacking.”  I.e. sometimes rates need to be increased to wring out financial excess.  Anyone see a chart of margin debt recently?  http://www.businessinsider.com/stock-market-margin-debt-2015-5
–Ten year yield rose 9.5 bps to 219.   In euro$’s greens, blues and golds all fell more than 10 bps (-10, -10.875, -11.375).  The curve steepened with red/gold pack spread +5.125 to just under 137.5.
–In terms of corporate issuance, note that corporate debt is already at a record level of $7.6T as of the end of last year, at a growth rate of 7.5% in Q4 2014.  In all likelihood those numbers have accelerated.   Makes sense for companies to borrow at these low rates, but balance sheets on the whole become more vulnerable, something that Fischer seems to be concerned about.  As Doug Noland said in his last missive, “Never have such enormous quantities of global securities and financial instruments been perceived as safe or low-risk (“money-like”)”… further noting that these paper claims constitute much of the ‘wealth’ of the modern world.  Though there’s still demand for long dated assets (Petrobras issued 100 year paper at 8.45%), the rate structure in much of the developed world doesn’t appear to compensate for risk.  There’s an interesting post on ZeroHedge citing Citi about the downgrade feedback loop:

     For many issuers’ credit contracts, a drop to a speculative grade rating acts as a payments trigger.

And they’re talking about Chicago and its new status as junk.  When it starts to go bad, it happens all at once.
–But it’s not just in the financial world where an unexpected explosion can occur…”Continuing a recent pattern of military exercises conducted with Pacific allies, the United States began major anti-submarine drills with South Korea on Monday. The largest of its kind, the exercises are meant to counter a perceived threat from North Korea.”  What could go wrong?

Posted on June 2, 2015 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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