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Fifth Street Finance Corp. Message Board

  • thewisejman thewisejman Aug 19, 2013 10:46 AM Flag

    There will be a lot of HURTs

    Last Friday, the rate of the 10-year treasuries had reached 2.84% and it continues to rise to 3%, watch out!

    Thursday, reading an article regarding repo in Japan running into problem and higher risk and then just read this article about US repo today in Bloomberg:

    "Repo Market Decline Raises Alarm as Regulation Strains Debt"

    "Repo Market Decline Raises Alarm as Regulation Strains Debt
    By Liz Capo McCormick & Anchalee Worrachate - Aug 19, 2013 6:06 AM CT

    Regulations aimed at reducing the risk of another financial crisis are starting to upend a key part of the bond market that expedites trading in everything from Treasuries to junk bonds.

    The U.S. repurchase, or repo, market where banks and investors borrow and lend Treasuries and other fixed-income securities shrunk to $4.6 trillion daily outstanding last month, down 35 percent from a peak of $7.02 trillion in the first quarter of 2008, based on Federal Reserve data compiled from its 21 primary dealers.

    From fewer repos to lower inventories of bonds, financial institutions are responding to more stringent capital standards imposed by regulators around the world. Already, the group of dealers and investors that advise the U.S. Treasury say that they see declines in liquidity in times of market stress, including wider gaps between bid and offer prices and the speed of completing trades. The potential consequences are higher borrowing costs for governments, companies and consumers.

    “During the market selloff over the past few months, those rules, a lot of which are just proposed or not yet taken effect, already impacted dealers’ willingness to take on inventory of Treasuries, investment grade corporates to emerging market debt,” Gregory Whiteley, who manages government debt investments at Los Angeles-based DoubleLine Capital LP, which oversees $57 billion, said in an Aug. 14 telephone interview. “That exacerbated the intensity of the selloff.” "

    It may be worth you time to study more about this.

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    • Interestingly, margin debts, according to NYXdata has been dropping since it peaked at the end of April, 2013:

      End of month Margin debt Free credit cash accounts Credit balances in margin accounts
      April $384,370 $115,732 $162,753
      May $377,002 $120,506 $169,705
      June $376,632 $122,208 $168,204

      However, margin debt peaked on July, 2007 and also stared coming down when the market crashed on October, 2007:

      Securities market credit ($ in mils.), 2007
      End of month Margin debt Free credit cash accounts Credit balances in margin accounts
      July $381,370 $122,740 $205,830
      August $331,370 $118,250 $214,890
      September $329,510 $118,910 $208,540
      October $345,420 $120,840 $222,900

      De ja vu? Only time will tell.

      • 1 Reply to thewisejman
      • There are still quite a few financial experts who predict the market will continue to rise and S&P will rise to 1800. I cannot rule out that possibility especially if the FED changes its mind and delays bond tapering, but interest rate has been steadily rising and the slow down on repo purchases may force the FED to announce bond tapering on September to avoid a major market crash.

        If you read this article on Bloomberg today:
        "Russian Recession Risk Worsened as Banks Skimp on Loans"
        "Elena Dibova was ready to pledge her 15 million-ruble ($456,000) apartment to get financing for her metal-safe business. As her bank dragged its feet, she hit the roadblock companies across Russia face as the economy sinks.

        Corporate-lending growth has plunged as the weaker economy prompts banks to demand more collateral and as borrowers shun interest rates that can top 20 percent. As VTB24, the retail arm of Russia’s second-largest lender, expanded its list of demands.... "

        We know India and Brazil are not doing well. China is hanging in there although their next GDP may get worse but they can probably bail themselves out by increase consumptions in their own country. Now if Russia starts tanking, the BRIC will not fare well.

        Another article on Bloomberg today:
        "U.S. Stocks Beat BRICs by Most Ever Amid Market Flight"
        "Investors are favoring U.S. stocks over emerging markets by the most ever as fund flows and volatility measures show institutions are increasingly seeking the relative safety of American equities.

        Almost $95 billion was poured into exchange-traded funds of American shares this year, while developing-nation ETFs saw withdrawals of $8.4 billion, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index (SPX) trades at 16 times profit, 70 percent more than the MSCI Emerging Markets Index. A measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia."

 
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