Top of the Street: more Brexit and a striking pricing proposal on CMOs

Before firing up the July Fourth grill, a few intrepid analysts continued interpreting Brexit, and FINRA unveiled a proposal that would make CMO pricing much more transparent.

Markets: The dust settles for equities but not for credit
“Only a few days into the post-UK referendum world, the market is back on its feet, fearing nothing and laughing at skeptics. So what if a 30-year socio-economic alliance at the heart of the post-WWII world has ended?” So begins Deutsche Bank’s Oleg Melentyev and Dan Sorid in marveling at some equity markets that have inexplicably rebounded to pre-Brexit levels while debt markets still show lingering impact. US 10-year rates remain 25 bp below pre-Brexit levels. The investment grade debt market stands 8 bp wider and high yield, outside of commodities, stands 46 bp wider. The analysts recap their case for further weakening in credit. Bruce Kasman and his colleagues at JPMorgan chime in along similar lines. See Deutsche Bank’s US Credit Strategy: A Riskless World, 30 Jun 2016, and JPMorgan’s Global Data Watch: The Dust if Far from Settled, 1 Jul 2016. (DB, JPM, Milepost).

Markets: A case for US 10-year notes at 1.25%
Expectations of a slower post-Brexit Fed path has dragged US 10-year rates toward historic lows, according to Deutsche Bank, but there’s still room for rates to come down further as capital flees to safety in coming month. The UK and EU will most likely meander through the mess of Brexit as the solvency of Italian banks becomes the next global financial soap opera. The ECB could encourage flows into the US by expanding QE heavily into the sovereign debt of EU peripheral countries, squeezing out another pocket of euro yield. See the US Fixed Income Weekly, 1 Jul 2016. (DB). 

Markets: Brexit and LIBOR
Since banks from the UK and Europe make up 11 of the 18 daily contributors to LIBOR settings, Brexit could drive up LIBOR and steepen the spread between shorter and longer swap maturities, according to Deutsche Bank. The financial health of the contributing banks has been reflected in past LIBOR contributions, the analysts argue, so weakness in the UK and Europe could spread into LIBOR. See the US Fixed Income Weekly, 1 Jul 2016. (DB).

 Markets: Raising the curtain on CMO pricing
CMO investors should finally start seeing timely pricing of individual securities, putting a new spotlight on liquidity, if the Financial Industry Regulatory Authority has its way. FINRA filed a proposal with the Securities and Exchange Commission last week to start reporting secondary CMO trades within 60 minutes if the value of the transaction is less than $1 million. Transactions of more than $1 million would get reported only if the CMO traded at least five times in a week or a month and only if two market makers or more were involved. In reviewing all CMO trades between May 13, 2011, and August 14, 2015, FINRA found that had the rules been in place it would have reported 87.86% of transactions and 30.27% of dollar volume. It could be up to a year or more before the proposal goes live. The FINRA proposal and its research on CMO market structure is here. (Milepost).