The Bounty Hunter and the Fugitive Collateral — The Flight Risk in the Corporate Bond Market

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‘Tis the season for bunnies, baskets and bill auctions. Wait – one of those did not belong. And yet, April will herald Treasury bill auctions that put optimists’ posits to the test. Is the spike in short rates a technical glitch that will right itself or is there an underlying issue?

At least we can all agree that borrowers of the $200-plus trillion in leveraged loans, interest rate swaps and mortgages linked to Libor worldwide sure do hope the technical glitch gets fixed and in a hurry. 2018 may be a young year but Treasury bill supply over the past five weeks has already exceeded the 2017 total by over two times. It should thus come as no surprise that demand for Treasury bills is at the lowest in nearly a decade. The first few trading days of April will bring bill auctions that should tell us a bit more about investors’ moods.

Speaking of the last decade, the yield curve is at its flattest in over ten years. After putting up quite a fight, the flight to safety trade finally kicked in during trading yesterday and carried over into the overnight hours. At 2.75%, the 10-year Treasury yield has broken through a key resistance level, technically speaking (again).

If you were just to look at the data, it might stand to reason that long rates are coming down, both here and abroad. Metals prices are receding, which typically flags a tempering in economic activity. On that other hand, rig count in the United States is at a three-year high implying downside to crude prices. Is it a coincidence that the Dallas Manufacturing index tanked in March? More to the point, what’s with all this worrying about inflation?

Please hold is the best answer I can come up with. Follow those earnings reports because other sorts of nefarious price pressures are eating many companies alive. The question is will Jay Powell take note of what companies report? Well, he did start the Industrials Group back in his Carlyle days.

It won’t take long to alarm Powell given what survey data have been saying about transportation and input costs rising. General Mills — cereal maker — gave a preview in one of the first earnings reports to be released commenting that input costs had risen so far so fast it caused the company to turn in a disappointing profits report.

As more companies follow suit, Powell should be emboldened to push for more tightening on the Fed’s part — raising probability that it will be four and not three rate hikes in 2018. Inflation and slowing growth? How very distasteful.

Investment bankers aren’t waiting for any verdicts to come in. They tried their college best to rack up their annual bonuses in just the first three months of the year. If they can manage to crank out another $5 billion in M&A activity in the last few days of the month, March 2018 will go down as the second highest monthly tally for M&A in history.

On the other, other hand, this cycle might just be gearing up for one last push. The yield curve has managed to not invert for the longest period on record, so we’ve got that going for us. Or is that maybe a bad thing? Remind me please. What happens when rates stay too low for too long?

For more on that (rhetorical) question, please enjoy this week’s foray into the wide (and I mean wide) of “investment grade” credit. You’ll understand the air quotes after you read, The Bounty Hunter and the Fugitive Collateral: The Flight Risk in the Corporate Bond Market


Happy Easter or Spring Break or both if they apply in sync, and as always, wishing you well,




PS.  Have you ever read something so good you had to share it? A few days ago my pal Richard Rosso tweeted out this gem of a quote that fits the times more than any I’ve recently read. Enjoy

Humans are prone to herd behavior – it is warmer and safer in the middle of the herd. We feel the pain of social exclusion in the same parts of the brain where we feel real physical pain. So being a contrarian is a bit like having your arm broken on a regular basis. — James Montier


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