Monday Morning Kickoff

The past week could have been exciting for market participants, but it turned out that the SP500 closed almost where it began the week –closing at 2992 after opening the week at 2996. The low for the week was about 2990 and the high was 3017–so about a 1% range. We remain very close to an all time high in stocks.

The 10 year treasury opened the week at 1.83% and traded as high as 1.88% on Monday and then traded with lower yields the rest of the week to close the week at 1.76%.

All in all markets were quiet for a week in which we saw the Fed Funds rate reduced by 1/4%, jitters from an attack on the Saudi oil fields and of course never ending banter about trade wars.

The Fed Balance Sheet grew by a MASSIVE $75 billion as the Fed had to step into the repo (repurchase agreement) market and provide liquidity to the banking system. This situation is somewhat unnerving and hopefully is a temporary situation. This $75 billion was”created” to allow the cash needs of financial institutions to be met because of shortages in the financial system–causing demand to drive overnight interest rates to as much as 10%—wow. Let’s watch this closely–the Fed stepped in daily this past week and if the supposed reasons for the cash shortages is in fact tax payments for the quarter the situation should resolve itself soon. If it is huge issuance of debt by the treasury to fund our deficits that is causing a cash shortage we may have a huge problem. As of Friday the FED said they would be doing some 14 day repurchase agreements next week–the explanations all seem fishy to me.

We had a few new income issues come to market last week.

REIT Rexford Industrial (NYSE:REXR) cam to market with a new preferred with a 5.875% fixed rate coupon. The issue is trading under temporary OTC ticker REXCP right now and last traded at $25.27.

Athene Holding (NYSE:ATH) sold a non cumulative preferred issue with a coupon of 5.625%. The issue is trading under temporary OTC ticker ATHHF and last traded at $25.50.

B Riley announced a new baby bond with a fixed coupon of 6.5%. Proceeds will be used to call their 7.5% baby bond (RILYL). The new issue will trade under the ticker RILYN–but has not yet traded, although we see it is set up to trade soon.

Lastly JMP Group (NYSE:JMP) sold a new issue of baby bonds with a fixed rate coupon of 6.875%. The company intends to call their 8% JMPB senior notes which are currently outstanding. No ticker was announced for the new issue but we are guessing it will be JMPE.

13 thoughts on “Monday Morning Kickoff”

    1. Harvey–will have to get this on the lists–totally missed this one. Looks pretty dicey with the 9.75% coupon, but will have to get a deeper look at the company.

  1. Repos are a fast way for the Fed to push money into the banking system. In theory, it’s temporary, but then the repos can be rolled (like options) and effectively become permanent.

    The Fed should play a much smaller role in the economy. It did so for the first hundred years; then they discovered they could take over economic policy from the executive branch through active use of monetary policy. The executive branch may do a bad job of it from time to time (ok, most of the time) but at least they have some accountability to the people.

  2. Another view of the recent repo issue from Cullen Roche:

    https://www.pragcap.com/three-things-i-think-i-think-repo-madness/

    He has a number of “primers” on topics like QE, bank reserves, federal reserve, money, etc., which I have found helpful for my understanding of these issues (which is, admittedly, meager) and is a bit different from some mainstream financial media. Good sense of humor and explanations closer to my comprehension level!

  3. Excellent article by Steve Schwarzman (Balckstone CEO) in 2015 regarding this very issue causing the next crisis. Basically, Dodd Frank requires more capital on balance sheet so less cash is available for market purposes. There is enough cash, its just in the wrong places.

    I can’t post the WSJ article due to pay wall issues.

  4. I don’t mind a little less in yield to have my cash in US govt mmkt and h/y savings right now, still getting 1.8-1.9%.. w the liquidity issues going on, corp short term debt bothers me if a mmkt fund or etf gets squeezed and there is a minor panic..

    so ironic there is a liquidity issue when there is so much “cash” sloshing around.. Japanese corp’s for example are sitting on $5.3US trillion of cash.. it would not take much to cause corp credit markets to freeze up again from what I can see.. it all makes me very nervous perhaps too conservative but to each her own I guess.. but big moves make for big opportunities as well

  5. I don’t understand the “repo” issue, how it happened, the fed’s role in it, nor how it affects markets. Can anyone clarify this mystery for me? Thanks.

    1. I am like Jeff, would appreciate further commentary. Particularly, how does repo uncertainty residential mortgage reits, which depend so heavily on repo financing.

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