By ALISTAIR BARR
U.S. Treasury bonds, often a top choice for risk-averse investors, are attracting more interest from hedge funds, according to a study released Wednesday by consulting firm Greenwich Associates.
Hedge-fund trading volume in U.S. government bonds surged in the past year. In 2009, hedge funds generated about 3% of trading in this market. This year, that share jumped to roughly 20%, Greenwich Associates said.
The move may be driven by two trends. Heightened sovereign-debt concerns may be creating more trading opportunities in the Treasury market. Hedge funds also may be responding to demands on the $1.8 trillion industry by institutional investors.
"Hedge funds over the past 12 months have been refocusing their attention onto more liquid products," Greenwich Associates consultant Tim Sangston said. "This change in approach reflects both shifts in investment strategies and the impact of liquidity demands on the institutions that supply a growing share of hedge-fund capital."
The Treasury-bond market is the most obvious example of this, but the trend can also be seen in the market for agency securities, which are backed by mortgage-finance giants Fannie Mae and Freddie Mac.
Hedge funds still make up a small part of the agency market, but their trading volume in these securities jumped by more than 60% from 2009 to 2010, Greenwich Associates said.
Hedge funds were hit hard by a wave of redemption requests triggered by the financial crisis in 2008. Many funds froze withdrawals, locking up investors' money for months.
Now, investors are pushing to be allowed to withdraw money more easily in times of market stress. To offer this, funds may have to keep more securities that can be sold quickly. Treasurys and agencies are among the most liquid securities.
Write to Alistair Barr at alistair.barr@marketwatch.com
From The Wall Street Journal published on AUGUST 13, 2010
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Goldman Sachs Says Don't Be Afraid as Bonds Trade Over Par: Credit Markets
By Shannon D. Harrington - Aug 11, 2010 6:18 PM GMT+0800
The highest corporate bond prices in more than six years show investors reconsidering an aversion to buying debt trading above face value as the Federal Reserve is compelled to take more steps to boost a slowing recovery.
The average investment-grade bond price has jumped about 4.5 cents to more than 110 cents on the dollar in the past two months as yields fell 73.5 basis points to 3.929 percent, according to Bank of America Merrill Lynch index data.
With short-term interest rates near zero and the pace of an economic recovery slowing, investors may drive prices higher as they turn to credit markets to bolster yields, said Alberto Gallo, a strategist at Goldman Sachs Group Inc., the U.S. bank that makes the most revenue from fixed-income trading.
“Even if prices look high, the current search-for-yield environment may drive them even higher,” Gallo said yesterday in a telephone interview from New York. “Investors have been worried about high prices because buying bonds trading substantially above par exposes them to more losses if spreads widen. When you put more capital to work, your level of risk increases as well.”
Fed officials said yesterday that a “more modest” recovery than anticipated is prompting them to retain a commitment to keep their benchmark interest rate close to zero for “an extended period.” The central bank will maintain holdings of securities to prevent money from being drained out of the financial system it helped prop up after the credit seizure in 2008. The Fed will reinvest principal payments on its mortgage holdings into long-term Treasury securities.
Spreads Widen
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt was unchanged at 175 basis points, or 1.75 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has narrowed 26 basis points since June 11. Average yields fell to 3.643 percent from 3.654 percent.
Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates set record lows. The cost of protecting company debt in the U.S. and Europe from default rose to the highest in almost two weeks. Leveraged loans weakened and in emerging markets, spreads climbed the most this month.
Fannie Mae’s 30-year fixed-rate, current-coupon securities declined about 2 basis points from Aug. 9 to 3.43 percent as of 5 p.m. in New York, keeping pace with 10-year Treasuries after the Fed’s announcement, according to data compiled by Bloomberg. That’s down from this year’s high of 4.67 percent on April 5, and surpasses previous lows reached several times this year, most recently at 3.45 percent on July 30.
Not ‘Major’
“From a mortgage market standpoint, it’s not a major event, except to the extent that Treasury rates rally, it will mean mortgage rates will follow,” Mahesh Swaminathan, a mortgage-bond analyst at Credit Suisse Group AG in New York, said yesterday in a telephone interview. The U.S. central bank’s decision was not “really a surprise,” he said.
The yield on 10-year Treasuries dropped 4 basis points to 2.72 percent as of 11 a.m. in London, according to BGCantor Market Data, and earlier touched the lowest level since April 2009. The yield on the two-year note fell 3 basis points to a record low 0.49 percent.
Bank credit may come under pressure and profits could suffer for years as the Fed, Fannie Mae and insurers step up demands on lenders to take back faulty mortgages, according to Moody’s Investors Service.
Repurchase Requests
Repurchase requests tied to mortgages made during the housing boom are increasing and expenses are rising at U.S. banks, New York-based Moody’s said in a report. New pressure is coming from the Federal Reserve Bank of New York, which acquired stakes in mortgage securities when it helped salvage Bear Stearns Cos. and American International Group Inc. in 2008, the report said.
The cost of protecting European company debt from default rose to the highest in more than two weeks. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, increased 3.75 basis points to 109.25, according to Markit Group Ltd.
The Markit CDX North America Investment Grade Index rose 2.55 basis points to 104.58 basis points in New York.
Asia Swaps
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bonds from Chesapeake Energy Corp. and Anadarko Petroleum Corp., which each sold $2 billion of notes on Aug. 9, were the most actively traded U.S. corporate securities yesterday by dealers, Bloomberg data show. Oklahoma City-based Chesapeake, the second-largest U.S. natural gas producer, had 299 trades of $1 million or more, while Anadarko, the oil company based in The Woodlands, Texas, that owns a stake in BP Plc’s damaged Gulf of Mexico well, had 214.
Anadarko’s 6.375 percent notes due in 2017 that priced at par fell 0.19 cent to 99.813 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Chesapeake’s $1.4 billion of 6.625 percent securities due in 2020 rose to 100.125 cents from par, Trace data show.
Leveraged Loans
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index fell 0.02 cent to 89.86 cents on the dollar. Loans have returned 4.16 percent this year based on the index, which tracks the 100 largest dollar-denominated first-lien leverage loans.
In emerging markets, spreads expanded 5 basis points to 263 basis points, according to JPMorgan Chase & Co. index data. That’s the biggest increase since relative yields on the debt climbed 7 basis points on July 28.
Declining interest rates and a savings rate that has reached the highest in almost 18 years may continue to fuel a reach for yield that has bolstered credit markets since 2009.
“Primary issuance is strong, but it’s a fraction of last year’s,” said Gallo, one of the strategists who wrote investors shouldn’t “be afraid of high prices” in a note to clients this week. “On the other hand, demand is closer to 2009, as shown by the $70 billion of inflows in investment-grade mutual funds, year-to-date. If investors get under-allocated in the primary market, they will eventually seek bonds in the secondary. High- priced bonds trading at a yield premium will soon look attractive.”
Default Risk
When prices are at or near face value, corporate bond investors typically look more at the excess yield that debt pays over Treasuries to determine whether the securities are cheap or expensive.
While the spreads on investment-grade debt have declined to 188 basis points from 600 basis points in March 2009, they’re still 56 basis points wider than in August 2007, when central banks globally pumped $135.7 billion into the banking system in an attempt to avert a growing crisis of confidence.
Investors may pay more attention to price as they stray higher from face value in part because they face greater losses if the risk of default increases. Even speculative-grade bonds now trade above par. Bonds rated in the two highest junk tiers are trading on average at 101.7 cents on the dollar, up from 97.1 cents on June 10, Bank of America Merrill Lynch index data show.
High-yield, high-risk debt is rated below Baa3 by Moody’s and lower than BBB- by S&P.
“There is that fear of a double-dip recession, and obviously you have a long way down from par if the outlook changes and the expectation becomes that default rates will rise,” said Martin Fridson, global credit strategist at BNP Paribas Asset Management in New York. “The other side is, I could eliminate that risk by not buying anything above par. But then you’re going to maybe be giving up at least a lot of current yield.”
To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net
From Bloomberg News published on Aug 11, 2010 6:18 PM GMT+0800
The highest corporate bond prices in more than six years show investors reconsidering an aversion to buying debt trading above face value as the Federal Reserve is compelled to take more steps to boost a slowing recovery.
The average investment-grade bond price has jumped about 4.5 cents to more than 110 cents on the dollar in the past two months as yields fell 73.5 basis points to 3.929 percent, according to Bank of America Merrill Lynch index data.
With short-term interest rates near zero and the pace of an economic recovery slowing, investors may drive prices higher as they turn to credit markets to bolster yields, said Alberto Gallo, a strategist at Goldman Sachs Group Inc., the U.S. bank that makes the most revenue from fixed-income trading.
“Even if prices look high, the current search-for-yield environment may drive them even higher,” Gallo said yesterday in a telephone interview from New York. “Investors have been worried about high prices because buying bonds trading substantially above par exposes them to more losses if spreads widen. When you put more capital to work, your level of risk increases as well.”
Fed officials said yesterday that a “more modest” recovery than anticipated is prompting them to retain a commitment to keep their benchmark interest rate close to zero for “an extended period.” The central bank will maintain holdings of securities to prevent money from being drained out of the financial system it helped prop up after the credit seizure in 2008. The Fed will reinvest principal payments on its mortgage holdings into long-term Treasury securities.
Spreads Widen
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt was unchanged at 175 basis points, or 1.75 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has narrowed 26 basis points since June 11. Average yields fell to 3.643 percent from 3.654 percent.
Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates set record lows. The cost of protecting company debt in the U.S. and Europe from default rose to the highest in almost two weeks. Leveraged loans weakened and in emerging markets, spreads climbed the most this month.
Fannie Mae’s 30-year fixed-rate, current-coupon securities declined about 2 basis points from Aug. 9 to 3.43 percent as of 5 p.m. in New York, keeping pace with 10-year Treasuries after the Fed’s announcement, according to data compiled by Bloomberg. That’s down from this year’s high of 4.67 percent on April 5, and surpasses previous lows reached several times this year, most recently at 3.45 percent on July 30.
Not ‘Major’
“From a mortgage market standpoint, it’s not a major event, except to the extent that Treasury rates rally, it will mean mortgage rates will follow,” Mahesh Swaminathan, a mortgage-bond analyst at Credit Suisse Group AG in New York, said yesterday in a telephone interview. The U.S. central bank’s decision was not “really a surprise,” he said.
The yield on 10-year Treasuries dropped 4 basis points to 2.72 percent as of 11 a.m. in London, according to BGCantor Market Data, and earlier touched the lowest level since April 2009. The yield on the two-year note fell 3 basis points to a record low 0.49 percent.
Bank credit may come under pressure and profits could suffer for years as the Fed, Fannie Mae and insurers step up demands on lenders to take back faulty mortgages, according to Moody’s Investors Service.
Repurchase Requests
Repurchase requests tied to mortgages made during the housing boom are increasing and expenses are rising at U.S. banks, New York-based Moody’s said in a report. New pressure is coming from the Federal Reserve Bank of New York, which acquired stakes in mortgage securities when it helped salvage Bear Stearns Cos. and American International Group Inc. in 2008, the report said.
The cost of protecting European company debt from default rose to the highest in more than two weeks. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, increased 3.75 basis points to 109.25, according to Markit Group Ltd.
The Markit CDX North America Investment Grade Index rose 2.55 basis points to 104.58 basis points in New York.
Asia Swaps
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bonds from Chesapeake Energy Corp. and Anadarko Petroleum Corp., which each sold $2 billion of notes on Aug. 9, were the most actively traded U.S. corporate securities yesterday by dealers, Bloomberg data show. Oklahoma City-based Chesapeake, the second-largest U.S. natural gas producer, had 299 trades of $1 million or more, while Anadarko, the oil company based in The Woodlands, Texas, that owns a stake in BP Plc’s damaged Gulf of Mexico well, had 214.
Anadarko’s 6.375 percent notes due in 2017 that priced at par fell 0.19 cent to 99.813 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Chesapeake’s $1.4 billion of 6.625 percent securities due in 2020 rose to 100.125 cents from par, Trace data show.
Leveraged Loans
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index fell 0.02 cent to 89.86 cents on the dollar. Loans have returned 4.16 percent this year based on the index, which tracks the 100 largest dollar-denominated first-lien leverage loans.
In emerging markets, spreads expanded 5 basis points to 263 basis points, according to JPMorgan Chase & Co. index data. That’s the biggest increase since relative yields on the debt climbed 7 basis points on July 28.
Declining interest rates and a savings rate that has reached the highest in almost 18 years may continue to fuel a reach for yield that has bolstered credit markets since 2009.
“Primary issuance is strong, but it’s a fraction of last year’s,” said Gallo, one of the strategists who wrote investors shouldn’t “be afraid of high prices” in a note to clients this week. “On the other hand, demand is closer to 2009, as shown by the $70 billion of inflows in investment-grade mutual funds, year-to-date. If investors get under-allocated in the primary market, they will eventually seek bonds in the secondary. High- priced bonds trading at a yield premium will soon look attractive.”
Default Risk
When prices are at or near face value, corporate bond investors typically look more at the excess yield that debt pays over Treasuries to determine whether the securities are cheap or expensive.
While the spreads on investment-grade debt have declined to 188 basis points from 600 basis points in March 2009, they’re still 56 basis points wider than in August 2007, when central banks globally pumped $135.7 billion into the banking system in an attempt to avert a growing crisis of confidence.
Investors may pay more attention to price as they stray higher from face value in part because they face greater losses if the risk of default increases. Even speculative-grade bonds now trade above par. Bonds rated in the two highest junk tiers are trading on average at 101.7 cents on the dollar, up from 97.1 cents on June 10, Bank of America Merrill Lynch index data show.
High-yield, high-risk debt is rated below Baa3 by Moody’s and lower than BBB- by S&P.
“There is that fear of a double-dip recession, and obviously you have a long way down from par if the outlook changes and the expectation becomes that default rates will rise,” said Martin Fridson, global credit strategist at BNP Paribas Asset Management in New York. “The other side is, I could eliminate that risk by not buying anything above par. But then you’re going to maybe be giving up at least a lot of current yield.”
To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net
From Bloomberg News published on Aug 11, 2010 6:18 PM GMT+0800
China Investment Vehicles to Issue More Bonds, Group Says
August 05, 2010, 9:39 AM EDT
By Bloomberg News
Aug. 5 (Bloomberg) -- China will probably let more investment companies backed by local governments issue bonds, according to the group that regulates the country’s interbank bond market.
On July 14, Shangrao City Construction Investment Development Group Co. sold 1 billion yuan ($148 million) of seven-year bonds, restarting sales a month after a central- government-imposed halt, the National Association of Financial Market Institutional Investors said in a report today.
Local governments set up financing vehicles to fund projects such as highways and airports after the central government restricted their direct-borrowing power this year because of concern money is going to non-viable projects.
“Under a situation where China’s economy might slow in the second half of the year, and as fiscal policy is expected to strengthen, issuance of local government financing platform bonds will inevitably increase,” the group said.
State media reported last month that the National Development and Reform Commission, China’s top economic planning agency, stopped approving bond issues by local financing platforms on concern that they might not be able to repay debts.
“In the intervening month the National Development and Reform Commission has again approved new bonds,” according to the group, also known as Nafmii. The interbank market is China’s most-liquid bond market.
The group also said the People’s Bank of China, the central bank, may cut the deposit reserve ratio in the third quarter. The central bank is likely to sell more than 1.5 trillion yuan of notes in the third quarter, as 1.359 trillion yuan of debt matures, it said.
Chinese monetary authorities have refrained from raising interest rates this year to cool economic growth that slowed to 10.3 percent in the second quarter. Instead, they have increased the ratio of reserves lenders must leave at the central bank.
“Loans and increased issuance of bonds will put definite pressure on the control of monetary supply,” the report said. While the central bank will continue its open market operations, “there is a possibility it may lower the deposit rate in the next quarter” as well, it said.
--Editors: Josh Fellman, Tom Kohn
To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net
From Bloomberg Businessweek published on August 05, 2010, 9:39 AM EDT
By Bloomberg News
Aug. 5 (Bloomberg) -- China will probably let more investment companies backed by local governments issue bonds, according to the group that regulates the country’s interbank bond market.
On July 14, Shangrao City Construction Investment Development Group Co. sold 1 billion yuan ($148 million) of seven-year bonds, restarting sales a month after a central- government-imposed halt, the National Association of Financial Market Institutional Investors said in a report today.
Local governments set up financing vehicles to fund projects such as highways and airports after the central government restricted their direct-borrowing power this year because of concern money is going to non-viable projects.
“Under a situation where China’s economy might slow in the second half of the year, and as fiscal policy is expected to strengthen, issuance of local government financing platform bonds will inevitably increase,” the group said.
State media reported last month that the National Development and Reform Commission, China’s top economic planning agency, stopped approving bond issues by local financing platforms on concern that they might not be able to repay debts.
“In the intervening month the National Development and Reform Commission has again approved new bonds,” according to the group, also known as Nafmii. The interbank market is China’s most-liquid bond market.
The group also said the People’s Bank of China, the central bank, may cut the deposit reserve ratio in the third quarter. The central bank is likely to sell more than 1.5 trillion yuan of notes in the third quarter, as 1.359 trillion yuan of debt matures, it said.
Chinese monetary authorities have refrained from raising interest rates this year to cool economic growth that slowed to 10.3 percent in the second quarter. Instead, they have increased the ratio of reserves lenders must leave at the central bank.
“Loans and increased issuance of bonds will put definite pressure on the control of monetary supply,” the report said. While the central bank will continue its open market operations, “there is a possibility it may lower the deposit rate in the next quarter” as well, it said.
--Editors: Josh Fellman, Tom Kohn
To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net
From Bloomberg Businessweek published on August 05, 2010, 9:39 AM EDT
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