Good Monday AM,
So much going on and to say this a.m.
I am likely going to share some snippets from around the news outlets..
Bonds are attempting to rally but there is not enough conviction from traders, and this is due to the upcoming Fed meeting on Wednesday. Seems I tell you every Fed meeting that THIS ONE is extra important, and it is. The Fed will have to show his cards as to whether he remains committed to breaking things and doing more damage to control inflation, or if he realizes it is time for this tightening cycle to pause or stop completely. Inflation will work itself out, but the damage being done to the economy can remain for years. Just because the patient looks healthy, does not mean he is healthy. Some illnesses can take months to surface to the point of being visible. Wednesday he is likely to raise rates only 25bps as opposed to 50. Some believe that it is possible he does not raise rates at all. In my opinion this Fed is not ready to leave things alone.
On the Fed.
Some central bank watchers say there’s a strengthening case for the Fed to forgo an interest-rate hike this week as worries over the banking sector reverberate across markets. While investors still see a quarter-point rate increase as likely, the Fed’s coordination with five other central banks to boost liquidity in markets echoes back to previous crisis periods. “The fact that you are engaged in global coordination with other central banking authorities to rescue institutions and keep liquidity flowing, it just suggests that a pause is probably a better risk/reward,”
This is a pretty good chart to look at.
Every time we get over the red dotted line, recessions happen, and rates drop.
Main Street businesses and American families are likely to find it harder to get a loan because of turmoil in the banking industry, denting economic growth and raising the risk of a recession. The collapse of Silicon Valley Bank set off fear among depositors that led to the failure of Signature Bank and the move to rescue First Republic Bank. “Once there is stress in a particular set of institutions, then those institutions and those that have similarities will tend to be more cautious in their lending,” said Greg Daco, chief economist at EY-Parthenon, a strategy consulting unit of Ernst & Young. Smaller banks are crucial drivers of credit growth, the fuel that powers the economy.
On Bank problems
Credit Suisse was purchased by UBS for 3.3B in stock over the weekend but the end result is investors will be crushed and wiped out (including the Saudi’s who invested more than $1billion just15 weeks ago). In a moment, a 166-yr old icon was gone. Some snippets on the fallout below.
The holders of Credit Suisse’s riskiest bonds — worth $17 billion — are set to be wiped out, which could send the $275 billion market for bank funding into a tailspin. UBS’s purchase will preserve $3.3 billion of value for Credit Suisse’s equity investors, but that’s not supposed to be the pecking order, some holders in the bonds insist.
Just because he’s a really smart guy, I wanted to share what DoubleLine Capital’s Jeffrey Gundlach had to say on the Credit Suisse sale.
Credit Suisse Group AG’s bondholders, who are irate after the takeover by UBS Group AG wiped out about 16 billion Swiss francs ($17.3 billion) of risky notes, have only themselves to blame. Debt owners who “foolishly kept holding Credit Suisse’s bail-in bonds” need to “look in the mirror,” the billionaire money manager said in a tweet. “Learn how to manage risk!” The deal will trigger a “complete write-down” of the bank’s additional tier 1 notes in order to increase core capital, Swiss financial regulator Finma said. Shareholders are set to receive 3 billion francs — sparking a furious response from some of Credit Suisse’s AT1 debt owners. Bloomberg reports the gunslingers who foolishly kept holding Credit Suisse’s bail-in bonds are angry they are being wiped out. Seriously? Put on your big boy pants and look in the mirror. That’s where the “blame” lies. Learn how to manage risk! In a typical writedown scenario, shareholders are the first to take a hit before AT1 debt faces losses. The bond wipeout, the biggest loss yet for Europe’s $275 billion AT1 market, triggered a plunge in other banks’ notes in Asia on Monday.
Members of my investment team met with a very significant asset allocator last Wednesday, who reported that ALL of their “distressed debt” managers opined that Credit Suisse’s bonds were “money good”, meaning would return par. Only off by 100 points. To quote Rick Perry: “Oops.” Goldman Sachs Group Inc. traders were preparing to take bids on claims against the Credit Suisse notes, people with knowledge of the matter said. Maybe the “Angry Distressed Debt Traders” (good name for a band!) are calling in some chits. Gundlach is the chief investment officer of DoubleLine, which manages more than $92 billion in assets. He founded the firm in 2009 after a bitter split from TCW Group. DoubleLine’s Total Return Bond Fund gained 1.46% in the first two months of this year, its website shows.
Gundlach also tweeted about the outlook for US bonds, saying the yield on 10-year Treasuries will head “much lower” if it breaches the 3.37% level. “May you live in interesting times,” he wrote.
Please remain safe and stay healthy, make today great!