FIN Current Events

why is the treasury market less liquid?

- decline in retail investors bc spooked bc of rapid rates - more expensive for banks to buy and keep treasuries - Japan and China have changed their purchaisng of treasuries - quant tightening for anti-inflation

British Credit Market CE

- British credit markets are starting to buckle under pressure - more pressure is expected from the fed as earnings are under extreme pressure - investors are buying bonds that can ride out the economic downturn (BBB bonds are the sweet spot) - govt announced tax reform which crashed the British pound and the UK government bond sell-offs

Arizona sports park early cash crunch squeezes bond holders CE

- Fed intervened to buy the muni bond to bring liquidity back - conduit issuers: private firms, typically non-profits, can borrow at tax-free rates with help of govt agencies, and not responsible for repaying the debt at all - *yields rose in the early pandemic, then the Fed announced that they would accept Muni bonds as collateral* - bond prices are plummeting, unprecedented labor issues, construction costs are soaring - giving tax subsidies to a for-profit company

rocky treasury market traiding battles with wall street

- US treasury market considered most liquid in the world and sets rates for rests of bonds - liquidity is an issue, trading t a higher yield, lower bid and offer sizes

GDP report shows economy grew 2,,6% in third quarter

- consumer spending continues to increase despite rising interest rates and prices, increase in govt spending

Fed minutes impact on investor appetite

- fed will start raising interest rates by .5 rather than .75, leading major indicies to rise - investors are gaining confidence that ultra-aggressive fed action will be in the rearview mirror - the NSADAQ is more sensitive to bond yields

World's central banks race to raise rates after fed increases, bond yield surge as post-fed hangover hits stocks CE

- global monetary policy aims to fight inflation - central banks around the world continue to fight against inflation - Uk raised rates for the 7th consecutive time - Swiss brought rates above 0 for the first time since 2014 - Japan sold dollars and bought yen, the first intervention in the market since 1998 - Turkey cut rates from 13% to 12%, despite 80% inflation levels - price volatility of longer-rated bonds is higher than shorter-rated bonds

India debuts green bonds sale

- green bonds are used to fund projects that benefit the environment, planning to release $2B in green bonds by March 31 - investors will have to buy at lower yields - can be tricky to make sure they are legit, proceeds going to real places, sustainable, etc - greenium: premium to buy these green bonds

Debt Financing in Elon Musk's Twitter Takeover

- he is using $45M in his cash, a $13B in buyout loans - interest ranks are much higher now than in April when they locked in the interest rates (12.5% compared to 16%) - two options for banks: sell off the debt,. or hold the debt in their balance sheet hoping for market recovery

Strong Labor Market and a Higher Consumer Price Index will Trigger Higher Treasury Yields

- incredible volatile and recession-risky market - unemployment went down - food and energy very volatile - concern that short-term rates will go up aggressively

Saudi Sovereign-Wealth Flub Issued 100-year Bonds

- issued 5, 10, and 100-year bonds - plan to invest up to $10M by 2026 - sale will help with sustainable projects, green bonds, but will not invest in Russian programs - investing in NOEM

Overweighting agency mortgages by money managers

- major investors are seeing agency mortgages closest to the cheapest they've been seen the financial crisis (ways to beat the benchmark) - now have a positive convexity, usually have negative - prepayment risk is highly predictable, has decreased as interest rates have increased - homeowners unlikely to refinance mortgages - bonds will become more valuable - the Fed is normally the biggest buyer, but they will hold out this year - two things to watch out for: who will become the new biggest buyer and will the fed sell down on its holdings

Housing Market CE

- mortgage rates currently at 6%, mortgage rates increase as bond rates increase, mortgages currently higher than treasuries - home prices starting to slow, home sales at weakest level - housing sector is the most sensitive to interest rates in the economy - correlated to moves in the 10-year treasury - Fed is a big buyer/seller of mortgages

European Central Bank's Monetary Policy CE

- raised the eurozone key rate (FFR) 75 basis points, concerning the Euro inflation rate, 9.1% inflation rate in August - Inflation is spreading beyond energy - euro keeps dropping - the US has banned Russian debt, and a lot of asset management firms own Russian bonds, even though Russia defaulted a few months ago

JP Morgan, PGIM say its time to buy high grade bonds CE

- really positive long-term opportunity in fixed-income which we haven't seen since 2009 - now, inflation rate risk is the main driver instead of credit risk - would be willing to take on more credit risk right now - mortgage rates are going wayyy up

labor markets report

- strong report compared to prepandemic numbers - slowing the labor market is one of the Feds goals, but they are not close yet and will continue to increase rates

Energy Dynamics in Europe CE

- the Ukraine war and how it is affecting gas prices - dependency on gas in germany - OPEC wants to raise prices again - Russia weaponizing weapons - *commodity prices up* - bond yields have fallen Russia

Changes in the Municipality Market CE

- these are taxable, but are typically less volatile - *due to rising interest rates, municipal bond prices have been falling* - a lot of money is being taken out of the market ($85B has flowed out of the muni market) - he predicts munis are gonna get hammered

A $1T burden looms over the world borrowers refinancing debt CE

- u used to be able to borrow new debt to pay off older debt, cannot do tho when inflation is high - Europe to bear the worst of the global recession

10 year treasury rate

3.58%

fed funds rate

3.78%

2 year treasury

4.4%

current US inflation

7.7%

Transition from LIBOR to SOFR

LIBOR - LIBOR set each say by collecting estimates from 18 global banks on the interest rates that they WOULD charge other banks for different loan securities, unsecured - LIBOR had some scandals and related to 2008 financial crisis - 2012: investigations uncovered schemes to manipulate LIBOR rates for personal profit - interest rate swap market is tied to LIBOR - June 30th, 2023, LIBOR will stop, and SOFR will take its place SOFR - based on the rates US financial institutions pay each other for overnight loans, administered by fed, essentially overnight repo rates, secured - less vulnerable to manipulation bc it is based on actual transaction rates compared to hypothetical key difference: *SOFR is more safe, and is collateralized by treasury notes, no credit risk, based on actual transaction rates*

Uptick in Demand from Retailers for Brick and Mortar Spaces

explains itself

businesses rush to sidestep rate shock by paying down debts

higher interest rates causing companies to pay down debt planning for a recession - downside of paying down debt: possible drain on case, equity holders could lose - investment grade companies issued so much debt during q1 2022

biggest news on capital markets

inflation data surprised on down side, maybe fed will slow its rate of increases - CPI below expectations

bank bond holding and rising rates

rising interest rates, discrepancies between market value and book value of bonds *holding to maturity pros and cons* - pros: wont realize losses, limits volatility of earnings stream - cons: if u need cash will take a loss,