First Impressions

As the Housing Turns

In 2006, after a decade-long uptrend, the U.S. housing market turned southward. This turned out to be the mother of all leading indicators. As the housing malaise picked up steam later in 2006 and into ’07, it dragged down the entire economy. We all know the rest of the story.

This morning, S&P Dow Jones Indices (SPDJI) released the S&P/Case-Shiller Home Price Index, which showed the sector turning south June. According to SPDJI’s David Blitzer, the pace of housing prices has fallen in each of the 20 cities comprising the index. He is quick to note,however, that other indicators such as builder sentiment, housing starts and existing home sales, still reflect more normal conditions.

My chief concern is that the market is turning negative even as mortgage rates continue their decline. Remember – though rates began rising last fall in anticipation of the Federal Reserve’s tapering of its bond-buying program, since January of this year, 30-year mortgage rates have fallen about 40 basis points, according to Freddie Mac.

In other words, if this is the best the market can do in this environment, we may be in for a tough slog in the housing market.

If to add fire to what could be a smoldering ember, the SEC is about to consider stricter rules for issuing asset backed securities including those tied to home, auto and student loans. Though the rules are designed to make securitized loans ultimately safer, they may also be the equivalent of a cigarette label, telling buyers that, though the contents are legal, you may wish to think twice before plunking down your money.

Read the full text of Blitzer’s comment, with accompanying charts, on the SPDJI web site.
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Quote of the Day

Bargain basement mortgage rates won’t continue forever; recent improvements in the labor markets and comments from Fed chair Janet Yellen and others hint that interest rates could rise as soon as the first quarter of 2015.

David Blitzer, chairman of the index committee at S&P Dow Jones Indices, on the release of the S&P Case Shiller Housing Index

Lead Stories

Asset-Backed Bonds Facing Tougher SEC Disclosure Rules
Dave Michaels – Bloomberg
Sellers of bonds backed by mortgages and auto loans would have to give investors details including the borrowers’ income and credit scores under rules the U.S. Securities and Exchange Commission is poised to consider this week, according to two people briefed on the plan.
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***DA: Great idea; bad timing.

Swaps Boom Is Unintended Consequence of New Curbs on Wall Street
Lisa Abramowicz – Bloomberg
The $9.8 trillion U.S. corporate-bond market may look pretty sleepy right now, but there’s more and more happening in its shadows.
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***DA: How about that for full circle. Lehman went under because their swaps book was too illiquid and complex to unwind in an orderly fashion.

U.S. Bank Liquidity Rule Said to Exclude Municipal Bonds
Jesse Hamilton and William Selway – Bloomberg
Municipal bonds will be excluded from the group of easily sellable assets that banks can use to show they’re able to survive a credit crunch, according to a person familiar with the rule.
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***DA: Shouldn’t paint all munis with the same brush. Some deserve to be excluded; others are just as safe and liquid as treasury bonds.

Why Can’t Wall Street Get Any Respect From Bond Market?
Liz Capo McCormick – Bloomberg
When it comes to predicting where U.S. borrowing costs are headed, the bond market isn’t taking Wall Street’s advice seriously.
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***DA: Heck; Wall Street itself does not take Wall Street’s advice seriously.

Hedge Funds Sue to Get Argentine Bond Payment in London
ALEXANDRA STEVENSON – Dealbook – NY Times
A group of hedge funds, including George Soros’s Quantum Partners and J. Kyle Bass’s Hayman Capital, is seeking a 226 million euro interest payment on Argentine bonds from Bank of New York Mellon that was blocked by a United States judge last month.
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U.S. Bank Liquidity Rule Said to Exclude Municipal Bonds
Jesse Hamilton and William Selway – Bloomberg
Municipal bonds will be excluded from the group of easily sellable assets that banks can use to show they’re able to survive a credit crunch, according to a person familiar with the rule.
Regulators including the Federal Reserve are set to approve a final liquidity rule on Sept. 3. The most recent draft bars debt issued by states and municipalities from being listed as high-quality assets that could help sustain a bank through a 30-day squeeze, said the person, speaking on condition of anonymity because the process isn’t public.
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Three big questions for Scotland
George Parker, Mure Dickie and Sarah Neville – Financial Times
As Alex Salmond and Alistair Darling meet for their second TV debate on Scottish independence, the Financial Times evaluates the position of both camps on three of the biggest subject areas: Currency, Oil, and the NHS.
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Junk Bonds Overtaken by High Grade as 2014’s Favored Bet
Sridhar Natarajan and Matt Robinson – Bloomberg
Bonds sold by investment-grade companies worldwide are on pace to deliver something they’ve managed only twice in the past 17 years: annual returns of at least 10 percent.
The debt has become a sweet spot for investors who see little threat of rising interest rates while avoiding the rush into higher-yielding junk bonds that last month handed buyers their biggest losses in a year. High-grade securities, on pace for an eighth straight monthly gain, have returned 6.5 percent since the end of 2013, according to the Bank of America Merrill Lynch Global Corporate Index.
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Odds and Ends as Jackson Hole Notebook Closes
Jon Hilsenrath – WSJ
The Federal Reserve’s annual Jackson Hole economics symposium, sponsored by the Kansas City Fed, is in the record books. Fed Chairwoman Janet Yellen and European Central Bank President Mario Draghi captured the headlines. But lots happened outside of their prepared texts. Here’s a rundown of odds and ends we picked up but which got buried in stories or left out altogether.
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BlackRock Favors Long Bonds at Priciest Since 2012: Muni Credit
Brian Chappatta – Bloomberg
When it comes to the longest-dated municipal bonds, value is in the eye of the beholder.
The securities are delivering the best returns in the municipal market as yields approaching five-decade lows lead investors to take on more risk. The gains have driven yields on top-rated 30-year munis to 0.92 percentage point above debt due in 10 years, the smallest gap since December 2012, data compiled by Bloomberg show. The bonds have also grown costly compared with federal debt: Last week, interest rates on benchmark 30-year munis fell below those on similar-maturity Treasuries by the most since May 2013.
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Central Banks

BOJ Pushing for Greater Global Yen Role
Takashi Nakamichi – WSJ
The Bank of Japan is pushing to extend the global reach of the country’s currency and bonds as part of a broader effort to modernize Japan’s financial markets.
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***DA: Too late. China is already watching the BOJ from its rearview mirror.

The BoE’s fixation with price stability has cost us all dearly
Anjum Hoda – Financial Times
Despite all the good news, the BoE has a problem: weak wage growth. Or perhaps that should be the other way round. Weak wage growth betrays a problem with the BoE. Its monetary policy has increasingly led to unstable economic outcomes since the late 1990s.
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***DA: Isn’t price stability a good thing?

Draghi Brings Inflation Expectations Firmly Into Focus
Brian Blackstone – MoneyBeat – WSJ
European Central Bank President Mario Draghi made waves at this weekend’s Jackson Hole conference, signaling a departure from the austerity-focus mindset that has dominated the euro zone’s debt crisis the past five years.
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Hits ‘n’ misses: Analysing Raghuram Rajan’s first year in office
Business Standard
RBI Governor Raghuram Rajan will soon be completing his first year term as RBI Governor. He came in at a time when the rupee was touching new lows and all measures taken to rein in the current account deficit proved futile. A series of subsequent measures announced by Rajan helped control the rupee as well as provided comfort to the equity markets.
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Macro Horizons: Jackson Hole Reverberates – MoneyBeat
Alen Mattich and Michael J. Casey – MoneyBeat – WSJ
Macro news is light on the ground on Tuesday, with most of the attention still focused on the Federal Reserve’s Jackson Hole jamboree.
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Currencies

Dollar Rallies Precede Fed Tightening Cycles: Chart of the Day
Andrea Wong – Bloomberg
History’s message to currency investors is buy the dollar six to nine months before the Federal Reserve starts raising interest rates.
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***DA: History’s message from this currency investor: good luck figuring out when that will be. The BoJ has been “six to nine months” from a hike for about 20 years.

European Corporates Lead on Renminbi Adoption
Chiara Albanese – MoneyBeat – WSJ
The internationalization of the Chinese renminbi has been fueled by a very fast adoption of the currency by European companies, according to data compiled by messaging service provider Swift.
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Indexes & Index Products

Second Asia structured product multi-dealer platform to launch
Justin Lee – Risk.net
Competition in the Asian structured product multi-dealer platform arena is set to increase with Swiss bank Vontobel planning to launch a platform in Asia similar to its Deritrade offering in Europe, according to a senior executive at the bank.
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First 10-year UST 3x short fixed-income ETF listed on LSE
Richard Jory – Risk.net
Boost launches UST 3x short ETF; Source launches JP Morgan Macro Hedge Dual Vega Target 4% TR Ucits ETF; Nasdaq OMX lists Calamos Focused Growth ETF
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Gold

India’s Appetite for Gold Improves
Biman Mukherji – WSJ
As gold prices linger near a two-month low, demand in Asia has started edging higher with buyers in India increasing purchases ahead of a Hindu religious festival this week.
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Russian, Kazakhstan Gold Reserves Rise, IMF Says
Rhiannon Hoyle – WSJ
The central banks of Russia and Kazakhstan continued to boost their gold holdings in July, suggesting emerging markets remain committed to bolstering their reserves of the precious metal despite a pullback in its value.
Russia, one of the world’s biggest holders of gold, increased its official reserves by nearly 340,000 troy ounces in July, to 35.5 million ounces, according to data Tuesday from the International Monetary Fund.
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