California Bond Yield Penalty Narrows on Gain in Demand

By Michael B. Marois - Apr 11, 2012 12:01 PM GMT+0800

Article from Bloomberg

California (STOCA1), poised for its first credit upgrade by Standard & Poor’s since 2006, is selling $1.3 billion of debt with its relative borrowing cost at the lowest point in more than three years.

California yesterday took orders for bonds maturing in 10 years with a preliminary yield of 2.82 percent, or 58 basis points more than top-rated securities, the smallest spread to AAA rated debt since November 2008, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

S&P, which puts California’s general obligations at A-, its fourth-lowest investment grade and the worst ranking for any state, in February changed its credit outlook to positive after Governor Jerry Brown, 74, and lawmakers took steps to ease a looming cash shortfall and cut the $20 billion annual structural deficit by three quarters.

“They’re definitely getting a better acceptance right now, just given that they’ve taken some positive steps over the last year,” said Daniel Solender, who manages more than $15 billion of municipal securities at Lord Abbett & Co. in Jersey City, New Jersey. “The deficits looking forward, while still sizeable, aren’t as big as they were.”

Treasurer Bill Lockyer is selling $890 million of general- obligation bonds for public works and $410 million to refund debt. He’ll seek bids from individuals again today before final pricing with institutions such as mutual funds tomorrow. He offered 30-year maturities yesterday at 4.45 percent, or 77 basis points more than top-rated securities.

Lower Volume

Brokers took orders for 25 percent of the debt during the first day of sales, Lockyer said. By comparison, 38 percent was sold on the first day of a $2 billion offering last month.

California has reduced the amount of general-obligation bonds it sells to the smallest two-year total since 2006 as lawmakers work to erase budget deficits. The latest sale will probably be the state’s last until around October, Tom Dresslar, a Lockyer spokesman, has said.

Combined with Brown’s proposal to raise income taxes, the lack of new offerings has stoked demand after municipal-bond yields reached four-decade lows earlier this year. The rate on general-obligation debt maturing in 20 years fell to 3.6 percent in the week ended Jan. 19, the lowest since April 1967, a Bond Buyer index shows. The index climbed to 4.08 percent last week.

Cooling Interest

The narrowing difference between California bonds compared with top-rated debt has cooled interest among some investors.

“We did see the deal and perceived it as narrow and so we declined it,” said Josh Gonze, co-manager of the $297 million Thornburg California Limited-Term Municipal Fund in Santa Fe, New Mexico. “But other investors will approve of it and say yes. So they will get the deal sold, but they won’t be able to sell any to Thornburg because we want to see more spread for this credit.”

Brown, a Democrat, has proposed erasing a $9 billion budget deficit partly by asking voters to temporarily raise income and sales taxes at the ballot box in November. If that fails, his plan calls for $5 billion of automatic cuts midway through fiscal 2012, which begins July 1. Most would come from schools.

The state’s fiscal condition remains precarious. March revenue trailed budget projections by 4.2 percent, missing the forecast by $233.5 million, according to Controller John Chiang.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

Article from Bloomberg

Deserved or Not, T-Bonds Are Set Up For A Rally

Tom McClellan|April 06, 2012|

Article from Business Insider

There are lots of investments that are undeserving of investors' money, and T-Bonds are at the top of the list.  Even though the principal is guaranteed by Uncle Sam's (or Uncle Ben's) ability to print new money, the current yield on even the longest duration bonds is still at roughly the same level as the inflation rate.  So any interest you earn on your money gets eaten up by the loss in value of that money due to the Fed's unwillingness to do its job and achieve price stability. 

But in the financial markets, whether or not an investment is "deserving" often bears very little on whether people will invest in it.  Logic is not mandatory.

This week's chart makes the statement that T-Bond prices are headed higher, and it does so in a roundabout sort of way.  In the upper portion of the chart is the price plot of T-Bonds (continuous near month contract).  The lower plot shows an indicator derived from data in the CFTC's weekly Commitment Of Traders (COT) Report.  But rather than look at the data on T-Bonds themselves, which can sometimes give wishy-washy information, here we are looking at the commercial traders' net position in the Japanese yen.

Commercial traders are the "big money" traders who hold large positions.  How large is "large" differs among the various futures contracts, and the CFTC sets out the rules for those determinations.  Because the commercial traders are the big money, the presumption is that they are also the "smart money". 

Right now, commercial traders of Japanese yen futures are holding a really big net long position.  That means they think that the yen will go up in value versus the dollar, and so they have positioned themselves to profit from that expected move.

The whole reason why this is relevant for T-Bond prices is that there is a really strong positive correlation between T-Bond prices and the Japanese yen.  But this has not always been so.  The chart below shows that relationship, and you can see that before about mid-2001, it used to be an inverse relationship.  Somebody flipped a switch in 2001, and now it is a strong positive correlation.  

So because the yen does pretty much what T-Bond prices do, at least in terms of the direction of travel, we can make reasonable inferences about what lies ahead for bond prices by looking at what lies ahead for the yen.  When the commercial traders are holding their biggest net long position in Japanese yen futures in several years, the implication is pretty strong that the yen should head higher in the coming weeks.  And as the yen heads higher, T-Bonds ought to tag along, whether they deserve to go up or not.

Given what we have learned from another borrowed COT Report relationship, that positive period for T-Bonds is not likely to last beyond early June.  The inverse relationship between T-Bond price and stock prices is still working very well, so the opportunity for T-Bond prices to advance should only last as long as stocks are in a corrective mode, and that corrective mode is scheduled to be finished by early June. 

Article from Business Insider

Asia Stocks Slide as Europe Debt Crisis Concern Flares

By Yoshiaki Nohara - Apr 5, 2012 3:49 PM GMT+0800

Article from Bloomberg

Most Asian shares fell, with the regional benchmark index headed for its biggest two-day decline in a month, after Spain struggled to sell bonds, renewing concern Europe won’t be able to contain its debt crisis.

Hutchison Whampoa Ltd. (13) and other companies that do business in Europe slid after demand fell at a Spanish government bond auction, sparking concern about the region’s sovereign-debt crisis. Industrial & Commercial Bank of China Ltd. dropped 2 percent after Premier Wen Jiabao said China needs to break the “monopoly” of a few big lenders. Soho China Ltd. rose 2.5 percent, leading gains among mainland developers after Credit Agricole SA said China is “almost guaranteed” to ease monetary policy further this month.

The MSCI Asia Pacific Index dropped 0.1 percent to 125.33 as of 4:47 p.m. in Tokyo after losing as much as 1.2 percent. More than two shares fell for each that rose on the measure, which yesterday slid 1.5 percent, the most since Dec. 19, after the U.S. Federal Reserve signaled it may not offer more stimulus.

“Expectations for China’s additional easing are causing short-covering,” said Yutaka Miura, a senior technical analyst at Mizuho Securities Co. “It’s not that a real solution has been brought to Europe’s crisis. That’s why Spain’s debt sale is reviving concern.”

BOJ Nominee

The MSCI Asia Pacific Index has risen about 10 percent this year amid signs the U.S. economy is recovering. Gains slowed after China last month cut its target for economic growth as it seeks to cool the property market and become less dependent on exports.

Japan’s Nikkei 225 Stock Average pared a loss to 0.5 percent after the rejection of a Bank of Japan nominee came as a victory for lawmakers pressing for more monetary easing.

South Korea’s Kospi Index rose 0.5 percent after the government said foreign direct investment into the nation increased 17 percent in the first quarter. Australia’s S&P/ASX 200 fell 0.3 percent.

Hong Kong’s Hang Seng Index retreated 1.1 percent, with trading volume 6.9 percent below the 30-day average. Markets in the city were closed yesterday for a holiday and will also be shut tomorrow. India and the Philippines are having holidays today.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, rose 1.7 percent after the government said it will more than double the amount foreigners can invest in equities, bonds and bank deposits.

A measure of volatility on the Hang Seng index rose 7.9 percent to 19.99, indicating traders expect a swing of 5.7 percent on the gauge over the next 30 days. Readings for the Nikkei 225 and core stocks on South Korea’s benchmark dropped.

Spain Debt Sale

Futures on the Standard & Poor’s 500 Index (SPXL1) advanced 0.1 percent today. The gauge sank 1 percent in New York yesterday after a measure of conditions at U.S. service companies showed slowing growth.

In Europe, Spain struggled to borrow in financial markets yesterday, selling 2.6 billion euros ($3.4 billion) of bonds at an auction, an amount that was near the bottom of a range set by the Treasury for the sale. European Central Bank President Mario Draghi said the region’s economic outlook is “subject to downside risks.”

“Investors realize those economies are heading into a significant recession,” said Andrew Pease, Sydney-based chief investment strategist for the Asia-Pacific region at Russell Investment Group, which manages about $150 billion. “Gains from here are going to be hard work.”

Companies that do business in Europe slid. Hutchison Whampoa lost 1.9 percent to HK$76.20. Cosco Pacific Ltd. (1199), which operates container facilities at Greece’s Piraeus port, slid 1.9 percent to HK$11.36 in Hong Kong. Nissan Motor Co., a carmaker that gets almost a fifth of its revenue from Europe, lost 1 percent to 869 yen.

‘Almost Guaranteed’

Stocks in the Asian-Pacific index, which includes companies from emerging markets, are valued at 1.4 times book value, compared with 2.3 times for the S&P 500 and 1.4 times for the Stoxx 600, according to Bloomberg data. A number below 1 means companies can be bought for less than value of their assets.

Stocks pared losses amid speculation China may relax some of its measures aimed at damping inflation.

The country is “almost guaranteed” to either cut interest rates or reserve requirement ratios in April, Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole, said in a Bloomberg television interview yesterday. The strategist cited comments made by Premier Wen Jiabao on April 3 that he plans to release fine-tuning measures “soon.”

Easing Speculation

China also accelerated the opening of its capital markets by more than doubling the amount foreigners can invest in stocks, bonds and bank deposits. Offshore investors will also be allowed to pump an extra 50 billion yuan ($7.9 billion) of local currency into the country, up from 20 billion yuan, according to a statement on April 3.

Mainland developers gained in Hong Kong. Soho China rose 2.5 percent to HK$5.78, and China Overseas Land & Investment Ltd. advanced 0.9 percent to HK$15.98. Agile Property Holdings (3383) Ltd. rose 2 percent to HK$9.86.

In Seoul, NHN Corp., operator of South Korea’s largest Internet search engine, gained 8.1 percent to 274,000 won after Daewoo Securities Co. increased its share-price estimate to 340,000 won from 300,000 won, citing a stronger outlook for mobile-advertising sales and growing popularity of NHN’s messaging service.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

Article from Bloomberg