US Q1 GDP Sags To -5% QoQ Annualized As Virus Lockdown Helps Crush Economy (Corporate Profits Shrink 14% In Q1)

Oof.

US GDP growth QoQ annualized plunged to -5% in the first quarter. Still not to the depths of The Great Recession (aka, housing bubble burst and ensuing financial crisis).

But you ain’t seen nothing yet.

The Atlanta Fed GDPNow estimate for Q2 GDP is -41.907%.

Why will Q2 look like a disaster? Take a peek at April’s preliminary durable goods orders: down -17.2%. Take out transportation and the decline is “only” -7.4%. In other words, the print (actual) are lower than the surveys. And while jobless claims clocked in at 2.12 million, it is the first decline in jobless claims so far.

Corporate profits shrank by 14% in Q1.

My Kuroda! A 0.0000148% Yield on Bond Sale in Japan Is Exciting Investors (Student Loan Bonds)

Its a sad state of the world where investors get “excited” about a zero percent bond.

(Bloomberg) — A 0.0000148% yield drew strong demand for a bond offering in Japan, as investors clamor for safe debt amid the pandemic even if it pays them next to nothing.

Japan Student Services Organization priced 30 billion yen ($278 million) of two-year social bonds on Friday with a coupon of 0.001% and a price of 100.002 yen, which equates to the near-zero yield. Orders totaled about 2.5 times the amount sold, according to people familiar with the matter.

Japan has long been home to striking examples of how investors will grab at whatever yield they can find on safer securities, a trend that has gone global and been intensified by monetary easing to cushion economies from the economic damage caused by the Covid-19 pandemic. The securities from Jasso, an independent administrative agency that offers student loans, are rated AA+ by Rating & Investment Information.

Jasso’s bonds drew strong demand from investors who are raising their holdings of environmental, social and governance assets. Buyers ranged from pension funds, banks, shinkin banks and foreign investors, according to the people familiar, who asked not to be identified as the details are private.

The organization has a history of notable debt deals. It priced Japan’s first minus-yield agency bond last year, when it sold a note with a coupon of 0.001% and a price of 100.003 yen, working out to a yield of around minus 0.0005%. 

It is not that surprising since 2-year Japanese Government Bond yields remain in negative territory, as do JGB of maturities of 10-years or less.

My Kuroda!

Limbo Rock! Fed Funds Futures Imply Negative Futures US Interest Rates

Fed’s Jerome Powell is watching how low interest rates will go.

Despite Chairman Powell’s claims that the US will never go negative, The Fed Funds Futures rates are signaling YES.

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Negative interests rates are appearing in US Treasury Strips (both coupon and principal strips).

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The short-end of the Treasury curve is flirting with negative yields while the TIPs curve is profoundly negative beyond 3 years.

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How low will interest rates go?

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Worst Property Debt Crash in Years Looms for Workout Specialists (Fitch Says 26% of CMBS Borrowers Asked About Payment Relief)

First it was on-line shopping spearheaded by Amazon that helped crush physical retail space. Then the knock-out punch was the government shutdown of the the US economy.

(Bloomberg) — Emptied out malls and hotels across the U.S. have triggered an unprecedented surge in requests for payment relief on commercial mortgage-backed securities, an early sign of a pandemic-induced real estate crisis.

Borrowers with mortgages representing almost $150 billion in CMBS, accounting for 26% of the outstanding debt, have asked about suspending payments in recent weeks, according to Fitch Ratings. Following the last financial crisis, delinquencies and foreclosures on the debt peaked at 9% in July 2011.

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Special servicers — firms assigned to handle vulnerable CMBS loans — are bracing for the worst crash of their careers. They’re staffing up following years of downsizing to handle a wave of defaults, modification requests and other workouts, including potential foreclosures.

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“Everything is happening at once,” said James Shevlin, president of CWCapital, a unit of private equity firm Fortress Investment Group and one of the largest special servicers. “It’s kind of exciting times. I mean, this is what you live for.”

No Relief

A surge in residential foreclosures helped ignite the last financial crisis. Now, commercial real estate is getting hit because the economic shutdown has shuttered stores and put travel on ice.

Not all of the borrowers who have requested forbearance will be delinquent or enter foreclosure, but Fitch estimates that the $584 billion industry could near the 2011 peak as soon as the third quarter of this year.

There’s no government relief plan for commercial real estate. Bankers usually have leeway to negotiate payment plans on commercial property, but options for borrowers and lenders are limited for CMBS.

Debt transferred to special servicers from master servicers, mostly banks that handle routine payment collections, is already swelling. Unpaid principal in workouts jumped to $22 billion in April, up 56% from a month earlier, according to the data firm Trepp.

Make Money

Special servicers make money by charging fees based on the unpaid principal on the loans they manage. Most are units of larger finance companies. Midland Financial, named as special servicer on approximately $200 billion of CMBS debt, is a unit of PNC Financial Services Group Inc., a Pittsburgh-based bank.

Rialto Capital, owned by private equity firm Stone Point Capital, was a named special servicer on about $100 billionof CMBS loans. LNR Partners, which finished 2019 with the largest active special-servicer portfolio, is owned by Starwood Property Trust, a real estate firm founded by Barry Sternlicht.

Sternlicht said during a conference call on Monday that special servicers don’t “get paid a ton money” for granting forbearance.

“Where the servicer begins to make a lot of money is when the loans default,” he said. “They have to work them out and they ultimately have to resolve the loan and sell it or take back the asset.”

Hardball

Like debt collectors in any industry, special servicers often play hardball, demanding personal guarantees, coverage of legal costs and complete repayment of deferred installments, according to Ann Hambly, chief executive officer of 1st Service Solutions, which works for about 250 borrowers who’ve sought debt relief in the current crisis.

“They’re at the mercy of this handful of special servicers that are run by hedge funds and, arguably, have an ulterior motive,” said Hambly, who started working for loan servicers in 1985 before switching sides to represent borrowers.

But fears about self-dealing are exaggerated, according to Fitch’s Adam Fox, whose research after the 2008 crisis concluded most special servicers abide by their obligations to protect the interests of bondholders.

“There were some concerns that servicers were pillaging the trust and picking up assets on the cheap,” he said. “We just didn’t find it.”

Troubled Hotels

Hotels, which have closed across the U.S. as travelers stay home, have been the fastest to run into trouble during the pandemic. More than 20% of CMBS lodging loans were as much as 30 days late in April, up from 1.5% in March, according to CRE Finance Council, an industry trade group. Retail debt has also seen a surge of late payments in the last 30 days.

Special servicers are trying to mobilize after years of downsizing. The seven largest firms employed 385 people at the end of 2019, less than half their headcount at the peak of the last crisis, according to Fitch.

Miami-based LNR, where headcount ended last year down 40% from its 2013 level, is calling back veterans from other duties at Starwood and looking at resumes.

CWCapital, which reduced staff by almost 75% from its 2011 peak, is drafting Fortress workers from other duties and recruiting new talent, while relying on technology upgrades to help manage the incoming wave more efficiently.

“It’s going to be a very different crisis,” said Shevlin, who has been in the industry for more than 20 years.

Ya think?

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We will see shortly if this is a phantom punch or not.

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Margin Call! Dirt-Cheap U.S. Mortgages Thwarted by $5 Billion in Margin Calls (ETFs Next!)

As Ronald Reagan once said, “The most terrifying words in the English language are: I’m from the government and I’m here to help.” The same applies to The Federal Reserve.

(Bloomberg) — The Federal Reserve’s emergency rescue of the U.S. mortgage market should have set off celebration among lenders trying to keep up with demand from borrowers. Instead, executives at Quicken Loans got a hefty margin call.

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That was just a fraction of the pain the Fed unintentionally inflicted on lenders in mid-March when it announced plans to buy a massive amount of mortgage securities. The move, meant to steady the market, caught many lenders by surprise and tipped their routine hedges deep into the red.

It’s added to strains throughout the industry that have left the gap between mortgage rates and benchmark Treasuries the widest since 2009. Back then, bank failures and concerns about the housing market kept home loans from becoming cheaper for borrowers. Now, it’s obscure parts of the financial world that are holding back efforts to shave thousands of dollars from many Americans’ biggest expenses — their mortgages.

“The Fed came in trying to help, but they overshot,” said Phil Rasori, chief operating officer of Mortgage Capital Trading Inc., which says it handles hedging for about 20% of the mortgage market. He estimates margin calls initially drained as much as $5 billion from lenders before the Fed eased off, posing “an existential threat” to some nonbanks that operate on thin cash cushions, selling off loans as soon as they’re made.

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Mortgage lenders promise to lock in interest rates for borrowers weeks before loans are finalized, then hedge that risk by shorting mortgage-related securities. But the Fed’s buying drove up prices for those assets, turning the safeguards into sudden demands for cash. Quicken, among the largest U.S. mortgage lenders, met its obligations during the period, spokesperson John Perich said.

Then there was this headline: “New York Fed Says It Will Begin Buying ETFs in ‘Early May’”

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Is Jerome Powell really Sid Vicious? At least for Quicken.

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A tip of the hat to Jesse from Jesse’s Cafe Americain!

Alarm! US Personal Spending Tanks -7.5% MoM In March (Durable Spending Tanks 15.1% MoM)

Alarm! 

US personal spending tanked -7.5% MoM, exceeded only by durable goods spending that tanked -15.1% MoM in March.

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Personal income dropped by “only” -2% MoM.

An additional 3.8 million filed for jobless claims.

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Pending home sales tanked -14.5% YoY for March.

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Alarm!

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BlackRock, Voya Revive TALF Trade That Returned Double-Digits

Memories of the housing crash and financial crisis of 2008-2009. A Federal Reserve program to allow some to borrow cheap from The Fed and buy distressed assets that earn double-digit returns.

(Bloomberg) — Money managers are reviving one of the most profitable credit trades of 2009, thanks to the Federal Reserve.

Dozens of firms, from BlackRock Inc. and Voya Financial Inc. to credit specialists Palmer Square Capital Management and Varadero Capital, are raising funds to deploy into a central bank lending program that’s being resurrected to support the flow of consumer credit, according to people with knowledge of the matter.

They’re seeking to replicate the windfalls many enjoyed in the aftermath of the financial crisis when, by taking advantage of low-cost loans via the Term Asset-Backed Securities Loan Facility, they were able to notch double-digit returns purchasing top-rated ABS as the economy recovered.

It’s the latest example of how credit managers who spent much of the past decade battling low yields are now raising cash to seize on deep discounts created by the economic fallout from the coronavirus pandemic.

Investors, for their part, have been happy to oblige, piling billions of dollars into funds targeting distressed and dislocated securities as they aim to make up for steep losses elsewhere.

“If you look at what you’re getting an opportunity to invest in, it’s AAA rated paper that’s offering really healthy yields for the risk,” said Chris Long, president and founder of Palmer Square. “This go around, the TALF program is a bit more of a known entity. The fact that TALF proved so successful in 2009 really bodes well for demand.”

Still, some market watchers are already warning that replicating the gains of the last crisis may prove easier said than done.
On the heels of the U.S. housing collapse, asset-backed securities looked a lot more fragile in early 2009 than they do today. Average risk premiums on AAA rated ABS deals reached nearly 8%, according to Bloomberg Barclays index data. This year, they peaked around 3% in March and have since fallen to about 1.4%.

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“You’re not going to get 20% to 25% returns like you did in 2009,” said Greg Leonberger, director of research at investment consulting firm Marquette Associates. “The return potential is lower because spreads are lower.”

An example of the availability of distressed assets available is the TRACE number of distressed bonds traded.

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Here is the latest TALF term sheet.

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The Fed’s Bigger Boat! Is The Fed’s Cure Worse Than the Covid-19 Virus?

Apparently, The Federal Reserve and US Treasury think they need a bigger boat!

(Bloomberg) — The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus.  Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. 

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.

PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.

TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.

SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.

MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position.

What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

Here is part of the mayhem The Fed/Treasury are trying to mitigate. The CitiMortgage Alternative Loan Trust 2007-A4 asset-backed security.

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Yes, the US Treasury curve is now below 0.75% from 10 years in, including negative yields on most Treasury bills.

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The US Treasury actives curve and On/off the run curves are under 1% at 15 years and in.

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Welcome to Amity Island, in a shutdown over the Corona-19 virus.

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Another Trading Day, Another Trading Halt (NASDAQ Opens Down 7%, Europe Down 9%, Brazil Down 11.65%)

Another trading day, another trading halt as NASDSAQ opens down 7%.

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Europe is a sea of red as is Brazil.

Here are the circuit breakers thresholds and time durations:

Level 1 halt (7% decline in S&P 500 index)

  • Trading will halt for 15 minutes if drop occurs before 3:25 p.m.
    At or after 3:25 p.m.—trading will continue, unless there is a Level 3 halt.

Level 2 halt (13% decline in S&P 500 index)

  • Trading will halt for 15 minutes if drop occurs before 3:25 p.m.
    At or after 3:25 p.m.—trading will continue, unless there is a Level 3 halt.

Level 3 halt (20% decline in S&P 500 index)

  • At any time during the trading day—trading will halt for the remainder of the trading day.

Trading has resumed in America. As of 10am EST, Europe keeps crashing (down 10%).

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High yield CDX gets crushed!

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Gold is down 3.82%, silver is down 5.40% and Brent crude is down 6.43%.

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UPDATE:

Dow down >2,000. Eurozone stocks crushed like an oversteamed bratwurst!

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Get to the choppa!

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Stimulypto! U.S. Stocks Rebound on Stimulus Speculation (Fiscal And Fed)

What do you call an expected 3 rate cuts by The Federal Reserve AND fiscal stimulus to combat the coronavirus? STIMULYPTO!!

(Bloomberg) — U.S. stocks turned higher in another wild day on Wall Street, with investors pining for details on the Trump administration’s expected stimulus to combat the coronavirus’s economic impact. Treasuries fell and oil jumped.

The S&P 500 whipsawed from the outset Tuesday, surging 3.5% before turning negative and the rising again. President Donald Trump promised “major” moves to counter the fallout, but he has not communicated his plans to Congress yet. He did say his administration would assist the airline and cruise industries. A 4% rally in European stocks got zapped.

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The Dow has recovered a bit from yesterday’s stock slaughter.

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The unknown fiscal stimulus (likely reduced tax withholding) in addition to the anticipated three Fed rate cuts coming in March.

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Stimulypto indeed!

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Update: after a few speed bumps, the Dow closed up 1165 points. Stocks Jump Most Since 2018 on Stimulus Hope

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And the 10-year Treasury yield is up 26 basis points.

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