MarketsMuse fixed income fix for Feb 5 is courtesy of Industry Veteran and debt capital markets guru Ron Quigley, Managing Director and Head of Fixed Income Syndicate for Mischler Financial Group, the sell-side’s first and foremost investment bank/institutional brokerage boutique that is owned and operated by service-disabled veterans. Mr. Quigley is also the author of “Quigley’s Corner”, a daily debt capital market commentary distributed to 1000+ Fortune treasurers, investment managers and public plan sponsors. Mischler Financial Group is the winner of the 5th Annual Wall Street Letter Award for “Best Broker-Dealer/Research”
The Guy-in-the-Corner’s Take on Interest Rates (Feb 4 Quigley’s Corner)
So, I was asked by a Senior Managing Editor of an anonymous multi-billion dollar global financial news operation for my thoughts on interest rates. When I began my response to him, it just seemed to continue as there are so many factors that influence that discussion. My response turned out to be a feature unto itself so without further ado, I thought I’d feature it in today’s “QC.”
As concerns your question about how recent jumbo deals (think “Apple”) have raised speculation of interest rates rising, there is a POV out there claiming issuers are quick to print in anticipation of higher rate action. I, however, lean the other way…….FAR the other way and here’s why:
I have always been a proponent of “lower-for-longer”. Yellen added language in her last minutes flagging the EU as a potential impact on keeping U.S. rates lower. In the prior minutes, she didn’t mention the EU at all (which I thought was egregious not to at least mention the worst and most impactful economic story on our planet).
o On any given day a slew of news would be headliners in their own right. Aside from MENA unrest and the dramatic ISIS killings and impact in the world’s most sensitive hotbed – MENA – there are myriad factors that can all impact our rate environment:
o The Swiss National Bank’s action to remove its cap with the euro is a red flag or bad sign to the markets. It means the Swiss (unknown for surprises and bastions of stability) do not like what they see in on the horizon for for the EU. Did someone say “currency wars?” Remember history and NEVER forget it. We are dealing with severe currency volatility between the USD, EURO, YEN et al. These are reminders of the economic dislocation circa the 1930s……and we know what that led to.
o The widening popularity and spread of EU “N”ationalism. We learn from the past for the future. Hasn’t enough been written about the “N” word to see what’s going on in Europe right now? Nationalism to Greeks means Communism; in France it’s far right; in Spain it’s akin to Greece. Oddly enough Marine Le Pen’s French National Front is allied with Greece’s anti-austerity posture! There is a big disconnect regarding austerity vs. stimulus which brings us to……
o Germany. The keystone of Europe that I think will one day be the keystone with other healthy Northern European nations as in Scandinavia, Austria, Holland and Luxembourg that can easily breakaway while sharing the same currency and similar economic policies, cultures and “histories”. A Southern Euro (for the laggards) will include France. They will be able to devalue their Southern Euro all they want as they’d be in control. This raises a TON of questions but that’s the direction I think Europe is headed.
o The EU had kicked off 2015 with a significant amount of event risk. Look at Greece; look at neighboring Turkey and how a Communist regime like Greece can disrupt stability in what is arguably the single most strategically important nation in the world. What’s more, Turkey is the bridge between Asia and Europe and a conduit of unrest for Islamic emigrants who make up a large part of the EU’s labor force. It shares borders with Syria, Iran, Georgia and the Black Sea which is patrolled by the Russian Navy, as well as Greece and Bulgaria – the personification of a “hot spot” nation. ISIS can travel through it easily.
o The crisis between Russia and the Ukraine will be fought economically by the West primarily because Ukraine is not a NATO member. Russia has escalated its battles with Ukraine. More importantly perhaps is the Russian/Ukraine/EU natural gas supply pact that expires in March. The EU derives 30% of its natural gas from Russia via its pipelines, all of which (I believe 8 major lines out of 10) run through Ukraine! Turkey will also be involved should there be a natural gas crisis therein.
o China is definitely challenged and we cannot ever trust or rely upon the economic data emanating from that People’s Republic! A slowdown has a massive economic domino effect on EM nations.
o Oil’s plunge was countered yesterday by a 7% rally but really shale vs. oil, the Middle East, the Saudi King died last week and who knows if his successor continues on the same path in dealing with internal fundamentalists. I think he will though. Saudi Arabia is the best equipped and most formidable armed forces in the region – next to Israel – but still oil is obviously always big news.
o Japan is still dealing with its debt crisis with only 1.5% GDP growth expected in 2015.
o My rates guru Tony Farren, pointed out that only 7 out of 29 economists surveyed by Bloomberg News guessed a 0.25% rate cut by Australia’s Reserve bank. YTD, Australia, Canada, Russia, India, Peru, Pakistan, Turkey and Egypt have cut rates. Denmark lowered its deposit rate and Singapore seeks slower currency appreciation. China also cut the amount cash lenders have to set aside in reserves to infuse liquidity into its slow growth economy.
o Low inflation coupled with weakening currencies is instigating swifter central bank rate actions foiling any semblance to markets of reliable Central Bank communications.
o The U.S. is the best of a lot of bad and/or worsening global stories. It doesn’t mean ours is in excellent shape. Social Security? Pensions? Aging population? Let me ask, if you’re starting a family today how many people are actually thinking of having more than 1 or 2 kids? Education prices? Housing prices are consistently up but still far from the levels they were in 2005.
So, as you can see although I know how to be optimistic in my personal life by always seeing my glass as half full, it’s not the case with our inextricably global-linked new world economy. Rates, should they hike in June/July as many prognosticators claim, will NOT be followed by the usual expected consistent string of FOMC rate rises. No……it will be one hike (if that) followed by a long string of no hikes. I believe we’ll see rates lower-for-longer and a rate hike to come next year.
How does that impact issuance? Well, Issuers should print now. The utility sector, for example, is currently enjoying low oil prices, low rates and inflation is more than tame. All these three conditions mean value creation for regulated utilities through rate base investments. While our economy slowly improves, demand for electricity will rise. Even the regulatory environment is healthy and strong. Some utilities such as Next Era Energy (“NEE”) are being purchased by investors as substitutes for U.S. Treasuries thanks to its “AA” rating. The search for yield will be found in higher quality IG rated Corporates. Corporate America is the best story out there and so I firmly believe we’ll see nice issuance and price performance.
Did you know that in each of our 5 quantitative easing strategies in the U.S. (QE1, post QE1. Operation Twist; QE2 and QE3) each easing action was followed within 2-3 weeks by rates rising naturally along the curve!! That will also happen in the EU. When it does the only game in town will be U.S. IG Debt. Stay tuned.
Above is the opening extract from Quigley’s Corner aka “QC” Wednesday, Feb4 2015 edition distributed via email to clients of Mischler Financial, the investment industry’s oldest and largest minority investment bank/institutional brokerage owned and operated by Service-Disabled Veterans.
Cited by Wall Street Letter for “2015 Best Research/BrokerDealer”, the QC observations provide a daily synopsis of everything Syndicate and Secondary as seen from the perch of our fixed income trading and debt capital markets desk and includes a comprehensive “deep dive” with optics on the day’s investment grade corporate bond new issuance and market data encompassing among other items, comparables, investment grade credit spreads, new issue activity, secondary market most active issues, and upcoming pipeline.
To receive Quigley’s Corner, please contact Ron Quigley, Managing Director and Head of Fixed Income Syndicate via email: rquigley@mischlerfinancial.com or via phone: 203.276.6646