June 21. Not ALL yields are low…

–Yields pressed lower Tuesday as crude oil continues to make new lows with CLQ down nearly $1/bbl yesterday at 43.51.  The ten year fell 3.3 bps to 215.3, but more importantly, many yield curve spreads made new lows.  For example, I marked 5/30 just under 98 bps, down nearly 4 on the day.  In eurodollars, the red/gold pack spread (2nd to 5th year) fell to a new low of 54.125.  The red/green pack spread (2nd to 3rd) closed at a new low of just 20.5 bps.  This spread had peaked above 44 in December, though in September to October it ranged from 12 to 19.  Boston Fed’s Rosengren yesterday: “Monetary policy is less capable of offsetting negative shocks when rates are already low.” I suppose that’s a reason to keep raising the FF target, but the long end isn’t dancing to the same music, and the flatter curve may, in an of itself, sow the seeds of the next negative shock.  In any case, October FF settled at 9881, indicating less than 15% odds of another hike in Sept.–Want yield?  Interesting item on Bloomberg yesterday notes the junk-rated Chicago Public School system is paying 9% on adjustable rate bonds, the maximum rate allowed.  The same article says that CPS is paying 6.39% for a short term $275 million loan to make a pension payment. It’s almost like a Chicago schools math problem: If I am the run the union and can get a kickback of 1.5% annualized on a short term borrowing of nine months, then where can I buy a Wisconsin summer house?  I would just point out that 20 year bonds in Greece were yielding 6.29% yesterday.  Illinois’ Comptroller yesterday sent a letter to state representatives saying the state would continue to make debt payments, but all else is in jeopardy. “I must communicate to you at this time the full extent of our dire fiscal straits and the potential disruptions that we face in addressing even our most critical core responsibilities going forward into the new fiscal year.”

–Existing home sales today expected 5.55m.  July treasury options expire Friday.  Maximum open interest on the call side is the 127 strike with 112k.


No Buyers for Chicago School Bonds Causes Rates to Hit 9 Percent
2017-06-20 18:21:30.319 GMT

By Martin Z. Braun
(Bloomberg) — Chicago’s school system is paying bond- market penalties similar to those seen during last decade’s credit crisis.
The junk-rated district, reeling from escalating pension costs and fallout from the Illinois budget gridlock, has been stuck paying punitive interest rates on $167.5 million of adjustable-rate bonds after PNC Capital Markets failed in March to resell the securities once previous owners sold them. The rate on the bonds, which are supposed to stay extremely low because investors can resell them to banks periodically, jumped to a maximum 9 percent on March 1 from 4.64 percent the week before and has stayed there ever since, according to data compiled by Bloomberg.
The spiraling interest bills are reminiscent of the chaos that erupted in the wake of the Lehman Brothers Holdings Inc.’s bankruptcy in 2008, when state and local governments were stung by soaring costs after investors sold the variable-rate securities en masse just as banks were scrambling to raise cash.
In Chicago’s case, though, it reflects how skittish investors have become about holding the debt of the cash-strapped school system.
“Chicago Public Schools has been unable to crate a fiscally responsible budget and it relies on outside sources that, as we see, sometimes comes through and sometimes don’t,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages $6 billion of municipal bonds, including about $3 million of insured Chicago school debt. “That’s unsettling investors.”
The school district agreed this week to pay a rate of 6.39 percent — subject to adjustment — for a short-term $275 million loan from JPMorgan Chase & Co. to help make a pension payment and cover the cost of staying open through the end of the school year. The schools didn’t receive $215 million more in state aid to make the retirement-fund contribution after a measure was vetoed by Governor Bruce Rauner. Illinois has failed to pass a budget for more than two years as the Republican governor and Democrat-led legislature battle over how to close the state’s chronic budget deficits.
Diane Zappas, a spokeswoman for Pittsburgh-based PNC Financial Services Group, didn’t immediately provide comment.
Michael Passman, a spokesman for Chicago’s schools didn’t immediately respond to an email.

Posted on June 21, 2017 at 5:32 am by alexmanzara · Permalink
In: Eurodollar Options

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