TO NEW YORK, where I’ve been sandwiched between the FOMC meeting on Wednesday, the US GDP print on Thursday (that came in on forecast) and ahead of the Bank of Japan policy meeting on Friday. I was in town to chair IFR’s US Rates and Credit Seminar and to gauge sentiment among New York market participants at this fascinating juncture.
We got no Fed action on Wednesday, of course, but the initial sell-off in US Treasuries, the move to a 50/50 December hike implied by futures, and the reprofiling of the technicals at the front-end of the curve and out to sevens tells you all you need to know about how seriously the market takes the surprisingly hawkish Fed stance, which caught pretty much everyone off balance. It also says a lot about how nervous, confused, freaked and frazzled the markets are right now; bouts of volatility followed by oases of calm (ie, volatility of volatility) isn’t helpful.
The fabulous and very distinguished rates strategists on our platform were almost unanimously of the view that the Fed has screwed up and missed opportunity after opportunity to move off the zero bound. There is also huge frustration out there: at the level of dissent on rates between FOMC members; at the mightily confusing signals their public disagreements send to the market; at the bait-and-switch tactics that result from their constantly-shifting data drivers and targets…
Second-guessing Fed action on rates has become easily the most heavily over-engineered exercise of the year, so while the shift in tone and the refocus on the performance of the domestic economy was welcomed by some in that it narrows the optionality, I didn’t remotely get the impression that the market has really gotten better clarity around near term market behaviour.
Participants have been ready to raise the white flag on the back of rate-hike fatigue for some considerable time. But on the basis that a December move is not at all a certainty – there’s still a lot of money on 1Q16 – that intense scrutiny and near-obsession with the subject ain’t going away. Neither, of course, does a clearer Fed signalling of priorities solve the conundrum of how the market reacts to the interplay of global central bank actions and the global headwinds, which remain intact.
What’s clear is that while we inhabit a fully globalised economy where transmission effects and impacts are constant risks, monetary outcomes are and probably need to be: a) domestic and by definition idiosyncratic (notwithstanding governor Yellen’s now-stricken and aberrant Central Bank of the United Nations intervention post-September meeting); b) self-serving; c) political.
Ultimately, the positioning, the politicking and the gaming are all ruses to manage and manipulate currencies in order to garner a bigger share of the global export pie. Are we heading towards a global currency war? No. Battle has already been enjoined.
Participants have been ready to raise the white flag on the back of rate-hike fatigue for some considerable time
AMID ALL THIS noise, debt issuers aren’t wasting any time. Front running the rate cycle is now an urgent driver. There’s been a veritable flood of US corporate supply, much of it M&A related. My IFR colleagues put out a story on Thursday saying bankers are estimating US$100bn–$120bn of bond financing for announced takeovers, including US$55bn for AB InBev.
I think volumes will dramatically overshoot that range. You can probably add as much again in not-quite visible supply and then add more on top of that. Factor in the number of companies that have said or will say in the near term that they plan to tap the bond market to fund share buybacks or dividends and you’ve got a market that’s off to the races.
The indications are that supply will be absorbed without too much indigestion if underwriters employ precision timing. Big public companies pushing out mega lines of stock will probably play well to investors, who will appreciate the liquidity value as much as anything else. With new-issue premiums on offer too, everyone’s a winner.
BUT AS MUCH as financiers are rubbing their hands with glee at the flood of activity, I do look at the rationales for some of these deals and wonder. In-sector corporate-to-corporate strategic mergers are all the rage but far from being an aggressive play on an economy that’s in growth mode, it strikes me that some of these deals are the last resorts of desperate CEOs who’ve figured out that the only way to offer shareholders any vestige of growth and EPS accretion beyond the blatant share price manipulation of buybacks is to merge and take the knife to their cost structures.
M&A bankers say that after years of waiting, corporate CEOs have gained the confidence to do the deals that have been on the docket for ages. After years of false dawns, they have to say that. But I’m not buying. Takeovers in this cycle are motivated by the lure of free money and a defensive rather than aggressive stance amid an incipient earnings recession that’s likely to deteriorate.
On that basis, it feels to me like the bond market may be chancing its arm. Back to the point I made above about underlying anxiety and skittishness, the house of cards isn’t built on a solid basis and could come crashing down if the volatility that everyone almost to a man expects to result from a Fed move sends us once again into risk-off territory.
My final word is one of caution to the banks, high on the M&A wave they’re funding via cheap bridges that have to get refinanced and termed out in the bond market. I sense a little over-exuberance here. Could hung bridges be one of the many poster-children of ZIRP boom and bust?
