Lead Stories

How rigged are the markets? Libor, ISDAfix, and now the oil price…
QFinance
It seems that news about the fixing of trillion dollar markets is becoming, well, rather routine. First there was Libor, then there was the announcement that the Commodities Futures Trading Commission (CTFC) was investigating the possible rigging of the interest rate swap rate, another market in the hundreds of trillions.
http://jlne.ws/192jqsv

Treasuries Advance After Fed Officials Back Bond-Buying Stimulus
Bloomberg News
Treasuries rose for the first time in three days as comments from Federal Reserve officials added to speculation Chairman Ben S. Bernanke will emphasize the need to sustain stimulus when he speaks before Congress tomorrow.
http://jlne.ws/14uIju2

Bund Yields Rise to 9-Week High as Bundesbank Sees Faster Growth
Bloomberg News
German government bonds fell, pushing 10-year yields to the highest level in nine weeks, after the Bundesbank said the economy will improve “markedly” this quarter, damping demand for the region’s safest securities.
http://jlne.ws/192fxnm

World stocks hit records as US Treasuries rise
The Age
The Standard & Poor’s 500 Index returned to a record as a Federal Reserve official said bond purchases should continue and Goldman Sachs Group Inc. forecast the stock rally will last at least through 2015. Treasuries rose and the yen pared earlier losses while grains and gold fell.
http://jlne.ws/192iVyK

Low Rates Can Raise Risks at Canadian Banks, Dickson Says
BloombergBusinessweek
Julie Dickson, Canada’s banking regulator, said the current period of low interest rates threatens to increase risks for the country’s lenders and that it has become an issue she’s closely monitoring.
http://jlne.ws/192jRmD

Dudley Says He Can’t Be Sure If Next QE Move Is ‘Up or Down’
Bloomberg
Federal Reserve Bank of New York President William C. Dudley said he has not decided whether the Fed’s next move should be to enlarge or shrink its bond buying program as he called for a fresh look at its eventual retreat from record asset purchases.
http://jlne.ws/192l0KX

Fed’s Bullard Opposes Pulling Back on Federal Reserve Bond Purchases
The Wall Street Journal
There is no case yet for tapering the U.S. Federal Reserve’s current quantitative easing program until inflation picks up, St. Louis Fed President James Bullard said Tuesday.
http://jlne.ws/14Ozs5P

Agency MBS: most thankful for the Fed’s dovish sentiment?
MarketWatch
U.S. markets spazzed with toddler-like glee when Fed officials gave remarks Tuesday indicating commitment to current monetary policies. But although equities and Treasurys gained on the statements of central bankers, the agency mortgage-backed security market may have gotten the biggest sugar high.
http://jlne.ws/192li4A

Economic News

Pound Slides to Six-Week Low Versus Dollar as Inflation Slows
Bloomberg News
The pound slid to a six-week low against the dollar after a government report showed inflation slowed more than economists forecast, giving the central bank more room to boost stimulus that tends to weaken a currency.
http://jlne.ws/192ggoG

Regulators

CFTC Said Preparing ISDAfix Probe Talks in Weeks: Credit Markets
Bloomberg News
Commodity Futures Trading Commission investigators are poring over 1 million e-mails and instant messages as part of their price-manipulation probe of a swaps benchmark that helps determine interest rates on everything from annuities to bonds linked to skyscrapers.
http://jlne.ws/10hc2X9

CFTC To Investigate Whether Benchmark Was Rigged
May 21, 2013 • Bloomberg News
Commodity Futures Trading Commission investigators are poring over 1 million e-mails and instant messages as part of their price-manipulation probe of a swaps benchmark that helps determine interest rates on everything from annuities to bonds linked to skyscrapers.
http://jlne.ws/14uNgDa

Global News

European share rally stalls on doubts about Fed support
Reuters
European shares fell from multi-year highs on Tuesday on concerns the U.S. central bank could call an earlier-than-expected halt to the stimulus programme that had underpinned demand for stocks.
http://jlne.ws/192j2tW

Investors price out Greek default as curve normalises
Reuters
Greek 10-year bond yields fell below longer-dated ones on Tuesday for the first time in three years as investors priced out the risk of Athens defaulting.
http://jlne.ws/192jhp9

China’s Interest-Rate Challenge
Project Syndicate
China’s successful transformation from a middle-income country to a modern, high-income country will depend largely on the reforms that the government undertakes over the next decade. Financial reforms should top the agenda, beginning with interest-rate liberalization. But liberalizing interest rates carries both risks and rewards, and will create both winners and losers, so policymakers must be prudent in their approach.
http://jlne.ws/192jEA3

Aso asks BOJ to communicate with market as interest rates volatile
GlobalPost
Finance Minister Taro Aso on Tuesday asked Bank of Japan chief Haruhiko Kuroda to continue communicating with the market as concern is growing that a possible further spike in the country’s long-term interest rates may have an adverse effect on the economy.
http://jlne.ws/192k3T0

Brazil cenbank keeps hawkish tone ahead of rate decision
May 21 (Reuters) – Brazil’s central bank chief Alexandre Tombini said on Tuesday that policymakers will do whatever is necessary to bring down inflation, maintaining a hawkish tone ahead of next week’s monetary policy decision.
http://jlne.ws/192gVGA

CMA plans a futures and options market segment at NSE
The Star
The Capital Markets Authority will invite and start receiving applications for futures exchanges from August if the regulations are gazetted by then.
It has published, for public comment, the first set of draft regulation on licensing requirements. The three draft regulations will be necessary for establishing a derivatives and futures exchange in the country. The other regulations will be on futures contracts and futures market intermediaries.
http://jlne.ws/192hlga

Stock futures steady ahead of Fed speakers
MADRID (MarketWatch) — U.S. stock futures were little changed on Tuesday with investors expected to look for more clues on any tapering of the Federal Reserve’s easing program. Two Fed presidents with voting rights on the interest-rate-setting committee are due to hit the tape.
http://jlne.ws/192hUGP

Lead Stories

U.S. Bonds Cheapest Since ’90 Versus Bunds Counter Buffett
Bloomberg
The longest decline in Treasuries this year has left U.S. government debt the cheapest since March 2011 when measured by real yields and the best relative value compared with German bunds in more than two decades.
http://jlne.ws/10hbujS

Why QE, low interest rates and volatility are an explosive mix for the markets
Simone Foxman, Quartz
Critics of quantitative easing (QE)—whereby central banks push down interest rates and buy up safe assets to stimulate flagging economies—have long worried about the possible unintended consequences. The point of QE is to push down the yields on safe assets like government bonds so that investors put their money in riskier assets where it can do more economic work; the worry is that too much money in risky assets could blow up in investors’ faces.
http://jlne.ws/14pd5EC

The Fed: Firefighter or Arsonist?
U.S. News
Since the financial meltdown in 2008, the Federal Reserve’s range of powers have expanded, as have the kinds of financial institutions it monitors and regulates.
http://jlne.ws/10hdpVC

Ebbing Deficit Likely to Keep Rates Low When Fed Tapers
Bloomberg
Federal Reserve policy makers say they want to avoid a sudden increase in interest rates when the time comes to start unwinding record monetary easing. A shrinking federal budget deficit is likely to help them meet that goal.
http://jlne.ws/10hcmoK

$2.6 Trillion In Money Markets May Slow Interest Rate Increase
Seeking Alpha
One of the big fears investors have is what will happen to the stock markets when interest rates begin to increase. That is a legitimate fear, but there are factors that may slow and/or lessen the eventual increase in interest rates that may provide a buffer for the stock market.
http://jlne.ws/10hcTaj

JPMorgan, Barclays Boost Forecasts on Junk-Bond Returns for 2013
Bloomberg
JPMorgan Chase & Co. (JPM) and Barclays Plc are lifting their forecasts for U.S. junk-bond returns as this year’s rally exceeds the expectations of top-rated credit strategists.
http://jlne.ws/10hbyjQ

Gross to Buffett Omens Disregarded as Sales Soar: Credit Markets
Bloomberg
Sales of corporate bonds in the U.S. are surging toward the busiest May ever as borrowers race to the market before demand dries up with Bill Gross and Warren Buffett cautioning against buying debt at all-time low yields.
http://jlne.ws/10hbTmq

The Too Big To Fail: Federal Reserve Bank At 100 Years Of Age
Forbes
As the markets reach new highs, and scandal dominates the nation’s capitol, I am compelled to
examine the still unresolved challenges about whether our 100 year old central bank– the Federal Reserve– will be capable of warding off another potential systemic financial crisis like the one that almost toppled the economy in 2008.
http://jlne.ws/10hdtov

Instead of Low Rates, Let’s Have Bigger Deficits
Bloomberg
Ben Bernanke, the chairman of the Federal Reserve, recently expressed concern that investors were taking too much risk. To some investors, this was heavy with irony — most of the risk-taking can be attributed to the policies that Bernanke has pursued during his tenure.
http://jlne.ws/10hd9pS

Fed’s Fisher wants to slow pace of MBS purchases
MarketWatch
The Federal Reserve can only slow the pace of its mortgage-backed securities, as a sudden stop would be “too violent” for the market, said Richard Fisher, the president of the Dallas Federal Reserve Bank on Monday.
http://jlne.ws/10hdyIM

Economic News

US economy has improved ‘quite a lot’: Chicago Fed
LiveMint
Federal Reserve Bank of Chicago president Charles Evans said the US economy has improved “quite a lot” as the central bank maintains record stimulus.
http://jlne.ws/10hdDvZ

U.S. 10-Year Yield at Almost 2-Month High Before Bernanke Talk
Bloomberg
Treasury 10-year note yields traded at almost a two-month high before Federal Reserve Chairman Ben S. Bernanke discusses the economic outlook in congressional testimony this week.
http://jlne.ws/10hbpge

Regulators

CFTC Said to Review 1 Million E-Mails in ISDAfix Investigation
Bloomberg
Commodity Futures Trading Commission investigators are poring over 1 million e-mails and instant messages as part of their price-manipulation probe of a swaps benchmark that helps determine interest rates on everything from annuities to bonds linked to skyscrapers.
http://jlne.ws/10hc2X9

Default Swaps on Junior Bank Debt Fall on ISDA Rule Speculation
Bloomberg
The cost of credit-default swaps insuring subordinated European bank debt fell to the lowest in three years amid speculation changes to rules governing the securities will devalue existing contracts.
http://jlne.ws/10hcyUX

Global News

Amari Says Further Slide in Yen May Have Negative Effects
Bloomberg
Japan’s Economy Minister Akira Amari said a further slide in the yen would have negative effects after the currency’s 21 percent drop in the past six months, and signaled concern at the prospect of higher bond yields.
http://jlne.ws/10hcc0N

Brazil Swap Rates Rise on Tombini Inflation Stance; Real Slips
Bloomberg
Brazil’s swap rates rose, reversing an earlier drop, as speculation the central bank will step up the pace of borrowing-cost increases overshadowed a report showing analysts reduced their 2013 growth forecasts.
http://jlne.ws/10hcjt5

Aust bond prices lower
The West Australian
Australian bond futures are lower in the wake of improved US confidence data late last week, but spent the local session trading in a narrow range.
http://jlne.ws/10hbbWv

Italian Bonds Rise for Fourth Day as Industrial Orders Increase
Bloomberg
Italy’s bonds rose for a fourth day as a government report showed the nation’s industrial orders increased more than economists predicted, adding to optimism the region’s economy is recovering.
http://jlne.ws/10hcu7V

Lead Stories

Fed has not lowered interest rates enough: Kocherlakota
Reuters
The Federal Reserve has not done enough to lower U.S. borrowing costs to boost economic growth, a top Fed official said on Friday, citing his outlook for overly low inflation and overly high unemployment over the next two to three years.
http://jlne.ws/112i9Kb

QE Reduced This Summer
Inside Futures
Futures are higher in spite of the second strong hint from the Federal Reserve in less than a week that there could be an earlier than expected scaling back of the Federal Reserve’s quantitative easing program.
http://jlne.ws/112hxV0

Bank of America and Friends Win Big
The Motley Fool
Shortly after the bell, Bank of America is on track to regain the 1% it lost yesterday. Though it does appear that the bank may be moving along with the market, there is one big headline that might be swaying the bank’s investors toward the positive end of the spectrum.
http://jlne.ws/112hzfB

Euro Eyes Fresh 2013 Low on ECB Policy- Pound Rebound on Tap
Inside Futures
The Euro slipped to 1.2830 as European Central Bank (ECB) board member Benoit Coeure reiterated that the Governing Council is ‘exploring options to further strengthen lending to the real economy and, in particular, to small and medium-sized enterprises,’ and it seems as though the central bank will continue to embark on its easing cycle over the coming months as the region struggles to return to growth.
http://jlne.ws/112hJ6F

Asmussen Says Long Phase of Low Interest Rates Carries Risks
Bloomberg
European Central Bank Executive Board member Joerg Asmussen said policy makers should be aware of the risks related to keeping interest rates low for an extended period of time.
http://jlne.ws/112ie0H

Profits are up, but low interest rates put pressure on banks
St. Louis Post-Dispatch
After some dismal performances during the economic downturn, most local banks are growing profits again.
The more than 80 locally chartered retail banks and thrifts in the St. Louis region reported $77.2 million in profits in the first quarter that ended March 31, up from a $60.6 million profit in the first quarter of 2012, according to a summary of bank performances by the Federal Reserve Bank of St. Louis released this week.
http://jlne.ws/112ifSc

How bond investors can avoid becoming losers
MarketWatch
The 10-year Treasury has recently been yielding between 1.5% and 2%. Short-term Treasury interest rates are near zero. Even if inflation stays at 2% over the next decade (the informal target of the Federal Reserve), government bonds will provide negative real (after inflation) rates of return.
http://jlne.ws/112iE78

Federal Reserve Cites Bank of Montreal Branch for Money-Laundering Deficiencies
Dow Jones Newswires (via Fox Business)
 U.S. regulators Friday ordered Bank of Montreal (BMO, BMO.T) to strengthen its anti-money-laundering programs, citing deficiencies in its U.S. subsidiary’s efforts at risk management and compliance with the Bank Secrecy Act.
http://jlne.ws/112j9y9

Banks lift FTSE to 5.5-year highs
Alistair Smout, Reuters
The FTSE top share index hit fresh five and a half year highs on Friday, as banks were buoyed by an upgrade, the prospect of the end of state ownership in the sector and rotation out of defensive stocks.
http://jlne.ws/12HoKwL

Economic News

Federal Reserve: rising inequality jeopardizes economic recovery
RT
A top ranking member of the United States Federal Reserve cautioned economists this week that growing inequality within the US was worsening the odds of a quick return to the conditions of the pre-recession days.
http://jlne.ws/112j3q4

Exchanges, Clearing Houses & MTFs

ICE Clear Europe Named 2013 Clearing House of the Year by Energy Risk Magazine
Press Release (ICE)
IntercontinentalExchange (NYSE: ICE), a leading operator of global markets and clearing houses, announced today that ICE Clear Europe has been named Clearing House of the Year for 2013 by Energy Risk magazine.
http://jlne.ws/YOhcZy

Regulators

CFTC Approves SEF Rules and Swaps Block Rule
CFTC Law
On Thursday the CFTC approved the Swaps Block Rule, the Made Available to Trade Rule, the SEF rules, and the Interpretive Guidance and Policy Statement on Disruptive Practices.
http://jlne.ws/112hEzQ

Big Banks Losing Grip on Derivatives
Bloomberg
Unless you’re employed by a derivatives trading desk at a large bank, here’s some good news: The derivatives cabal is slowly but surely headed for a break-up.
http://jlne.ws/112hQPu

Global News

EURO GOVT-ECB rate cut talk lifts Bunds to one-week high
Reuters
German Bunds hit one-week highs on Friday, with traders citing talk the European Central Bank was checking with some banks whether they were ready for a potential cut in its deposit rate to below zero.
http://jlne.ws/112i0Xi

Brazil central bank pledges to bring down inflation this year
Reuters
Brazil’s central bank chief Alexandre Tombini on Thursday pledged to bring inflation lower this year and next, suggesting a more aggressive monetary tightening stance that sent interest rate futures rallying.
http://jlne.ws/184oVp8

Aust bonds prices move higher
The West Australian
Australian bond futures prices are higher after disappointing US economic data saw Treasury yields fall.
http://jlne.ws/112hSXH

Interest rates hit historic low following Central Bank decision
The Journal of Turkish Weekly
Turkey’s bond yield faced a fall to its historical low in response to central Bank’s decision to cut all three of its main interest rates by 50 basis points yesterday in an attempt to stimulate the faltering economy and guard against lira appreciation.
http://jlne.ws/112irRg

Mexico Grows Less Than Forecast Reinforcing Rate Cut Outlook
BloombergBusinessweek
Mexico’s economy grew less than analysts expected in the first quarter, fueling bets policy makers will cut interest rates again this year.
http://jlne.ws/112iz3e

Conversation Starter

Today’s ugly data raises questions about strength of U.S. economy
Reuters (via Financial Post)
The U.S. economy showed worrisome signs as jobless claims rose sharply last week while ground-breaking at home construction sites tumbled in April and a gauge of underlying inflation pointed to weak demand.
http://jlne.ws/184qAew

*There is some good news buried amidst the bad news — SR

The Fed Is Failing On Both Parts Of Its Dual Mandate
Huffington Post
When it comes to monetary policy, the Federal Reserve has just two jobs, and it’s failing at both of them.
The Fed has a dual mandate to promote maximum employment and to keep prices stable.
http://jlne.ws/11I9AvB

*HuffPo puts in its two cents — SR