Bloomberg – Digital Finance Analytics (DFA) Blog

Mortgage Bond Sales Flood Market

The financial crisis is now in full swing, and credit markets are at the epicentre of current events, as owners of mortgage bonds and other asset-backed securities try to sell billions of dollars in assets, amid reports that there are significant investor withdrawals from these funds.

Bloomberg reported that Funds who buy up bonds of all kinds — from debt of America’s largest corporations to securities backed by mortgages — have struggled with record investor withdrawals amid choppy trading conditions in fixed-income markets. The rush to unload mortgage-backed securities signals that a credit meltdown that began with corporate bonds is spreading to other corners of the market.

Further Federal Reserve support, and other Central bank support is being sought. Raises the question, who should be supporting who, and should financial speculators really be bailed out?

Amid the selling, the Structured Finance Association, an industry group for the asset-backed securities market, asked government leaders on Sunday to step in and help boost liquidity in the market.

In a letter to U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell, the industry group said that “the future path of the pandemic has significantly disrupted the normal functioning of credit markets.”

The group asked them to “immediately enact a new version of the Term Asset-Backed Securities Loan Facility,” a financial crisis-era program that helped support the issuance of securities backed by consumer and small-business loans. Such a measure, the group said, would help enhance the liquidity and functioning of crucial credit markets.

“The overwhelming supply of securities for sale to meet redemptions has put significant downward pressure on almost all segments of the bond market,” Szilagyi said in the statement.

The sales included at least $1.25 billion of securities being listed by the AlphaCentric Income Opportunities Fund. It sought buyers for a swath of bonds backed primarily by private-label mortgages as it sought to raise cash, said the people, who asked not to be identified discussing the private offerings.

“The coronavirus has resulted in severe market dislocations and liquidity issues for most segments of the bond market,” AlphaCentric’s Jerry Szilagyi said in an emailed statement on Sunday. “The Fund is not immune to these dislocations” and “like many other funds, is moving expeditiously to address the unprecedented market conditions.”

The best way to obtain favorable prices is to offer a wider range of securities for bid he said, declining to discuss the amount of securities the fund put up for sale.

The AlphaCentric fund plunged 17% on Friday, bringing its total decline for the week to 31%.

“We can most likely expect a continuation of price volatility across the bond market spectrum until the panic selling and market uncertainty subsides or government agencies intervene to support the broader fixed-income market,” Szilagyi said

Build More Ventilators

General Motors Co.’s Mary Barra offered to manufacture hospital ventilators in auto factories shuttered by the coronavirus outbreak, an effort that would echo Detroit’s contribution to Allied powers during World War II. Via Bloomberg.

GM’s chief executive officer floated the idea during a conversation with top White House economic adviser Larry Kudlow, he told reporters Wednesday. On Fox News earlier, he described an unidentified auto executive’s offer to call back workers to idled plants to make the medical devices needed to treat critically ill virus patients, and said it was made “on a voluntary basis for civic and patriotic reasons.”

Barra, 58, suggested ways the company could help during the crisis, a person familiar with the matter said. GM could use some of its excess factory space to build ventilators and has people looking into how that would be done, said the person, who asked not to be identified describing a private conversation.

After U.S. President Franklin D. Roosevelt called for arming and supporting Britain, France and other nations in 1940, Detroit’s auto industry quickly transitioned their car assembly lines over to make military jeeps, tanks and bombers. Within a year and a half after the 1941 attack on Pearl Harbor, 350,000 workers moved to the Motor City to join in the war effort, according to the Detroit Historical Society.

U.K. Prime Minister Boris Johnson earlier this week called on manufacturers to build ventilators. Carmakers Jaguar Land Rover Plc and Toyota Motor Corp. are among the companies that have offered to help.

Yield Curve Inverts, Briefly

The fears relating to the coronavirus and weakish consumer sentiment from the US, plus the Feds hold decision turned the tables on the US yield curve overnight, with the 3-month rate 2 basis points higher than the 10-year at one point. Its slightly positive now… but this is a sign of uncertainty.

Plus a measure of core U.S. inflation released on Thursday showed price pressures slowed to an annualized 1.3% in the fourth quarter from 2.1%, a weaker figure than analysts had expected. And below the Fed’s target.

The dip will be seen as some as a warning signal because it has inverted before each of the past seven U.S. recessions. The last inversion was at the height of the trade war.

But it also is driven by the thought that the Fed may need to pump more liquidity into the market, despite the assurance they were planning to ease back their open market operations in the next few months. This means buying more treasuries out along the curve. – Price up means yields fall.

Clearly, investors are looking for some form of safety and buying Treasuries out the curve is really the only way to do it.

And Bloomberg says that falling yields also triggered other market dynamics which are exacerbating the move. Convexity hedging — when mortgage portfolio managers buy or sell bonds to manage their duration exposure — is back in play. As yields fall, they make purchases.

The sequence of a swift drop in yields and curve flattening unleashing convexity-linked forces that re-starts the cycle is a recurring feature of the Treasury market .

A massive wave of convexity-related hedging in the swaps market in March helped send 10-year yields to levels then not seen since 2017. That came after the Fed took an abrupt shift away from policy tightening they had been doing in 2018. The Fed went on to cut rates three times over all of 2019.

Other factors may be at work now as well. Structural demand for long-dated Treasuries — linked to liability-driven investment and hedging from foreign investors including Taiwanese insurers — has helped to drive the curve flatter, according to Citigroup Inc.

We think its too soon to know whether this is an over-reaction, but once again it underscores markets are on a hair trigger. So expect more volatility ahead.

Facebook Transcribed Users’ Audio Chats

Via Bloomberg.

Facebook Inc. has been paying hundreds of outside contractors to transcribe clips of audio from users of its services, according to people with knowledge of the work.

The work has rattled the contract employees, who are not told where the audio was recorded or how it was obtained — only to transcribe it, said the people, who requested anonymity for fear of losing their jobs. They’re hearing Facebook users’ conversations, sometimes with vulgar content, but do not know why Facebook needs them transcribed, the people said.

Facebook confirmed that it had been transcribing users’ audio and said it will no longer do so, following scrutiny into other companies. “Much like Apple and Google, we paused human review of audio more than a week ago,” the company said Tuesday. The company said the users who were affected chose the option in Facebook’s Messenger app to have their voice chats transcribed. The contractors were checking whether Facebook’s artificial intelligence correctly interpreted the messages, which were anonymized.

The social networking giant, which just completed a $5 billion settlement with the U.S. Federal Trade Commission after a probe of its privacy practices, has long denied that it collects audio from users to inform ads or help determine what people see in their news feeds. Chief Executive Officer Mark Zuckerberg denied the idea directly in Congressional testimony

The Month When Everything Changed

November marked one of the most decisive shifts for global financial markets in recent years, with a bevy of asset classes — from bank stocks, emerging-market bonds to hard commodities — staging sharp price swings in the space of a mere three weeks, says Bloomberg.

Investors reckon the ascent of Donald Trump presages a regime shift for the global economy, marked by trade protectionism, a stronger U.S. inflation outlook, and a higher U.S. fiscal deficit.

The anchors of global asset repricing: a stronger dollar, an increase in U.S. growth expectations, fears of a more protectionist Trump-led administration, and a steeper U.S. yield curve which brought the premium for borrowing at the long-end, relative to short-end obligations, back to positive territory.

Developed-market equities have been in vogue over the past three weeks, with a rotation out of defensive stocks in favor of consumer discretionary shares, industrial commodities, and financials underscoring how a repricing of growth expectations has trumped the prospect of a higher discount rate. Meanwhile, fixed-income has fallen firmly out of favor, stocking fears the 35-year bond bull-run is coming to an abrupt end. That signals a reversal of the perverse investment strategy in the first half of the year to snap up equities for yield, and bonds for capital gain.

November was the worst month ever for the Bloomberg Barclays Aggregate Total Return Index, which staged a 4 percent loss, as yields on U.S. 10-year Treasuries climbed from 1.8 percent to 2.4 percent in swings reminiscent of 2013’s taper tantrum.

“The U.S. election result just over 3 weeks ago sparked a huge divergence across asset classes and also between developed and emerging markets,” Jim Reid, Deutsche Bank AG strategist, wrote in a note to clients on Thursday. “In years to come markets may well look back at the month just passed as one of the most pivotal in recent memory.”

Most asset classes were in a relatively stable trading range in the first 8 months of the year. All that changed in the month after the Trump victory.

With the prospect of regulatory relief from a Trump administration, the S&P 500 Financials Index returned 13.9 percent in November, while copper gained 18.9 percent — its best monthly gain in a decade — driven, in part, by Trump’s campaign pledge to turbocharge infrastructure spending.

By contrast, emerging-market local-currency bonds had their worst month of 2016, with Latin American debt, tracked by IHS Markit, shedding 7 percent. The drop in local currencies erased returns for equity and debt investors in dollar terms. The sharp appreciation of the dollar — and associated liquidity fears for emerging markets next year — has challenged leveraged fixed-income trades that rely on cheap dollar funding, with the cost to borrow dollars in Japan rising.

In sum, November saw credit and rate markets taking a hit, while developed equity markets led the gains. “Analysts have been criticized for suggesting beforehand that a Trump victory would instigate a selloff in assets but the reality is that of the 39 global assets we cover (excluding currencies) only 11 are up in November in dollar terms (12 in local currency) with most being U.S. assets,” Reid wrote.

It wasn’t bad news for all emerging markets, however. Russia’s benchmark Micex index of equities gained 4 percent in dollar terms, underscoring expectations of a thawing of tensions between Washington and Moscow next year.

Taking stock: credit, particularly U.S. high yield, has had a solid year thus far while November losses have crimped year-to-date gains in developed rate markets. Elsewhere, there are a flurry of interesting local stories that dominate asset returns this year, including the ongoing saga of European banks, the gilt market’s struggle to recover from its October maelstrom, and the roller coaster in Brazil’s Ibovespa index.

No Credit History? No Problem.

From Bloomberg.

Financial institutions, overcoming some initial trepidation about privacy, are increasingly gauging consumers’ creditworthiness by using phone-company data on mobile calling patterns and locations.

The practice is tantalizing for lenders because it could help them reach some of the 2 billion people who don’t have bank accounts. On the other hand, some of the phone data could open up the risk of being used to discriminate against potential borrowers.

Phone carriers and banks have gained confidence in using mobile data for lending after seeing startups show preliminary success with the method in the past few years. Selling such data could become a more than $1 billion-a-year business for U.S. phone companies over the next decade, according to Crone Consulting LLC.

Fair Isaac Corp., whose FICO scores are the world’s most-used credit ratings, partnered up last month with startups Lenddo and EFL Global Ltd. to use mobile-phone information to help facilitate loans for small businesses and individuals in India and Russia. Last week, startup Juvo announced it’s working with Liberty Global Plc’s Cable & Wireless Communications to help with credit scoring using cellphone data in 15 Caribbean markets.

And Equifax Inc., the credit-score company, has started using utility and telecommunications data in Latin America over the past two years. The number of calls and text messages a potential borrower in Latin America receives can help predict a consumer’s credit risk, said Robin Moriarty, chief marketing officer at Equifax Latin America.

“It turns out, the more economically active you are, the more people want to call you,” Moriarty said. “That level of activity, that level of usage is what’s really most predictive.”

The new credit-assessment methods could allow more people in areas without bank branches to open accounts online. They could also make credit cards and loans more accessible and prevalent in some parts of the world. In the past, lenders mainly relied on bank information, such as savings and past loan repayments, to judge whether to let someone borrow.