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Posts from the ‘Institutional Investor’ Category

May 22

Mark Cernicky

Bank Loans Are Good, but Don’t Expect Miracles

There’s a lot of money flowing into bank loans. As of May 17th, bank loan funds have had 48 consecutive weeks of inflows; year-to-date inflows have totaled a record US$24 billion. Compare that with year-to-date inflows of US$2.6 billion for high yield bonds.  In fact, over the past 16 weeks, bank loan funds have averaged over US$800 million per week, and six of those weeks have represented the highest flows ever. A recent Wall Street Journal article covered the topic (paywall). Bank loans are a high yield asset class, which draws a natural comparison to high yield bonds. Consider this – despite the overwhelming positive demand for bank loans, year to date, high yield bonds have outperformed bank loans by over 2% (5.51% for the JP Morgan US High Yield Index vs. 3.26% JP Morgan Leveraged Loan Index). To me, this represents both caution and opportunity.  Don’t assume that bank loans, as an asset class will outperform high yield bonds.  That said, bank loans can still be a positive contributor if you understand what makes the asset class  unique and if you understand what makes one issuer better than another. Read more

May 21

seema shah's picture
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Countdown to Carney at the Bank of England

Britain’s reigning monarch, Queen Elizabeth II, has graced the obverse (that’s coin-and-currency aficionado jargon for “front”) of the Canadian $20 banknote since 1954. Now, 59 years later, a Canadian is getting the opportunity to influence British money…well, monetary policy, at least.

On July 1, Mark Carney, a Canadian and the outgoing head of Canada’s central bank, will cross the pond to take over as the governor of the Bank of England. When he does so, Carney looks to be inheriting an economy that will likely be somewhat improved from the depths of its double-dip recession. The UK is, in fact, enjoying an upturn in activity. First-quarter GDP growth was a positive surprise, and the most recent purchasing manager index readings are suggesting that the recovery has stretched into the second quarter. Read more

May 16

Bob Baur's Photo

Das Ist Gut, oder Eher, Das Ist Nicht Sehr Schlecht – Economic Improvement from Germany

Growth is good. So, even at a revised 0.1%, German GDP growth could still be considered good. Sure, it wasn’t as much as economists had forecasted, but growth still beats recession – especially, after several months where the economic malaise in the Eurozone threatened to turn into a Teutonic Plague as well. The actual German output data has been much better than the dreary business surveys. Manufacturing orders (up more than twice what was forecast), industrial production (up 1.2% versus expectations of -0.1%), trade (surplus of€18.8 billion), and consumption all looked strong as the first quarter ended. Read more

May 16

White, Derek_web

From the Desk of Risk: Demand for Downside Protection Falls off a Cliff

Equities are at an all-time high and the demand for protection of downside risk has collapsed.

The Credit Suisse Fear Barometer (CSFB) is a measure of the protection that can be purchased through 3-month put options by selling 10% out-of-the-money (OTM) 3-month call options.  For example, if put options and call options were equally priced for equivalent levels of money-ness, then the proceeds from selling a 10% OTM call could be used to purchase a 10% OTM put.  As the demand for hedging downside risk increases, the cost of the puts will increase relative to the calls.  When this happens, the proceeds from selling a 10% OTM call may only be able to purchase further OTM put options (e.g. 20% OTM).

What we have seen with the CSFB index for most of this year has been a relatively extreme demand for downside protection.  As a case-in-point, the CSFB hit an all-time high of 35.24on March 26, 2013.  What this meant is that – at that date – selling a 10% OTM would only be able to finance a put that was 35.24% below the current SPX level!  In fact, during 2013, this index has averaged 31.05 when its long-term historical average has been 17.47.

But we have witnessed a notable break during the past two weeks. Read more

May 10

Mark Cernicky

Engineering the Volatility Out of the Market

What’s one of the most noticeable consequences of the Fed’s third round of quantitative easing (i.e. QE3)? It’s the stark drop in fixed income volatility. Look at the chart below, which demonstrates this point for the investment grade credit market. The blue line is the rolling 21-day realized total-return volatility for a Barclays Global Investment Grade Credit Index.  The red line is Thursday, September 13, 2012 – the day the Fed announced QE3. As the blue line crosses the red one, you can see marked drops in the level and range of volatility.

Vol Chart Read more

May 3

Mark Tezak

Our Man at Milken – Final Thoughts

The Milken Institute Global Conference is over for 2013; Wednesday was the conference’s last day…and what an experience. For my last post on the conference, I’ll look back on something other than macroeconomic forces and investment trends. I’m taking a slightly different tack than previous posts because there was plenty of thought-provoking content on a wide range of other topics throughout the conference…and I’d be remiss not to give those topics some coverage.

Before I attended the conference, I didn’t fully appreciate the Milken Institute’s broad mission. That mission is to “improve lives around the world by advancing innovative economic and political solutions that create jobs, widen access to capital, and enhance health.” Read more

May 1

robin anderson
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Complex Systems, Collapse, and Virtual Connections at the Milken Global Conference

There’s been a lot of talk (and blogging) this week about the Milken Global Conference that’s going on in Los Angeles. I wasn’t able to attend in person this year, but, after looking at their website, I’m amazed at how much of the conference can be experienced virtually. The majority of the sessions are posted to their website within a few hours of their completion. After looking around, I was struck by the connections you can make at the Milken Global Conference. I’m not talking about the networking type of contacts – networking from 1,700 miles away is difficult, at best. No, I’m talking about how the conference’s melding of business, political, and academic leaders can serve to demonstrate the similarities in our experiences, whether they’re separated by thousands of miles or millennia.

As an example, I watched a panel discussion called “The Rise and Decline of Nations and Civilizations,” whose participants included Pulitzer Prize-winning author and UCLA professor Jared Diamond, and best-selling author and Harvard professor Niall Ferguson. Read more

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