European Central Bank president Mario Draghi took the soft approach this week when he said the bank would come up with ways to assist struggling eurozone countries “over the coming weeks.” BondDesk Group reports that in July daily trade volume (as measured by trade counts) in Treasury, Agency and CD declined from June levels.
Conversation Starter
Bond Desk Group: Monthly Guide to the U.S. Retail Fixed Income Markets
In July, daily trade volume (as measured by trade counts) in Treasury, Agency and CD declined from June levels amid a slight drop in yields in Treasury and Agency. Yields in CD had a modest gain. Buy-to-sell ratio in all three asset classes increased from June.
See the full report here.
http://jlne.ws/PoNLnB
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David Robin, co-head of the New York Financial Futures and Options Group at Newedge was kind enough to field a few questions this week from JLN Interest Rates.
Q: What is the bottom line for the interest rate market after this week’s FOMC announcement?
A: The bottom line for the interest rate markets is the Fed has provided further detailed, tangible evidence that they will remain on hold for an extended period of time, that is until they are convinced of the long term sustainability of growth in the economy and jobs. While it is not clear what the next policy prescription will be—QE3, reduction in interest on excess reserves, etc.—it is clear that, in the absence of sudden changes in economic trajectory, the Fed will adhere to “on hold to late 2014,” and longer if needed.
Q: Do you feel that there was anything significant in the statement that the commentators missed?
A: The commentators got it right; the initial reaction of the marketplace got it wrong, but the marketplace has subsequently been adjusted. The initial reaction by the market was disappointment at the lack of tangible policy moves, either extending the guidance or announcing QE3. This overlooked what was a decidedly dovish statement, which all the commentators correctly identified.
Q: What part of the market will see activity in coming days after the FOMC statement? (What part of the curve, etc.)?
A: All parts of the interest rate curve will be active over the next several weeks, as there remains ongoing debate and uncertainty regarding policy timing and strategic value, while at the same time there is a seasonal period of illiquidity, which could exaggerate price swings.
Q: How can we expect trade in interest rates to evolve going forward?
A: The most interesting part of the curve, in my opinion, are the deferred Eurodollar futures, starting in late 2014 and beyond, which are underpriced to the stated policy path and have convergence value over time. For example, December ‘15 Eurodollars at 98.95 should, over time, trade much closer to Dec ’13 Eurodollars at 99.55 in an “on hold to late 2014′ policy path environment.
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Risk 25 Firms of the Future: Eris Exchange
Risk Magazine
Neal Brady, Eris Exchange
If over-the-counter interest rate swaps didn’t exist, and a product was invented today to do the same job – knowing what the market knows about the Dodd-Frank Act and Basel III – it might look a lot like the Eris Exchange swap futures contract. As a future, it’s subject to lighter margin requirements – clearinghouses can calculate initial margin requirements over a one-day period for futures rather than the five or seven days used for OTC trades – and can be netted with existing futures positions. For the Eris contract, that means offsets can be calculated against interest rate futures a firm has cleared with CME Group – in aggregate, a $37 trillion pool of contracts as of April this year.
http://jlne.ws/Otip3r
Lead Stories
Eurozone Crisis: ECB’s Draghi Disappoints Markets
BBC
European markets have fallen after the European Central Bank president Mario Draghi said the bank would come up with ways to assist struggling eurozone countries “over the coming weeks.”
http://jlne.ws/NLMtIG
Monetary policy: See no evil
The Economist
The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.
http://jlne.ws/QiMWkV
Federal Open Market Committee Aug. 1 Statement: Full Text
Bloomberg
By Washington newsroom +1-202-624-1820. Editors: [bn:PRSN=3083722] James – 2012-08-01T18:13:43Z
http://jlne.ws/Osv3Nj
Fed Weighs Cutting Interest on Banks’ Reserves After ECB Move
Bloomberg
Federal Reserve Chairman Ben S. Bernanke may be taking another look at cutting the interest rate the Fed pays on bank reserves to bring down short-term borrowing costs and spur the slowing U.S. expansion.
http://jlne.ws/PDfX6z
Federal Reserve says US economy has decelerated in first half of year, takes no new steps
Associated Press via Yahoo! News
http://jlne.ws/Qy5obA
Federal Reserve says U.S. economy has slowed
The Patriot-News
WASHINGTON — The Federal Reserve said Wednesday that the U.S. economy is losing strength and repeated a pledge to take further steps to stimulate growth if the job market doesn’t show sustained improvement.
http://jlne.ws/OtKgQY
Federal Reserve could be moving to more bond buying
Lansing State Journal
The Federal Reserve appears to be moving toward announcing some new step to try to energize the troubled U.S. economy. The question is whether it will do so after its policy meeting this week. Probably not, many economists say. The U.S.
http://jlne.ws/Osvhns
Video – Heat Rises on Fed and European Central Bank
WSJ.com
The U.S. Federal Reserve and European Central Bank face critical tests this week amid heightened expectations that they are moving toward new actions to tackle fragility in the global economy.
http://jlne.ws/OkmNl3
Judicial Watch Sues Federal Reserve Board of Governors for Records Detailing Justification for AIG Bailout
Marketwire via Yahoo! Finance
WASHINGTON, DC– – Judicial Watch announced today that on July 18, 2012, it filed a Freedom of Information Act lawsuit ) against the Board of Governors of the Federal Reserve System seeking records related …
http://jlne.ws/OJ56Na
How do you solve a problem like Libor?
The Banker
Libor has come under huge scrutiny since Barclays was fined for manipulating it. While few bankers believe it can be replaced, even its staunchest supporters say it needs to be reformed. But it is not obvious how.
http://jlne.ws/OIbFzH
Libor, the New Asbestos
BusinessWeek
These are parched times for law firms. Clients just aren’t willing to pay what they used to for associates’ billable souls.
http://jlne.ws/OLRVJT
The Cartel – Behind The Scenes In The Libor Interest Rate Scandal
Free Internet Press
There have been plenty of banking scandals, but none quite like this: Investigators and political leaders believe that the manipulation of the Libor benchmark interest rate was the result of organized fraud. Institutions that participated could face billions in fines and penalties.
http://jlne.ws/MmaZjZ
Deutsche Bank says staff took part in Libor scam
AFP via Yahoo! News
Deutsche Bank, Germany’s biggest lender, confirmed for the first time Tuesday that a “limited number” of its employees had been involved in the Libor interest-rate rigging scandal.
http://jlne.ws/MYN2NM
US Treasury will offer floating-rate securities
Channel 8 San Diego
The Treasury Department said Wednesday that it will offer investors Treasury securities with variable interest rates, similar to those on some home mortgages.
http://jlne.ws/Mmb5b9
John Eckstein, Pioneer of Treasury Futures Trading, Dies at 74
Bloomberg
John F. Eckstein III, one of the first traders of Treasury bill futures contracts following their debut in 1976 and a pioneer of cash-futures arbitrage trading in the U.S. government bond market, has died. He was 74.
http://jlne.ws/QYUVFl
FHFA Rejects U.S. Treasury Request for Mortgage Debt Writedowns
Bloomberg
Fannie Mae and Freddie Mac won’t forgive principal on delinquent mortgages they guarantee even as the U.S. Treasury Department is offering incentive payments for writedowns, the companies’ regulator said today.
http://jlne.ws/NWqEn8
Mohamed El-Erian Is the Bond Market’s New Leading Man
New York Times
Mohamed El-Erian, chief executive of Pimco, the bond fund giant, has stepped out of the long shadow of Bill Gross, its longtime maestro.
http://jlne.ws/M6qNpD
TARP Was Even Worse Than You Think: “An Abysmal Failure, Barofsky Says
Yahoo! Finance: The Daily Ticker
Follow The Daily Ticker on Facebook! Most Americans have a sense TARP was a badly managed program that bailed out “fat cat” bankers at the expense of U.S. taxpayers.
http://jlne.ws/Qy5JuT
Halfway Through, 2012 Has Been a Disappointment
WSJ.com
This year began with such hopeful expectations–almost all of which have been dashed. Real gross domestic product rose by only 1.5% in the second quarter, the weakest pace since 2011′s third quarter. Revised data show real GDP expanded by a ho-hum 2.0% in the first quarter.
http://jlne.ws/M5xhAp
Chicago futures industry
Chicago Tribune
The recent scandals at MF Global and Peregrine Financial have resonated deeply in Chicago, where the futures industry matured into a global financial juggernaut.
http://jlne.ws/Mudmwm
5 lessons Bernanke has learned on the job
MarketWatch
Back in 2006 when Ben Bernanke was named chairman of the Federal Reserve, he knew he’d make some mistakes, but he was pretty sure the Fed wouldn’t do what the United States did in the 1930s or what Japan did in the 1990s that allowed depressed conditions to persist for years.
http://jlne.ws/M5LAVG
Events
Bond China Congress
September 4-5, 2012, Shanghai, China
http://jlne.ws/KXsmS0
CTA Expo Chicago
September 13, 2012
http://jlne.ws/LmhfFu
Economic News
Jobless Claims Increase
WSJ.com
The number of U.S. workers filing applications for jobless benefits rose last week, continuing an uneven pattern that suggests job creation was likely modest in July. Separately, factory orders unexpectedly fell in June, the latest sign that the slowing economy is sapping demand.
http://jlne.ws/OsYHF3
US economic growth slowed to 1.5 percent rate in 2nd quarter
Post-Bulletin
WASHINGTON — The U.S. economy grew at an annual rate of just 1.5 percent from April through June, as Americans cut back sharply on spending. The slowdown in growth adds to worries that the economy could be
http://jlne.ws/QjCcTy
EMPLOYMENT COST INDEX – JUNE 2012
http://jlne.ws/OzzXZh
Cleveland Case-Shiller (NSA) year-over-year change continues to show decline, but rate is slowing
http://tinyurl.com/ydrbsa2
Exchanges, Clearing Houses & MTFs
IntercontinentalExchange Reports 18% Increase in Second Quarter Earnings; Diluted EPS of $1.95, up 19%
PR Newswire via Yahoo! Finance
http://jlne.ws/NMF2Rs
Firms & Banks
Morgan Stanley faces charges over Greek bank talks
Associated Press via Yahoo! News
Greek court officials say a prosecutor has brought misdemeanor charges against Morgan Stanley for alleged insider trading in connection with a planned local bank merger.
http://jlne.ws/OLaXQH
BNP Paribas Profit Falls 13% in Second Quarter
By LIZ ALDERMAN – NY Times
Europe’s deepening debt crisis curbed trading revenue at the French bank BNP Paribas, pushing its net profit down by 13 percent in the second quarter compared to the same period last year.
http://jlne.ws/OLaZIi
Goldman Sachs Leads Foreign Banks Accelerating Job Cuts in Japan
Bloomberg
Goldman Sachs Group Inc. led major foreign banks in Japan in accelerating job cuts last fiscal year as employees relocated to other Asian financial centers and firms trimmed costs to cope with a worldwide industry slump.
http://jlne.ws/OLaXQG
UBS Whistle-Blower Birkenfeld Released From U.S. Prison
Bloomberg
Bradley Birkenfeld, the former UBS AG banker who blew the whistle on how the bank helped thousands of Americans evade taxes, was released today from the U.S. prison in Minersville, Pennsylvania, according to his lawyer.
http://jlne.ws/OLaZIl
Peregrine Trustee Seeks to Subpoena Banks on Transfers
Bloomberg
The trustee liquidating Peregrine Financial Group Inc. asked a judge for authority to subpoena the defunct futures brokerage’s banks including JPMorgan Chase & Co. and Citigroup Inc. for information about transfers from segregated accounts and proprietary accounts.
http://jlne.ws/MYN349
Peregrine Probed by Labor Department, Trustee Says
Bloomberg
Peregrine Financial Group Inc.’s handling of its employees’ 401 plan is being reviewed by the U.S. Labor Department, the collapsed commodity firm’s bankruptcy trustee told a U.S. Senate Panel.
http://jlne.ws/Nd6gvE
Why Did It Take 20 Years to Catch Peregrine’s CEO?
BusinessWeek
On Saturday, May 26, Doug McClelland traveled to Peregrine Financial Group’s $18 million headquarters in Cedar Falls, Iowa, for the trading firm’s annual meeting.
http://jlne.ws/OrrgzW
AIG Looks To Keep Business And Brand Recovery Rolling With Earnings
Forbes
The Treasury’s stake in the company has been cut down from 92% to 60%, with common stock worth $30 billion left with the government.
http://jlne.ws/MmbvOL
Credit Suisse bonds achieve 97% take-up
FT.com
Credit Suisse‘s shareholders have taken up 97 per cent of a SFr1.9bn convertible bond issue which forms a key part of the bank’s plans to shore up its capital position following pressure from the Swiss National Bank.
http://jlne.ws/QMj5hD
Regulators
ECB may have to change tack on bond buys
WXOW 19 La Crosse
When European Central Bank head Mario Draghi said that he was ready to “do whatever it takes” to save the euro.
http://jlne.ws/NMFrUe
Bernanke, the Reluctant Revolutionary
BusinessWeek
Inside Ben Bernanke are two birds. The hawk hates inflation. The dove hates unemployment. On Aug. 1 the chairman of the Federal Reserve expressed his inner hawk.
http://jlne.ws/RdVNpx
Ben Bernanke Could Lose for Same Reason as Olympic Sailor
Bloomberg
Ben has the right map. That’s the assumption about Ben Ainslie, the U.K.’s top sailor, as he competes in the Olympics this week.
http://jlne.ws/MBeVsr
Bold Draghi leaves room for ECB disappointment
MarketWatch
European Central Bank President Mario Draghi proved last week that bold talk from the right big shot can still rock the markets.
http://jlne.ws/NQXg1A
Draghi under pressure to deliver on pledge to save euro
Reuters
European Central Bank President Mario Draghi must back up his pledge to do what it takes to protect the euro when the bank’s policy makers meet on Thursday or else face deep disappointment from investors hungry for – and expecting – immediate action.
http://jlne.ws/MOoqsO
Global News
China’s Central Bank Makes Economic Growth a Bigger Priority
WSJ.com
China’s central bank said Thursday it will make stabilizing economic growth a bigger priority, signaling rising concern over the slowdown in the world’s second-largest economy.
http://jlne.ws/RfikxT
What’s Cooking With China’s Inflation?
WSJ.com
Inflation was supposed to be off the radar screen of China’s policy makers after the consumer price index fell to a mild 2.2% in June from a peak of 6.5% in July 2011. But they have recently turned the heat on cooking-oil producers, telling them not to raise prices – unless they really have to.
http://jlne.ws/OxjNPS
UK ministers eye nationalizing Royal Bank of Scotland: FT
Reuters via Yahoo! News
Senior British government figures are discussing the possibility of buying out private investors in Royal Bank of Scotland , the Financial Times reported on Thursday. Ministers are discussing a potential full nationalization of RBS, which is already 82 percent owned by the government, to help boost business lending to companies.
http://jlne.ws/OLaXAj
BoE leaves policy on hold as British economy worsens
Reuters via Yahoo! News
LONDON – The Bank of England left its monetary policy unchanged on Thursday, judging that its July decision to expand its buying of government bonds is enough stimulus for now despite signs of growing economic weakness. Since the BoE’s Monetary Policy Committee met last month, official data has shown that Britain’s economy shrank much more than expected in the second quarter of 2012 …
http://jlne.ws/M6rDCF
India’s Central Bank Holds Rates On Inflation Fears
RTT News
India’s central bank on Tuesday decided to leave its key rates unchanged as widely expected as policymakers focus on maintaining inflation under control amid slowing growth.
http://jlne.ws/T508tK
Argentina’s Central Bank Sees Economic Rebound In 2nd Half
Nasdaq
http://jlne.ws/MTk5Vp
Italy PM Sees ESM Banking License In Due Course
FOX Business
Italian Prime Minister Mario Monti said Wednesday that he expects the European Union’s permanent bailout fund to be granted a banking license “in due course,” defying staunch opposition from the German central bank and government.
http://jlne.ws/N5IC5P
Greek bank staff strike against takeovers
FT.com
Greek bank employees staged a 24-hour strike on Monday in protest against consolidation of the sector following the takeover of state-owned Agricultural Bank of Greece (ATEbank) by Piraeus Bank, the country’s fourth largest lender.
http://jlne.ws/QZNgq2
