BlackMask Breaking News

• Pension funds are now selling US high-grade corporates
• Announced end of central bank support has investors nervous

UK pension funds are dumping assets to meet margin calls as the BOE confirmed it will end emergency bond buying, and the reverberations are being felt everywhere from Sydney to Frankfurt and New York.  In the US, investment-grade corporate bonds are falling, with average prices of around 86 cents on the dollar compared with 90 cents on Sept. 21. UK pension funds have contributed to the selling pressure in recent days, according to one Wall Street trading desk.  In Europe, leveraged loans bundled into bonds known as collateralized loan obligations have been under pressure. In Australia, investors have reportedly been asked to bid on mortgage-backed securities that were being auctioned off. The yield premium on Asian investment-grade dollar notes is at a two-month high and headed for a third day of increase. UK pensions are selling to meet margin calls on derivatives they used to help ensure they could keep paying retirees even if interest rates changed, using a technique called liability-driven investing. The offloading that first began after a spike in gilt yields two weeks ago was renewed this week, when the Bank of England confirmed that it plans to end an emergency bond buying program on Friday. Investors are hoping the central bank will back down.  “The market simply doesn’t have the confidence, for now, that the LDI crisis won’t return and has increased concerns that other pockets of leverage may cause issues,” Janusz Nelson, head of Western European Investment Grade Corporate Syndicate at Citigroup Inc. said. “Until we see some stability in the rates market, wherever that may come from, investors will continue to be nervous around their holdings.” The Bank of England had hoped its bond-buying support measures would create a bazooka so big that nobody would be in any doubt that they would intervene to quell market turmoil, according to a person with knowledge of the matter. Limits on the buying were increased to allay any concerns that anyone seeking to tap the program this week would have difficulties accessing it, the person said, asking not to be identified as the matter is private. Then traders grew concerned about the end of BOE intervention. Yields on UK government securities tied to inflation, known as linkers, moved out again. Yields on sterling denominated investment-grade corporate bonds ballooned to over 7% for the first time since 2009. Their fears intensified on Tuesday when BOE Governor Andrew Bailey warned that the program will end on Friday. The next day, the BOE made its biggest round of emergency purchases since the intervention began last month.  But the selling pressure in recent sessions has been spreading to other parts of the world as well. UK markets have been in a tailspin since Chancellor of the Exchequer Kwasi Kwarteng presented a package of unfunded fiscal stimulus on Sept. 23.  “Investors fear further selling from UK liability-driven investment managers in response to margin calls, including selling of USD high-grade credit,” JPMorgan Chase & Co. strategist Eric Beinstein wrote Wednesday. “There was some evidence of this selling yesterday.” That selling was manifest in risk premium movements. On Tuesday, US investment-grade bond spreads widened five basis points, according to Bloomberg index data. But the Markit CDX North American Investment Grade Index, a proxy for credit risk, widened just 1.9 basis point. Similar underperformance of cash bonds happened two weeks ago when the UK pension issue first flared up, JPMorgan’s Beinstein wrote.  The end of forward guidance by central banks has roiled market strategies based around buying the dip and selling volatility on the assumption that correlations would continue to be stable as they had been for two decades, said Alberto Gallo, co-founder of hedge fund Andromeda Capital Management. Risk parity strategies and 60-40 portfolios are among those that could be vulnerable, he said. “What’s happening in the UK could lead to further volatility also in the Eurozone market,” said Gallo, who previously ran money for Algebris Investments. “There’s a lot of assets that should not be priced where they are now. We’re just at the beginning.”

NN: There BACK. And idiots though the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (which have been hailed by some as two of the biggest pieces of corporate reform legislation passed by the U.S. in recent decade)  was suppose to rain in the banker whores worked. HAHAHAHAHA  Sarbanes-Oxley was intended to protect investors from corporate accounting fraud by strengthening the accuracy and reliability of financial disclosures. It was passed by Congress in 2002 after a number of billion-dollar accounting scandals, perhaps most famously at energy-trading company Enron and telecommunications company WorldCom. The Dodd-Frank Act was passed in 2010 in response to the 2007-08 financial crisis, which brought Wall Street to its knees. Dodd-Frank was meant primarily to reduce risk in the financial system by more closely regulating big banks and financial institutions ending bailouts of “too-big-to-fail” banks, such as those that occurred during the financial crisis. Reality is the banks have been bailed out for more then the past decade with zero interest rates and massive government give away programs. They enacted The Volcker Rule, named for former Federal Reserve Chair Paul Volcker, prohibited commercial banks from engaging in short-term speculative trading with depositors’ money. HAHAHAHAHAHA These measures were meant to prevent the build-up of excessive risk-taking by big financial institutions, which was a major factor in the financial crisis and Wall Street’s collapse. As you are seeing since the Fed has drained liquidity (witnessed by  the plunging M2 money supply) And interest rates now approaching 4% that the bankers are up to their old tricks. As witnessed yesterday with our previously predicted reversal of the stock market  the FED has got a great big problem. The financial system is at the edge of the abyss… AGAIN. And we know the FED will back off and get a great big stock market rally going to bail out the financial system for a little while longer. See Blog story: The Edge of The Abyss

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Bank of England Governor Andrew Bailey’s blunt warning that fund managers have to cut vulnerable positions before the central bank ends debt purchases is sending a shiver around already fragile global bond markets.  The strict deadline puts investors worldwide on notice that some of the pension funds managing £1.8 trillion ($2 trillion) in defined-benefit schemes may again blow up the gilt market. The specter haunting investors is that a wave of forced selling from Treasuries to corporate bonds will be set off as the funds move to exit positions that are only tenable because the BOE stepped in last month to buy UK gilts.

“Gilts are having an outsized impact on global bond yields and all eyes will be on the UK market for the rest of the week, and especially once the temporary purchase program ends on the 14th,” said James Wilson, a senior portfolio manager at Jamieson Coote Bonds in Melbourne. “If the BOE totally steps away, it could be horrific for gilt owners, as well as the pound.”

Treasuries fell Tuesday following Bailey’s comments, made at the Institute of International Finance annual meeting in Washington. They rallied on Wednesday after the Financial Times reported the BOE had told banks it was prepared to extend its emergency bond-buying program past Friday if market conditions demanded it. The newspaper cited people it didn’t identify, and didn’t say when the central bank had made those comments. Central banks have turned this year from guardians to grinches when it comes to markets, driving bonds into the the first global bear market in at least a generation as they prioritize the battle to quash inflation.

“The global message may be that markets must unwind trades that are going to fail anyway as rates rise and stay high, with a brief central-bank backstop,” Michael Every, a global strategist at Rabobank in Singapore, wrote in a note to clients in regards to Bailey’s comments. “Perhaps the BOE is sending the united message that the game has changed, Volcker-style.”

The global financial turmoil is spurring contagion concerns, especially for less liquid markets, according to Laura Fitzsimmons, executive director of macro rates and FX sales at JPMorgan’s Australian unit in Sydney.  “What is happening with the BOE is adding more volatility when we really don’t need it,” said Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. Spreads of asset-backed securities and mortgage-backed securities have widened in recent weeks as a number of investors tapped dealers about potential sales of their holdings after UK pension funds were forced to sell down some assets to meet margin calls, Chrystal said.  Global credit spreads for such debt across currencies were only one basis point below their year-to-date high on Tuesday, a Bloomberg index shows.

Pound Rebounds on Report BOE Offers to Extend Bond Purchases

• Volatility jumps in sterling amid signaling whiplash
• Bailey comments on bond buying plan end had weakened pound

The pound swung to a gain after a Financial Times report appeared to walk back comments from Bank of England Governor Andrew Bailey, who had said the central bank is set to halt its market support this week. The British currency reversed a loss of as much as 0.4% to trade 0.2% higher in early London trading. The BOE had signaled privately to bankers it could extend a bond-buying program past Friday’s deadline, the FT said, though it was unclear from the report when that guidance was given.

Bailey told pension funds Tuesday they have just “three days left” to sort out their liquidity positions before emergency bond purchases will be halted. His comments came after UK debt markets closed but sent Treasury yields spiking and the sterling to a two-week low. “The pound has found some relief on the report of a reprieve for the gilt market but sterling is likely to remain fragile given that Governor Bailey was very clear that the program is temporary,” said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney. “Sterling still looks like a sell on rallies against a solid dollar, heading back to $1.08 and below in coming sessions.” The signaling whiplash left gilts set for another volatile session. The BOE’s unlimited debt purchase plan announced on Sept. 28 had spurred a turnaround in the market, but the benchmark 10-year note has almost erased gains since then. According to the FT, the BOE will decide whether or not to extend the facility on Thursday or Friday. The central bank is assessing whether affected liability-driven investment managers have built up enough cash reserves to meet margin calls, the newspaper said.

NN:

Close to two-thirds of France’s refining capacity remains paralyzed by industrial action. Earlier today, the French government threatened to break down the blockades workers have set up at refineries and oil depots to resume the flow of fuels to end consumers. Meanwhile, per a Bloomberg report, Asian refiners bought at least 12 million barrels of U.S. crude in the last two weeks as the strikes in France slashed demand. The increased Asian buying came predominantly from refiners in South Korea that snapped up cargos of West Texas Intermediate Midland for January delivery at a premium of $9 per barrel over the Dubai benchmark, traders told Bloomberg. The report also mentioned that Exxon had diverted one cargo of U.S. light crude from its original destination in France to the UK, and that it was offering more U.S. crude on the market. Refinery workers went on strike in France two weeks ago, which caused shortages of fuel at retail stations and forced France to tap its strategic fuel reserves last week. What’s perhaps worse is that there is no deal in sight for the striking workers. Earlier this week, the CGT union said the latest wage offer by TotalEnergies was tantamount to “blackmail” and the strike will continue. At the same time, workers at two Exxon refineries in France are striking, too, demanding higher salaries in response to inflation. NN: This is just the start of the winter of discontent..

• Bank of England ‘not going to save the market’: BNY Mellon
• Strategists doubt plan to restart active gilt sales on Oct. 31
• Structures debt instruments from HELL strike again….. will they ever learn?

UK bonds slumped after the Bank of England’s moves to increase emergency backstop measures failed to reassure the market, suggesting there’s plenty more chaos in store for traders. Inflation-linked debt was the worst hit ahead of a bond sale, with the yield on 10-year inflation-linked bonds rising 64 basis points to 1.24%. That was more than double the size of the move in conventional debt and a record in data going back to 1992. Investors are dumping UK assets once again after a selloff that started in late September on concerns about the new government’s fiscal policies. While the BOE announced new measures to ease the pressure on pension funds caught up in the rout, it also confirmed its first program of emergency purchases would end as planned on Oct. 14, removing a key plank of support.

“The BOE is going to calm the market, but it’s not going to save the market,” said Geoffrey Yu, senior strategist at Bank of New York Mellon in London. While ensuring liquidity for the pension funds most badly affected, the central bank won’t cap yields, Yu added.

These funds “will need to closely manage their risk and be prepared for more shocks further up the line,” said Yu. The September selloff on concerns about the Liz Truss government’s borrowing-fueled tax cut plans saw the pound hit a record low against the dollar, central bank intervention and led to a humiliating government climbdown amid questions over credibility. The rout in sterling-denominated assets pressured funds to liquidate £50 billion ($55 billion) of long-term bonds, sparking fears of an industry meltdown. Monday’s moves suggested the same problems were building again. “The BOE will once again be concerned about the selloff in gilts and linkers leading to more collateral calls once again, the vicious cycle it hoped it put a stop to on Sept. 28,” said James Lynch, an investment manager at Aegon Asset Management. UK Treasury and BOE Step Up Action to Reassure Rattled Markets The BOE said Monday that it would buy up to £10 billion of gilts daily until its temporary bond-buying offer ends. It also announced a temporary extended repo facility that will run until Nov. 10 to help ensure pension funds have access to enough liquidity. Policy makers seem determined to show they’re not engaging in a new round of long-term quantitative easing — but in doing so, they are failing to achieve their aim, according to Daniela Russell, strategist at HSBC Holdings Plc.

CHICAGO (Reuters) -The U.S. Federal Reserve is clear on the need for restrictive monetary policy to lower inflation, Fed Vice Chair Lael Brainard said on Monday, but the path and pace of rate increases will remain “data-dependent” as the central bank monitors the economy and the evolution of domestic and global risks.

In prepared remarks and responses to questions, Brainard said Fed rate hikes to date were beginning to slow the economy – perhaps even more than expected – and that the full brunt of tighter policy would not even be felt for months to come.

Additionally, the “concurrent” rate hikes by central banks abroad as they all fight local outbreaks of inflation was creating an impact “larger than the sum of its parts” that posed potential risks U.S. officials need to monitor, Brainard said.

“There is clarity that monetary policy will be restrictive for some time, until there is confidence inflation comes down. … The (Federal Open Market) Committee has said policy rates will increase further,” Brainard said. But “we also will be learning as we go and that assessment will reflect incoming data and also risks domestically and globally … The actual policy path will be data-dependent.” She referred to projections of policymakers about the path of interest rates, which as of September showed the median officials anticipating the federal funds rate rising to around 4.6% next year, as “very helpful at a point in time,” but also based on expectations about how the economy will evolve.

“Things can change,” she said.

Brainard gave no sense the Fed was weakening in its resolve to quell inflation that is currently triple the central bank’s 2% target, or that the Fed will not proceed with planned rate increases including a possible three-quarter point hike at its Nov. 1-2 session. In an appearance at a National Association for Business Economics conference, she restated that it would be risky for the Fed to back off “prematurely” in its rate tightening, and that it would “take some time” for inflation to fall. However she spoke at a time of mounting external concern that the speed of Fed rate increases was stressing the global economy and had outrun the central bank’s ability to monitor the impact it was having. In a poll of 45 professional forecasters conducted by the NABE, a little over half said that “the greatest downside risk to the U.S. economic outlook is too much monetary tightness.” Fed officials have for the most part discounted those concerns, acknowledging the risks of over-tightening but also saying they need to get the target federal funds rate to a level they feel will bring inflation under control by restraining the economy. The Fed has raised rates rapidly this year, using three-quarter point increments of late to bring the target federal funds rate to a range between 3% and 3.25%.