Here We Are Again! JPMorgan Sold Credit Derivative Protection On $177 Billion Of Junk Credits

The specter of credit derivatives, the theme of the book and movie “The Big Short” has returned!

From Wall Street On Parade:

According to JPMorgan’s 10K, it has sold credit derivative protection on $177 billion of “subinvestment grade” i.e., junk credits.

[When you sell credit protection, you are on the hook to pay the buyer if that entity goes belly up. When you are selling credit protection on subinvestment grade entities, it is far more likely that they could go belly up.]

JPMorgan Chase will likely argue that they have also purchased boatloads of credit derivatives, which might be on the same entities, but there is no way for anyone to accurately predict if this mega bank has aligned these risks correctly. Even the bank admits that, writing in its 10K the following:  

“JPMorgan Chase could incur significant losses arising from concentrations of credit and market risk. JPMorgan Chase is exposed to greater credit and market risk to the extent that groupings of its clients or counterparties:

“Engage in similar or related business, or in businesses in related industries;

“do business in the same geographic region, or;

“have business profiles, models or strategies that could cause their ability to meet their obligations to be similarly affected by changes in economic conditions.

For example, a significant deterioration in the credit quality of one of JPMorgan Chase’s borrowers or counterparties could lead to concerns about the creditworthiness of other borrowers or counterparties in similar, related or dependent industries. This type of interrelationship could exacerbate JPMorgan Chase’s credit, liquidity and market risk exposure and potentially cause it to incur losses, including fair value losses in its market-making businesses…

“JPMorgan Chase regularly monitors various segments of its credit and market risk exposures to assess the potential risks of concentration or contagion, but its efforts to diversify or hedge its exposures against those risks may not be successful.”

JPMC notional contracts:

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And protection sold (sounds like Frank Nitty from The Untouchables) ..

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Here we are again!

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Rollercoaster! Global Economic Growth (G10, US, Emerging) Sliding Down Together

The global economy is in a rollercoaster pattern.

And unfortunately the G10, US and Emerging nations are on the downward side.

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This might explain Larry Kudlow’s call for a 50 bps drop in the Fed Funds Target Rate. At least Trump’s nominee for The Fed’s Board of Governors was previously the President of the Kansas City Federal Reserve. And CEO of Godfathers Pizza! Conditional on the US Senate approving his appointment, “Welcome to the party, pal!”

 

 

Liquifying The S&P 500! Central Bank Money Printing Sends S&P 500 Skyrocketing

So much for market discipline.  In fact, central bank intervention kills-off market discipline, a vital component of free markets.

However central banks are not concerned with market discipline. They are concerned with perpetuating asset bubbles.

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“The Sag” In The US Sovereign And Dollar Swaps Curve Continues, But Germany, UK And Japan Curves Are Sagging Too!

It’s the same all over the world.

The US Treasury actives curve and dollar swaps curves are markedly sagged (or kinked).

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But other countries are experiencing curve sags as well, but just not as pronounced. Germany, Japan, UK and France are all sagging, but less notably.

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Numerous risks abound in the global economy such as Brexit, China trade disagreement, etc.

On the other hand, there is Venezuela which has entered a seemingly permanent sag.

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And the SAG award goes to … the USA for short-term SAG.

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The permanent SAG award goes to …. Nicolas Maduro and Venezuela.

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Slowing! US Pending Home Sales Fall 5% YoY In February As Inventory Remains Low (Fed Rate CUT At 72% In 2019)

The US housing market is slowing and The Federal Reserve is likely to CUT interest rates in 2019 (at least the market is betting on it).

(Bloomberg) — Contract signings to purchase previously owned U.S. homes fell more than estimated in February, suggesting that the prior month’s surge resulted from pent-up demand and that a sustainable recovery may take more time.

The index of pending home sales fell 1 percent from the prior month, after a downwardly revised 4.3 percent increase in January, according to data released Thursday from the National Association of Realtors in Washington. The gauge fell 5 percent from a year earlier following a 3.3 percent annual decline.

And pending home sales fell 5% YoY in February,

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Not only are pending home sales YoY slowing, but so is home price growth.

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Existing home sales inventory is down considerably from 2007.

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At least interest rates are likely to be cut by The Fed in 2019.

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Killer Bees: Banks And Other Corporations Still Feasting On BBB-Rated Debt

One of the byproducts of Central Banks low-rate policies (and corporate asset purchases) is the glut of BBB-rate debt (largely by energy companies such as Mexico’s PEMEX and the US energy company EPD). Banks also populate the B-rated bond list.

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Of course, one of the more interesting bond types is the contingent convertible bond or CoCo (also known as an enhanced capital note (ECN) is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs). Banca Santander is a Spanish bank that issues CoCo bonds.

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(Bloomberg) — The market for bank capital debt was shaken last month when Banco Santander SA defied precedent and declined the option to call a bond. Keep an eye on the next securities due to be called.

Santander skipped an option to call 1.5 billion euros ($1.7 billion) of perpetual contingent-convertible notes, or CoCos. The rationale was that current market-funding costs meant it could be cheaper to extend the existing notes than redeem them and sell new ones.

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As the ECB continues to repress interest rates, incentive remains in. Europe (and the US) to continue to issue corporate bonds .. and CoCos.

Dazed And Confused! Existing Home Sales Rise 11.5%, Highest Since 2015 As Interest Rates Decline

As the US yield curve starts smelling like recession,

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February existing home sales rose 11.8% MoM in February.  As rates decline because of recession fears in the US and Europe, the outlook for US housing improves … in the short run.

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The housing market is dazed and confused by Fed policies.

Talk about dazed and confused, President Trump is thinking of nominating Stephen Moore for the Federal Reserve Board of Governors. How about a serious economist like Stanford’s John Taylor of The Taylor Rule fame?

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Broken Arrow! U.S. Treasury Yield Curve Inverts for First Time Since 2007

Since an inverted Treasury curve occurs before a recession, the Federal Reserve may have to expend all remaining policy tools.

The US Treasury 10-year yield declined 10 bps today which is a large pop.

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The Federal Reserve finally achieved an inverted Treasury yield curve for the first time since 2007.

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The Federal Reserve, in the past, has reacted aggressively when the yield curve slope breached 0 slope. Aka, Snake and Nape (Snake Eye Missiles and Napalm).

It’s been a lovely *%*$#$$  non-recovery from the last recession. Just asset bubbles.

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Fed’s Powell Turns Dove And Throws In The Towel As Yield/OIS Curves Remain Kinked

With a projected slowing economy and core inflation still under 2%, Fed Chair Jerome Powell officially threw in the towel on monetary normalization yesterday by announcing  no more rate increases this year and balance sheet reduction will cease in September.

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The US Treasury Actives curve remains kinked from 6 months to 10 years reflecting economic slowdown. The overnight indexed swap curve is hyper-kinked.

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A closer look at the US  Overnight Indexed Swap rate flattened after The Fed’s last rate hike, signaling that there be no more in the short run.

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One can view Powell as Mean Mr. Mustard (and Yellen as Polythene Pam), the surrender on monetary normalization is welcome by equity markets and mortgage lenders.

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