Friday, April 29, 2005
High- yield bond market troubles may herald worse to come
Hard times for high- yielding bonds may presage more rough days for the stock markets and the economy. Investors typically demand higher returns on high- yield debt ie junk bonds, to compensate for the risk that the issuers could go broke and not pay them back.
But in recent years default rates have been low and institutions and individual investors in search of higher payouts have snapped up billions of dollars worth of these bonds or mutual funds that specialize in them. Among the companies whose debt trades as junk are Qwest Communications International Inc., Nextel Communications Inc. and El Paso Corp.
Now investors are backing away from junk bonds as the economy shows signs of slowing and the Federal Reserve keeps bumping up interest rates.
Almost $1.5 billion in high-yield bond offerings were postponed last week, some leveraged buyout deals could be in trouble, and mutual fund investors are starting to cash out of high-yield bond funds.
Many of the factors causing the junk bond market to cool are unique to it.
The fear is that those downgrades will mean the junk-bond category will be awash with new debt. The total value of junk securities is about $900 billion. GM's rated debt, which doesn't include the car loans its financing arm makes to customers, total $200 billion, according to Standard & Poor's.
The volume of GM debt has investors worried that some institutions, including insurance companies and state pension funds, would be forced to unload their GM bonds because of rules requiring them to only hold investment-grade securities.
Other factors affecting the high-yield market are the same as fears roiling stock markets in recent weeks: The fear of inflation and anticipated interest-rate increases, which make sitting on cash look more attractive.
The change in the economic outlook follows a period when conditions in the junk bond market were close to ideal: Stocks weren't too volatile and interest rates were low. During the second half of 2004 and the beginning of 2005, virtually any deal could get done, the market was not discriminating. That's changed.
Three deals worth almost $1.5 billion, for junk bonds from Cheniere Energy Inc., Diamon Inc. and Hughes Network Systems were all postponed last week.
Banks trying to sell high-yield debt also are finding fewer buyers. A $3 million deal might get done, while a $3 billion deal might not get done because there aren't enough players.
Mutual fund investors are also getting nervous. They've pulled $1 billion out of high-yield bond funds in the last 10 days, while the total outflow for all bond funds was $1.3 billion, said Charles Biderman, president of Trim Tabs Investment Research, which tracks the flow of money in and out of the stock market and mutual funds.
Investors aren't leaving because they were losing a dramatic amount of money. Junk- bond funds declined only 1.3 percent in value, on average, in the last two weeks.
But in recent years default rates have been low and institutions and individual investors in search of higher payouts have snapped up billions of dollars worth of these bonds or mutual funds that specialize in them. Among the companies whose debt trades as junk are Qwest Communications International Inc., Nextel Communications Inc. and El Paso Corp.
Now investors are backing away from junk bonds as the economy shows signs of slowing and the Federal Reserve keeps bumping up interest rates.
Almost $1.5 billion in high-yield bond offerings were postponed last week, some leveraged buyout deals could be in trouble, and mutual fund investors are starting to cash out of high-yield bond funds.
Many of the factors causing the junk bond market to cool are unique to it.
The fear is that those downgrades will mean the junk-bond category will be awash with new debt. The total value of junk securities is about $900 billion. GM's rated debt, which doesn't include the car loans its financing arm makes to customers, total $200 billion, according to Standard & Poor's.
The volume of GM debt has investors worried that some institutions, including insurance companies and state pension funds, would be forced to unload their GM bonds because of rules requiring them to only hold investment-grade securities.
Other factors affecting the high-yield market are the same as fears roiling stock markets in recent weeks: The fear of inflation and anticipated interest-rate increases, which make sitting on cash look more attractive.
The change in the economic outlook follows a period when conditions in the junk bond market were close to ideal: Stocks weren't too volatile and interest rates were low. During the second half of 2004 and the beginning of 2005, virtually any deal could get done, the market was not discriminating. That's changed.
Three deals worth almost $1.5 billion, for junk bonds from Cheniere Energy Inc., Diamon Inc. and Hughes Network Systems were all postponed last week.
Banks trying to sell high-yield debt also are finding fewer buyers. A $3 million deal might get done, while a $3 billion deal might not get done because there aren't enough players.
Mutual fund investors are also getting nervous. They've pulled $1 billion out of high-yield bond funds in the last 10 days, while the total outflow for all bond funds was $1.3 billion, said Charles Biderman, president of Trim Tabs Investment Research, which tracks the flow of money in and out of the stock market and mutual funds.
Investors aren't leaving because they were losing a dramatic amount of money. Junk- bond funds declined only 1.3 percent in value, on average, in the last two weeks.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 11:28 AM 0 comments
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Thursday, April 28, 2005
eurozone debt yields slide on growth fears
Eurozone government bond yields yesterday hit all-time record lows as debt prices surged after a poor set of US data triggered fresh concerns about a slowdown in global economic growth.
Durable goods orders in the US unexpectedly dropped 2.8 per cent in March – the market had been expecting a 0.3 per cent increase – to make it the biggest decline since September 2002.
The US report added to gathering gloom about growth in the eurozone area and sent the yield on the 10-year benchmark Bund to a historic low of 3.406 per cent before recovering to 3.415 per cent, down 3.3 basis points. The yield on the two-year Schatz was 2.3bp lower at 2.285 per cent.
Yields have been flirting with the lows in recent weeks and the bullish tone in the eurozone bond market was evident throughout the day.
The German GfK survey for May fell to 4.9 from 5.1 in April, indicating that consumer sentiment would worsen in May. The French statistics office reported that business confidence fell to 97 in April from 101 in March.
US Treasury prices also rallied, sending yields sharply lower.
The durable goods report, which pointed to a potential slowdown in manufacturing activity, reignited the debate about whether the US, the world’s biggest economy, was entering a soft patch, leading the US Federal Reserve to pause its steady pace of interest rate hikes.
The weak data raised the possibility that today’s first quarter gross domestic product numbers could come in below the consensus 3.5 per cent annualised rate.
However, analysts pointed out that the durable goods data are often volatile month-on-month.
US government bond yields on both the two-year and the 10-year Treasury notes were down more than 7 basis points (bp) on the day, before weak demand in the latest auction of new two-year notes ended the rally and sent yields higher.
The two-year note traded at 3.64 per cent and the 10-year yield stood at 4.24 per cent in late New York trade.
Gilt prices in the UK followed other government bond markets higher. The two-year gilt was yielding 4.535 per cent, down 2.1bp while the 10-year gilt yield fell 2.2bp to 4.550 per cent.
The yield on the benchmark Japanese 10-year government bond rose by 0.5bp to 1.265 per cent as investors adjusted their positions ahead of the Golden Week holiday period, which starts tomorrow.
The slight rise in the yield came in spite of a moderate fall in Japanese equity prices as traders reacted to earnings results.
Durable goods orders in the US unexpectedly dropped 2.8 per cent in March – the market had been expecting a 0.3 per cent increase – to make it the biggest decline since September 2002.
The US report added to gathering gloom about growth in the eurozone area and sent the yield on the 10-year benchmark Bund to a historic low of 3.406 per cent before recovering to 3.415 per cent, down 3.3 basis points. The yield on the two-year Schatz was 2.3bp lower at 2.285 per cent.
Yields have been flirting with the lows in recent weeks and the bullish tone in the eurozone bond market was evident throughout the day.
The German GfK survey for May fell to 4.9 from 5.1 in April, indicating that consumer sentiment would worsen in May. The French statistics office reported that business confidence fell to 97 in April from 101 in March.
US Treasury prices also rallied, sending yields sharply lower.
The durable goods report, which pointed to a potential slowdown in manufacturing activity, reignited the debate about whether the US, the world’s biggest economy, was entering a soft patch, leading the US Federal Reserve to pause its steady pace of interest rate hikes.
The weak data raised the possibility that today’s first quarter gross domestic product numbers could come in below the consensus 3.5 per cent annualised rate.
However, analysts pointed out that the durable goods data are often volatile month-on-month.
US government bond yields on both the two-year and the 10-year Treasury notes were down more than 7 basis points (bp) on the day, before weak demand in the latest auction of new two-year notes ended the rally and sent yields higher.
The two-year note traded at 3.64 per cent and the 10-year yield stood at 4.24 per cent in late New York trade.
Gilt prices in the UK followed other government bond markets higher. The two-year gilt was yielding 4.535 per cent, down 2.1bp while the 10-year gilt yield fell 2.2bp to 4.550 per cent.
The yield on the benchmark Japanese 10-year government bond rose by 0.5bp to 1.265 per cent as investors adjusted their positions ahead of the Golden Week holiday period, which starts tomorrow.
The slight rise in the yield came in spite of a moderate fall in Japanese equity prices as traders reacted to earnings results.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 10:31 AM 0 comments
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Tuesday, April 26, 2005
Treasuries slip as equities bounce
Rising equity markets and the forthcoming sale of new short-dated paper were enough to move US Treasury yields higher and prices lower in an otherwise quiet trading session on Monday.
The US Treasury is set to sell $24bn of new two-year notes on Wednesday, which may have prompted some selling in the market by trading accounts.
The two-year Treasury yield rose 4 basis points to 3.65 per cent. Meanwhile, the yield on the 10-year Treasury, which fell below 4.24 per cent – as US equities opened higher – bounced back to about 4.26 per cent by afternoon trade in New York. The moves reduced the difference betwen the short and the long end of the yield curve to less than 62bp, from 66bp at the end of last week.
Eurozone government bond yields sank and prices rose on further weakening of business confidence in Germany. The Ifo Institute said its business climate index fell to 93.3 in April from 94.0 in March, the third consecutive monthly decline.
But prices dropped earlier highs, leaving the yield on the 10-year Bund 1.7bp lower at 3.449 per cent and the yield on the two-year Schatz 1bp higher at 2.313 per cent.
The market, however, is bracing for more disappointment, with six German economic institutes and the government expected later this week to revise down annual growth forecasts.
There was little domestic news to give direction to UK gilt prices, where yields followed their continental counterparts lower. The 10-year gilt yield fell 1.7bp to 4.576 per cent, while the two-year bond was yielding 4.569 per cent, down 0.6bp.
In Japan, investors scooped up government bonds, pushing the yields on the benchmark Japanese government 10-year bond by 2.5bp to near a 14-month low.
They were prompted in part by the chance to earn interest from bond coupons during next week’s Golden Week public holiday, during which bond and equity markets in Japan close close.
But investors were also prompted by a more depressing thought: the global flight to bonds as they become more pessimistic about both Japanese and global economic prospects.
The US Treasury is set to sell $24bn of new two-year notes on Wednesday, which may have prompted some selling in the market by trading accounts.
The two-year Treasury yield rose 4 basis points to 3.65 per cent. Meanwhile, the yield on the 10-year Treasury, which fell below 4.24 per cent – as US equities opened higher – bounced back to about 4.26 per cent by afternoon trade in New York. The moves reduced the difference betwen the short and the long end of the yield curve to less than 62bp, from 66bp at the end of last week.
Eurozone government bond yields sank and prices rose on further weakening of business confidence in Germany. The Ifo Institute said its business climate index fell to 93.3 in April from 94.0 in March, the third consecutive monthly decline.
But prices dropped earlier highs, leaving the yield on the 10-year Bund 1.7bp lower at 3.449 per cent and the yield on the two-year Schatz 1bp higher at 2.313 per cent.
The market, however, is bracing for more disappointment, with six German economic institutes and the government expected later this week to revise down annual growth forecasts.
There was little domestic news to give direction to UK gilt prices, where yields followed their continental counterparts lower. The 10-year gilt yield fell 1.7bp to 4.576 per cent, while the two-year bond was yielding 4.569 per cent, down 0.6bp.
In Japan, investors scooped up government bonds, pushing the yields on the benchmark Japanese government 10-year bond by 2.5bp to near a 14-month low.
They were prompted in part by the chance to earn interest from bond coupons during next week’s Golden Week public holiday, during which bond and equity markets in Japan close close.
But investors were also prompted by a more depressing thought: the global flight to bonds as they become more pessimistic about both Japanese and global economic prospects.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 9:13 AM 0 comments
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Monday, April 25, 2005
FED to continue raising interest rates
The US Federal Reserve is "not yet finished" bringing up interest rates to a normal level after seven straight increases of a quarter percentage point, central bank governor Donald Kohn said on Friday.
In a speech to a New York economics conference, he said the federal funds rate, now at 2.75 percent, is likely to keep rising at a "measured" pace, the term used by the Fed to signal a quarter-point.
Kohn said the Fed remains on its path of "removing the unusual degree of policy accommodation," or extremely low rates to ward off deflation and stimulate growth.
"We have not yet finished this task: The federal funds rate appears to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run, and, if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace," he said.
Kohn said the bank is focused on keeping inflation in check while maximizing growth, and not on other factors such as the housing market or the current account deficit.
"These imbalances certainly affect the forces of supply and demand and have consequences for price stability. Nevertheless, their direct influence on monetary policy is limited," he said.
"We should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly," Kohn said.
At the same time, the Fed would not hesitate to raise rates even if the higher rates mean higher debt-servicing burdens for the current account, the government, or households.
"In my view, our role is to anticipate as best we can the macroeconomic effects of imbalances and their correction and to respond to unexpected changes in asset prices and spending propensities as they occur," he said. "It is through such actions that we aim to achieve our objective of economic stability."
In a speech to a New York economics conference, he said the federal funds rate, now at 2.75 percent, is likely to keep rising at a "measured" pace, the term used by the Fed to signal a quarter-point.
Kohn said the Fed remains on its path of "removing the unusual degree of policy accommodation," or extremely low rates to ward off deflation and stimulate growth.
"We have not yet finished this task: The federal funds rate appears to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run, and, if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace," he said.
Kohn said the bank is focused on keeping inflation in check while maximizing growth, and not on other factors such as the housing market or the current account deficit.
"These imbalances certainly affect the forces of supply and demand and have consequences for price stability. Nevertheless, their direct influence on monetary policy is limited," he said.
"We should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly," Kohn said.
At the same time, the Fed would not hesitate to raise rates even if the higher rates mean higher debt-servicing burdens for the current account, the government, or households.
"In my view, our role is to anticipate as best we can the macroeconomic effects of imbalances and their correction and to respond to unexpected changes in asset prices and spending propensities as they occur," he said. "It is through such actions that we aim to achieve our objective of economic stability."
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:49 AM 0 comments
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