Credit Writedowns

Once again, savers are punished – they either have to take risk (such as rate or credit risk) or live with 5bp (or less). Money markets simply have not benefited from higher interest rates.

Australia’s central bank left rates on hold yesterday as was generally expected. The RBA continues to be quite hawkish as well as relatively optimistic on the nation’s economy. Given the “cash rate” is at historical lows at 2.75%, the board wants to leave room for further action should the need arise. There are only so many “bullets” left before you hit zero.

This is what has changed in the EM space in, our view. 1) Brazil is stepping up its defences against market volatility. 2) Signs that China is looking for more (and better) sources of external funding sources is mounting. 3) Turkish central bank governor Basci seems ready to take action to stabilize markets.

MPT is based on a number of assumptions, some of which are more restrictive than others. The question is whether the sum of those assumptions is so far off the mark that it renders the entire theory absolutely useless. Effectively the question is whether EMH, and with it MPT, should be ditched altogether.

Editors note: Moody’s released the following press release yesterday in conjunction with a ratings action it took on Turkish sovereign debt. Moody’s Investors Service has today upgraded Turkey’s government bond ratings by one notch to Baa3 from Ba1, and has assigned a stable outlook. The key drivers for today’s rating action are: 1. Recent and expected future improvements in key [...]

Analysts’ latest adjustments to corporate earnings forecasts for Japanese firms show many more upward than downward revisions. Merrill Lynch tracks the “number of stocks for which consensus EPS estimate has risen vs. the number for which it has fallen” over a 3-month period. That ratio (chart below) has spiked relative to other nations.

Now, you may well deduct from all of this that I am as bearish as I have ever been, but nothing could be further from the truth. The issues I have discussed in this month’s letter are clouds on the horizon which are likely to take years to play out and, in the meantime, investors will continue to be preoccupied with far more mundane issues. All I know is that financial markets cannot stay disconnected from economic fundamentals forever so, ultimately, the Tony Dyes of the world will be proven right. Unless they lost their jobs beforehand, that is.

This is an important day for Portugal. It is selling 10-year bonds for the first time in more than two years. Demand is reportedly strong. Today’s 10-year sale follows the 5-year bond sale in January and heralds to full return of Portugal to the capital markets. Portugal’s success in returning to the capital markets is a success for European officials more broadly.

Since we’ve never been at these yield levels, this is uncharted territory in corporate bond pricing. Certainly bond spreads have been lower in the past – especially during the boom years. But in the post-crisis era, corporate spreads seem to have found a floor.

ECB President Draghi confirmed the decisions made today to cut the main refi rate by 25 bp to 50 bp and cut the lending rate, the ceiling of its rate corridor, by 50 bp. Most importantly he seemed more open to a cut in the deposit rate and it is this that drove the euro lower after trading choppily initially.

Spain’s 10-year bond yield has fallen 108 bp this year. Just above 4%, the yield is the lowest Q4 2010. The 2-year yield has fallen 93 bp this year. The yield is slipping through 1.70%, for the first time Q2 2010. Recent data suggested that Spanish banks have been the featured buyers of Spanish bonds. The Spanish government released data at the end of last week that we have poured over. These figures paint a strikingly different picture. Spanish banks have indeed bought Spanish debt, but non-residents bought even more in Q1.

Moody’s Investors Service released the following statement in conjunction with a ratings action it took today on Slovenian sovereign debt.