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Weekly Fixed Income ETF Overview & Outlook: Cypress Hill Edition
March 18, 2013 01:18 PM
FIXED INCOME WEEKLY
I had planned to look at interest rates across the world. To show where US 10-year yields stood relative to other countries (2% actually looks like a good yield). To show that volatility in treasuries and FX is picking up relative to stocks (a bizarre consequence of global QE).
In the end, I will spend a few minutes on Cyprus.
As part of another “bailout” in Europe, Cyprus will place a “tax” on deposits. It is 6.75% on amounts less than €100,000 and 9.9% on amounts above. The numbers are less important than the fact that the EU has done this.
One of our themes in the past month as we have turned bearish on Europe in particular is that the
ECB is NOT the Fed
During our crisis, the FDIC increased its protection of depositors. It increased the amount that was guaranteed. They allowed banks to issue FDIC insured bonds so they could tap into other pockets of money. The action in Cyprus is the exact opposite.
Yes, you can argue that the allegations that much of the deposit base was money laundering for the Russian,s but then go after it properly, not through this mechanism. You can argue the banks were unsustainable and depositors would have losses anyways, fine, but go through the formal process to determine losses.
Cyprus is small enough I’m not looking for a big immediate reaction. The economic data has been okay and we are still being force fed QE so there is support for the market, but longer term this action in Cyprus could cause weakness in Europe and a more widespread realization that the ECB has talked up the market for months, but isn’t actually able to act.
QE and the FOMC
We get a full post FOMC press conference this week. Look for Bernanke to defend QE. Look for a much more aggressive series of questions, particularly after last week’s economic data showed both strength and signs of inflation.
The Fed wants to continue to do QE, but there is growing resistance within the Fed and Treasury to the program, and with inflation creeping up, consumer confidence ratcheting down, there will be greater public opposition to it.
While nothing will change, this press conference is far more likely to cause some risk off trading than add to recent record highs. Bernanke tends not to respond well to hostile and informed audiences. He doesn’t like his “genius” challenged. He is great a prepared statements, and can easily dismiss silly questions that can’t be followed up on at DC hearings. He has performed less well when his policies have been questioned by those with facts and figures and well thought out opinions. This could be interesting.
TF Market Advisors in the Media
We had a busy week in the media. We were in
on junk bonds and the pull to par effect. I appeared on
where we actually spent some time talking about our business in addition to the markets. We were in the
Wall Street Journal
discussing the treasury market. On Friday we were in the
market wrap on Friday discussing why CPI data had a negative impact on the markets, and finally, were mentioned on CNN in regards to JP Morgan and the testimony in DC.
Sentiment versus Reality, or What is Priced In
Treasuries, the 10 year in particular, is now our favorite fixed income allocation. Investment grade CDS still looks attractive, but with the roll coming up, and the recent strength, we have recommended being flat or short that market.
Bank credit spreads continue to look cheap but weakness in Europe last week could spill over into the US this week (think someone knew something about Cyprus?).
Leveraged loans and high yield have both gotten far too rich where the upside is minimal (some current income) but the downside is higher than people realize as leverage is being used throughout the system and liquidity may be at an all-time low if you actually need liquidity.
The problems in Spain and Italy are being ignored and that debt shouldn’t be owned here. I think France is overpriced as is Germany, but we may see some “redenomination” talk creep back into the market.
ALL DATA IS FROM THURSDAY MARCH 7th To THURSDAY MARCH 14th.
We continue to like treasuries here. They seem to have found support and with the uncertainty in Europe starting again should do well. TIPS in particular are interesting as signs of inflation are appearing (well except to the Fed, but that is another story).
Credit Performed Well
Credit had a good week. High Yield did well again. Investment grade credit spreads tightened. CDS, which we like, and have lamented how difficult it is for smaller institutions and individuals to participate in, did very well with the domestic CDS indices leading the way.
As much as we like leveraged loans as an asset class, BKLN is overdone. This is not an asset class that should be bid up this high. We like loans, and
Powershares Senior Loans
) is okay as well, but this is time for a pause. Let the system digest the inflows. Let some new issues come, let prices drift back down a little and then buy. The yields on the loans are only going down – lower LIBOR floors, and “flex” pricing. The prices drift lower with calls. A great asset class, often under appreciated and under invested, but one that isn’t particularly liquid and for now shouldn’t be chased.
There really is no reason for leveraged loans to outperform high yield so much in an up week. In a down market the defensive nature of loans should kick in, but this is just a bit strange (though goes in line with our view that even high yield bonds have run out of price appreciation opportunities).
A bad week for munis. Whether it was treasury related, sequester related, or some rotation, it wasn’t a good week. We like munis.
EM Bonds – Back to Warning
EM debt has been a reliable warning sign for EM stocks. The picture isn’t great. Even the “currency wars” couldn’t help local currency debt. Of all the indicators we look at for signs of potential global weakness, EM has been a good leading indicator and is pointing that way again.
Dividend Stocks and Income Stocks
iShares US Preferred Stock Index Fund
) did well. That went well with our theme from last week that bank credit spreads were too cheap. JPM CDS did very well dropping from 76 to 69 and Citi and Bank of America did even better. We continue to believe that the “stigma” period is ending and that investors will realize in the new world that bank credit should trade at a premium again, not their stocks (this reversal in mentality is just starting). We think it continues.
Fixed Income Allocations
” strategy is meant to have limited number of trades. It would only be readjusted as longer term views change, or short term views become very large or very strong.
The core strategy has high duration risk and medium on the credit exposure.
” is meant to have more frequent rebalancing and to capture smaller moves in the market.
An aggressive position in rates here.
Aggressive Trading Strategy
” is meant to be traded frequently and will expect to generate more from positioning than from yield.
The portfolio is aggressively positioned for duration and is looking for underperformance in high yield.
No positions in stocks mentioned.
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