“Since 2008, the repo market has been shrinking as banks have shifted to longer-term financing in response to new regulatory capital rules and other post-crisis pressures. What remains of the $4.2tn market is increasingly being taken up by non-bank entities (alt) such as real estate investment trusts, mutual funds and hedge funds…repo financing is also playing a new role in the marketing of collateralised loan obligations, or CLOs, which are bonds backed by loans to companies…by lending against the CLOs, banks can make money from assets they would not be able to own under incoming new rules.” Says one banker, “Since we can’t hold the assets on balance sheet, it is a good way to get exposure.” Meanwhile, “a proposed exchange-traded fund will make it much easier for anyone to double down on junk-rated loans. The AdvisorShares Pacific Asset Enhanced Floating Rate ETF will use derivatives to boost gains on high-yield loans, allowing retirees and pensioners to magnify bets on debt that promises higher yields.” Meanwhile, “home-equity lines of credit (alt), or Helocs, and home-equity loans jumped 8% in the first quarter from a year earlier…The $13 billion extended was the most for the start of a year since 2009…While that is still far below the peak of $113 billion during the third quarter of 2006, this year’s gains are the latest evidence that the tight credit conditions that have defined mortgage lending in recent years are starting to loosen.”
Natural Gas Is Going Global
“Projects under way mean that by 2018 over a third more LNG (liquid natural gas) capacity will come onstream — the equivalent of China’s current consumption of LNG and piped gas combined…LNG’s share of the world’s gas supply is likely to rise from around 15-20% now to as much as 30% if all the projects being planned come to fruition…The beginning of a genuinely global market in LNG is a transformation similar to what happened with oil.” Meanwhile, the Federal Energy Regulatory Commission is taking baby steps towards allowing LNG exports (alt). Also, new research by the Department of Energy “concludes that both Europe and Asia would probably cut total greenhouse gas emissions by switching from coal to LNG (alt), although that relies on the US keeping down the rate at which gas escapes from wells and pipes.” Also, the Energy Information Administration thinks that LNG could “play an increasing role in powering freight locomotives in coming years…America’s seven major U.S. freight railroads spent $11 billion in 2012 for more than 3.6 billion gallons of diesel fuel in 2012. For these railroads, fuel accounts for nearly one quarter of operating expenses.” Last year, the average price for a gallon of diesel was $3.97, and “the equivalent amount of energy in natural gas cost 48 cents at industrial prices.”
“As interest rates continue to decline, mutual fund and ETF investors continue to buy bond funds in the typical fashion of flows following returns. Hence, over the last four weeks as 10-year Treasury yields declined 20bps, inflows into fixed income funds totaled $19bn. Stocks, on the other hand, saw $7bn in outflows over the same period, suggesting some reverse rotation out of stocks and into bonds.” Also, “investors have poured $3.1 billion into municipal-bond mutual funds this year (alt)…the gains mark a shift after investors pulled $39.9 billion from the funds in the last 31 weeks of 2013.” Meanwhile, here’s an interesting theory about unwinding QE and interest rates: “people tend to believe that QE suppresses rates by creating a bid where there otherwise wouldn’t be one…this isn’t a rational thing to think at all. In reality, QE is and always has been about diminishing liquidity risk in the system. Take the tap away, and you open the door to rollover risk, defaults and so-on — all of which increases risk aversion, which puts a bid on longer dated Treasuries.”
“Whether banks qualify for a lower reserve ratio will depend on whether their loans to smaller-sized firms and the farming sector account for a certain proportion of their total lending…other pro-growth measures announced on Friday included an instruction to banks to speed up lending, and a promise from the central bank to disburse more loans to commercial banks through a scheme known as ‘re-lending’…a way for China to increase money supply in the system and lift economic growth.” Meanwhile, is China pulling a Mario Draghi?
Global: Complacency Everywhere
Space: Take A Dragon To The Moon!