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Markets | Fed Shift Shakes Up World of Speculative Debt
Good morning. Amrith Ramkumar here breaking down the latest market moves.
Stock futures are slipping, after the Dow inched slightly further away from last year's record Wednesday. The S&P and Nasdaq edged down from their Tuesday all-time highs.
Facebook and Microsoft are climbing premarket after yesterday
afternoon's results, while Tesla shares are sliding. We're also weighing
just-released figures from a host of companies including Comcast and
UPS. Amazon.com, Intel and Starbucks lead the group reporting after the
Before we see if the Dow can make a run at a new record, our Sam Goldfarb examines the rally in speculative-grade bonds.
Markets in a Minute
Stocks in Europe and several Asian markets slipped on Thursday
following a weaker close for U.S. markets and poor economic data from
South Korea, one of Asia’s biggest exporters.
A sharp rally
in speculative-grade corporate bonds has pushed their average yield
below that of comparably-rated loans, an unusual market distortion
reflecting an improved economic outlook and the Federal Reserve’s
retreat from tightening monetary policy.
Bond yields, which move in the opposite direction of prices,
typically exceed those of loans because holders of the latter are
typically paid first in bankruptcies. This year, yields on both are down amid a broad rally in riskier assets.
Still, yields on bonds are down more in large part because the floating
coupons of loans have become less appealing now that the Fed is no
longer raising interest rates.
As of April 23, the average yield to maturity of bonds in the Bloomberg
Barclays high yield index was 6.51%, down from 8.0% at the end of last
year, while the average yield of loans in the S&P/LSTA Leveraged
Loan index was 6.53%, down from 7.23%.
Loan yields have exceeded bond yields since March 26, the first prolonged stretch where that has been the case since 2007. That year, the Fed also halted rate-increases after a long period of tightening monetary policy.
Some consider the extra yield that investors are demanding to hold loans over bonds to be surprising.
Despite a recent uptick in issuance of secured bonds that would be
ranked equal to loans in a bankruptcy proceeding, most bonds are
unsecured, meaning their holders are at greater risk of losses if the
companies that have issued them encounter financial stress.
That is why average loan yields have been lower than average bond
yields for the vast majority of time since a market for loans emerged in
What is happening now is “a technical dislocation” in the debt markets,
said Frank Ossino, a senior portfolio manager and sector head of the
bank loan asset class at Newfleet Asset Management.
Responding to the shifting outlook for interest rates, investors have pulled cash out
of loan mutual funds and exchange-traded funds for 22 consecutive
weeks, leading to a total net outflow of $25.6 billion, according to
Lipper. Bond funds, meanwhile, have pulled in a net $3.4 billion over
that stretch, including $7.2 billion over the past six weeks.
The PHLX Semiconductor Index climbed 1% Wednesday to a sixth
consecutive record close after the latest earnings from Texas
Instruments. Semiconductor stocks are now up 38% for the year.
Anadarko Petroleum shares rose 12% Wednesday, bringing their rally
since Chevron offered to buy the company earlier this month for roughly
$33 billion to 53%. The stock is at its highest level since July.
Wednesday's rise came after Occidental Petroleum offered to buy Anadarko for about $38 billion, setting up a possible bidding war.
On this day in 1961, the first patent for an integrated circuit was
awarded to Fairchild Semiconductor’s Robert Noyce, who later co-founded
Intel with Gordon Moore. Today Intel has a market value of nearly $265
U.S. durable-goods orders for March are expected to rise 0.5% from the prior month. The figures are slated for 8:30 a.m. ET.
U.S. jobless claims, also out at 8:30 a.m., are expected to rise to 201,000 from 192,000 a week earlier.
Natural-gas inventories will be released at 10:30 a.m.
Stockpiles are expected to have risen 89 billion cubic feet last week, a
much bigger addition than average for this time of year, per the
average target of 13 analysts and traders surveyed by the Journal.
The wager would pay out if the ETF gave up some of its recent gains and
fell more than 1% by June. It occurred during a period of strength in
the U.S. dollar and weakness in the euro. PHOTO: PAUL YEUNG/BLOOMBERG
Trading surged on bearish options of a U.S. dollar ETF. A large wager took place on Wednesday which showed that the recent strength in the U.S. dollar could be short-lived. Even so, the U.S. dollar rose broadly amid signs of weakness in a number of economies around the world.
Deutsche Bank deal talks with Commerzbank have broken down. Banking giant Deutsche Bank and crosstown rival Commerzbank ended merger talks, leaving in tatters the German government’s hope to shore up both banks and create a banking powerhouse.
Messaging startup Slack is expected to file its listing prospectus this week. Slack Technologies is taking the next step toward going public, with plans to reveal its prospectus as soon as this week, according to people familiar with the matter.
Venmo’s user base outnumbers most big banks. More than 40 million individuals used Venmo in the past 12 months, making the digital-money transfer service among the most popular financial apps in the country, owner PayPal Holdings reported in its quarterly results.
Barclays’ investment bank is struggling ahead of a key board vote. Barclays Chief Executive Jes Staley dismissed the need for any strategic changes after first-quarter net profit in its corporate and investment bank fell 28%.
A big warehouse owner plans to go public. Industrial-warehouse manager GLP is planning to take its U.S. arm public this year, in what would be one of the biggest real-estate listings on record.
What We've Heard on the Street
“Unless U.S. growth falters, oil prices look well supported. But
counting on China to push them much higher might be a mistake.”