Wednesday, August 11, 2010

Jones: Hedge funds develop taste for US Treasury bonds

Hedge fund managers now account for one-fifth of all trading volume in the $10,000bn US Treasury bond market, up from just 3 per cent in 2009, according to a comprehensive investor survey by consultancy Greenwich Associates.

Trading in the once-sedate Treasuries market has spiked as volatility has increased and fund managers have scented opportunities to make large amounts of money from the uptick in government bond issuance and market anomalies caused by quantitative easing.

As well as bond trading “global macro” funds such as Brevan Howard, Tudor Investment Corporation and Moore Capital, which aim to profit from swings in global economic balances, the Treasuries market has seen an increase in fixed-income arbitrageurs.

Pricing inefficiencies have made the government bond market attractive for relative value trading, in which arbitrageurs bet that “anomalous” prices caused by an issuance glut will correct over time, according to traders...

Monday, August 9, 2010

Whiffen: Fed monetary moves implications for markets

...It is thought likely that the Fed will begin to reinvest repayment revenues from its holdings of mortgage-backed securities, thus halting the slow reduction in the level of quantitative easing. Plans for further stimulae may also be set out in the event that conditions deteriorate further...

Politi: Fed quantitative easing...

...The yield on two-year notes sits at a record low of 0.51 per cent, while five-year notes have dropped to 1.51 per cent from 2 per cent in mid-June. In the past month the bond market has moved to price in the first rate rise at the end of 2011, rather than next June. That has been accompanied by a sharply weaker dollar against big currencies, notably the Japanese yen.

“Although it is a fairly close call, we now expect the Federal Open Market Committee to announce that they will reinvest the paydown of MBS in the bond market at next Tuesday’s meeting,” said economists at Goldman Sachs, calling this a “baby-step” toward fully-fledged monetary easing late this year or in early 2011, involving asset purchases of at least $1,000bn and a “more ironclad” commitment to low interest rates...

Farchy: Dollar faces gathering headwinds

...In July, net inflows from foreign institutional investors into the Indian equity market totalled $3.8bn. The Korean and Taiwanese equity markets each received net inflows of more than $2bn last month. These flows have boosted the region’s currencies. The Singapore dollar is flirting with a record high, while the Indonesian rupiah and the Malaysian ringgit have risen to their highest in more than a year.

The conditions are building, too, for a return of the dollar “carry trade”, in which investors take advantage of low US borrowing costs to invest in higher-yielding assets elsewhere. Given the weaker outlook for the country’s economy, US interest rates are expected to stay on hold at least until late 2011. Hans Redeker, head of currency strategy at BNP Paribas, says his bank’s measure of “carry risk” has peaked, an auspicious signal for for carry traders.

In addition, Volatility has also fallen in the past two months, providing the stable conditions needed for a successful carry trade.

One dollar carry trade has involved buying Indonesian bonds. Foreign ownership of Indonesian bonds has risen to a record, while bond yields – which move inversely to prices – have fallen to record lows. Estimating the size of the dollar carry trade is an inexact science. Tim Lee at Pi Economics, a consultancy, says the dollar carry trade may now be worth more than $750bn, approaching the size of the yen carry trade at its peak in 2004-07. A revival of the carry trade would put further downward pressure on the US currency. In the short term, though, the currency’s direction is likely to be determined by the Fed’s action on Tuesday, with traders saying anything short of a move to ease policy further is likely to disappoint the market...

JonesL US hedge funds embrace the benefits of Ucits

Ucits, though, are the biggest thing in the hedge fund industry. Ostensibly a variety of European mutual fund, tightly regulated by EU laws, they have become the toast of London’s Mayfair and now New York.
In depth: Hedge funds - Jun-08
Paulson joins trend with launch of retail fund - Jul-21
Ucits catch on with US managers - Jun-06
Prop-hostile climate throws up tough calls for banks - Aug-03
Ucits brand threatened by growing complexity - Jul-11

Thanks to tweaks in the EU laws that created Ucits, hedge fund managers have discovered ways to repackage their strategies in Ucits form. In doing so, they have accessed retail and institutional investors who had been shut out of the high-octane hedge fund world.

“Ucits hedge funds now account for 7 per cent of the total hedge fund universe of $1,500bn but have attracted 20 per cent of the net inflows into the industry year-to-date,” according to Alexander Mearns, chief executive of Eurekahedge.

Hitherto, almost all Ucits start-ups have been European. But, as the accents in Monaco at the GAIM hedge fund conference this June attested, there are signs that is changing.

The attraction for US managers – as for European – is twofold. First, Ucits funds are to be exempt from the forthcoming AIFM directive, an EU law that threatens to freeze US managers out of Europe. Second, Ucits are a way for hedge funds to tap a vast institutional investor base.

Heise: Bond yields fall into abyss..

Bond markets have not only been ignoring all talk about inflation, but they are also absorbing quite a massive increase in the supply of government bonds in recent quarters. The fact that increasing supply is not depressing prices and pushing up interest rates is reminiscent of the Japanese experience, where standard economic theories have not given good guidance for some years. An obvious difference between Japanese government bonds and the US Treasury or German Bund markets is obviously that Japan actually experienced deflation for a number of years, which of course justifies low long-term bond yields.

Brittan: on central banks

Grant: Emerging markets lure big exchanges

This week Eurex, the derivatives arm of Deutsche Börse, and SGX, the Singapore exchange, said they would launch an Asian version of Euro Stoxx 50 index futures and options on futures – one of the German exchange’s flagship products.

It is the latest in a flurry of “cross-listing” deals struck in the past few months by Eurex and its main global rival, US-based CME Group, with exchanges in Malaysia, India, South Korea, Mexico and Brazil...

Cross-listings are designed to expand distribution of established exchanges’ core products beyond their time zones and to tap into communities of traders in other regions.

Masters: Bank regulators reach deal on liquidity

The The Basel Committee on Banking Supervision said on Monday that all but one of the 27 member countries had signed up to the new principles, which limit what banks can count as so-called tier-one capital – the only kind that can be counted on to absorb losses. The lone hold-out, said by people familiar with the situation to be Germany, said it would decide whether to sign on later this year.
Editorial: Basel must not yield to pressure - Jul-25
FDIC chief warns over capital standards - Jul-20
Finreg heralds a Great Escape for bankers - Jul-16
Basel bank capital buffer plan unveiled - Jul-16
Lex: Achieving closure - Jul-16
In depth: US banks - Jun-14

... The real effect will depend on the committee’s next decision, due this autumn, which is to set the minimum required ratio of tier-one capital to risk-weighted assets. The higher the ratio, the bigger the expected impact.

The committee delayed several of its more innovative proposals. For example, the planned “net stable funding ratio”, a first-of-its-kind liquidity rule that requires banks to match the duration of their liabilities and assets more closely, will be in an “observation phase” until at least 2018 and may be modified substantially.

The committee also is taking a deliberate approach in imposing a new leverage ratio designed to prevent banks from using off-balance-sheet vehicles and risk-weighting methods to hide the true size of their balance sheets. The new rule, which would require banks to hold tier-one capital equal to 3 per cent of unweighted assets, will be in a test phase until the end of 2017.

Jenkins: stress test results 'underwhelming'

“Stress tests should help, but are not such a game changer,” said Morgan Stanley. “The CEBS stress test result is of limited value to us, as expected by the market,” said JPMorgan. Others agreed. For all Committee of European Banking Supervisors’ protestations, the market’s view is that the parameters of the stress test, particularly using headline tier one capital, rather than the higher quality core tier one number, and its headline results – only 7 out of 91 failing with a €3.5bn ($4.6bn) capital deficit – were “underwhelming”, to cite Citigroup.

Jenkins: Euro stress tests

Two months on and European markets are still jittery over the prospects for the continent’s banking industry. But this morning, when the markets open, optimists believe a new calm will envelop the sector, following the publication late on Friday of a comprehensive exercise to stress-test 91 of Europe’s biggest banks. Only seven – all of them at least partly public sector – failed, with a combined capital shortfall of just €3.5bn, a result that regulators insist is a tense meeting with Wolfgang Schäuble, Germany’s finance minister, Mr Geithner not only discussed broad policy issues around deficits and financial regulation. This was where the American’s hectoring two-month campaign began to persuade Europe to follow the US example of a year ago and carry out a transparent, comprehensive banking sector stress test.

“There was market pressure and there was pressure from the US,” recalls one top French banker. “Tim Geithner pushed a lot to get this more transparent. His view was, ‘just get money on the table and provide transparency’.”

Thursday, August 5, 2010

Armenian Karabagh rug

Dated: 1901, inscription. 3.5' by 5.9