IMF calls for greater investment in Infrastructure

The IMF released their World Economic Outlook yesterday. Part of the outlook includes a study that advocates increased investment in infrastructure. You can see it here http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/c3.pdf

The crux of the study is that infrastructure forms the backbone of all modern societies. Described in the report as "a crumbling backbone", the last three decades has seen a significant decline in public infrastructure investment across almost all regions. By investing in infrastructure now, governments and the private sector can raise short term output through (among other things) job creation while also creating long term efficiencies and eliminating infrastructure bottlenecks.

The report concludes that the current environment of low financing costs and economic slack provides us with an opportunity to create an impressive infrastructural legacy if we invest well and efficiently. Well worth a read in our opinion.

Italian public sector payments: "The cheque is in the post"

If a European Government were to miss a payment on its debt we would have outcry from all corners of financial markets and very possibly a rapid return to the chaos of the early months of 2012. Luckily that risk has passed (for now) so spare a thought for those businesses that provide services to Eurozone public sector bodies.

It's a sad fact that European governments have a growing habit of dragging their heels when it comes to paying their invoices. Last week the Italian state provided over 30 billion euros to pay overdue bills owed by its public sector bodies. In some cases these delays have gone on for months, resulting in job losses and bankruptcies. Even with this cash now available, the process for making payments is so cumbersome that creditors could still face further months before receiving their overdue payments.

Is the US Muni market about to become an investment opportunity for European Banks?

The US Federal Reserve is set to exclude Municipal Bonds from the a banks liquidity pool according to Bloomberg. The most recent draft of the rule that is due to be approved on September 3^rd does not include the debt products issued by public sector entities in the United States. Such a move could have a substantial effect on municipal bond pricing in coming months.

If confirmed, it could provide investment opportunities for European banks who have already secured special status for covered bonds, including public sector covered bonds as an increased part of their liquidity profile. Could we be looking at a situation where US banks can't invest in their domestic municipal debt for liquidity reasons but European banks flock to it for exactly the same reason?

Covered Bond liquidity treatment update

As mentioned last week, lobbying by the covered bond market driven by Denmark was beginning to make progress. It now appears their efforts have worked, at least in part. Denmark's economic ministry have announced that banks will be allowed to hold up to 70% of their liquidity buffers in covered bonds at 93% of their market value. This is a big step up from the original 40% and 85% of market value in the current plan. There will be additional criteria for individual transactions such as deal size and credit rating that will have to be met in order to qualify for the improved ranking but these are expected to be relatively benign.

These new rules are still to be approved by the European Commission. Assuming a smooth path to approval, this development is a shot in the arm to the Covered Bond market and removes a significant hurdle to the further development and growth of the sector.

T. Rowe Price Launches Credit Opportunities Fund

As the hunt for yield continues, more and more investors are looking toward the more esoteric side of credit markets. Yesterday, T. Rowe Price announced the launch of a credit opportunities fund that will have a wide mandate to invest in the more esoteric side of fixed income markets.

http://www.prnewswire.com/news-releases/t-rowe-price-launches-credit-opportunities-fund-for-investors-seeking-appreciation-and-income-258291771.html

Battle for Covered Bond liquidity treatment steps up

Covered Bond issuers and investors will soon have clarity on just how European regulators will treat their bonds in relation to liquidity ratios in the future. Under Basel III, banks are required to hold liquidity buffers in assets made up of at least 60% of "Type 1" 0% risk weighted government securities and a max of 40% of "Type 2" AA- rated 20% risk weighted securities that includes covered bonds.

The covered bond market has been pushing for their bonds to be included in the Type 1 bucket for some time with little success but discussions seem to have intensified in recent weeks amid some hope that some form of compromise can be reached.

The outcome of discussions with regulators will have profound effects on both the future size of the covered bond markets and the profitability of European banks under Basel III. Keeping covered bonds as part of the Type 2 group of assets will reduce demand from investors, driving yields higher and reducing issuance. Moving covered bonds into the Type 1 category will potentially drive significant issuance from issuers as banks increase their holdings in covered bonds as opposed to sovereign debt in order to maximise returns on their liquidity buffers. A full update of the story can be seen here 

http://www.bloomberg.com/news/2014-05-06/eu-covered-bond-talks-intensify-as-bank-liquidity-rules-in-play.html 

Barclays set to launch "bad bank"

It is being widely reported that Barclays will announce the formation of its own bad bank next week. The bank has recently exited all commodities business and continues to streamline its investment banking division. The bank announced a portfolio of assets called Exit Quadrant last year and this £54 billion pool of assets is expected to make up the core of the bad bank portfolio.
The Financial Times has also reported today that Barclays' retail businesses in Spain, Portugal, Italy and France will also be added to the portfolio.
It is expected that Eric Bommensath, the current co-CEO of corporate and investment banking at Barclays will oversee the new unit.

Miserly US GDP growth of 0.1% in first quarter

The US economy grew at a miserly 0.1% in the first quarter of the year as difficult winter conditions disrupted the economy and exports fell. Forecasters had expected a 1.2% increase in GDP according to Bloomberg. An assumption that the severe weather conditions in the first three months of the year was to blame is supported by a significant rise in consumer spending of 3% which was driven primarily by a rise of 4.4% in spending on services. including utility bills as America turned up the thermostat during extended bouts of bitterly cold weather.
Most economists expect a significant rebound in the second quarter with predicted growth levels of 3% which hasn't been seen since the pre-crisis days of 2005.

Detroit Bankruptcy Update #1

The bankruptcy of Detroit has reset the rules for municipal investors when assessing credit risk. In little under a year the city has blown the assumptions most bondholders would have adhered to over many decades when it comes to recovery given default. Kevyn Orr, the emergency financial manager for the city has played a far tougher game with institutional investors than they have been used to in previous bankruptcies and for the most part he has been successful. In the latest development, the city has reached an agreement with its public sector retiree's which is a substantial PR win. You can read the story here.
http://www.bloomberg.com/news/2014-04-26/detroit-retirees-reach-tentative-agreement-over-pensions.html
While the city could come out of bankruptcy later this year, the real legacy of the Detroit bankruptcy will be the effects it has on other large issuers struggling under enormous debt piles and increasing retirement costs. Watch this space, the bad news is not going to stop here.