Draghi breathes new life into 246-year-old mortgage bond market

Mario Draghi's efforts to boost Europe's economy are reviving a 246-year-old bond market that used to provide a vital source of financing to mortgage lenders. 

PHOTO: REUTERS

DEC 3, 20157:08 PM

[LONDON] Mario Draghi's efforts to boost Europe's economy are reviving a 246-year-old bond market that used to provide a vital source of financing to mortgage lenders.

The European Central Bank has bought 138 billion euros (S$205.6 billion) of covered bonds, securities backed by assets including home loans, since entering the market in October 2014 as part of its quantitative easing program. That's helped sales this year rise to the highest since 2012, Deutsche Bank AG data show.

The revival has been driven by banks from outside the region, who are flocking to take advantage of borrowing costs pushed down by QE, reversing a dip in issuance prompted by tougher capital regulations on Europe's lenders. Issuance has outpaced redemptions, bucking analyst expectations that the 850 billion-euro market would contract for a third consecutive year.

"The market has been supported by the ECB and issuers have taken advantage of this and issued more than expected," Cristina Costa, a senior covered bond analyst at Societe Generale SA in Paris, said by phone. 

Sales of the notes, at 143 billion euros through Nov 24, have surpassed the 140 billion euros of redemptions scheduled for 2015, according to data compiled by Deutsche Bank that includes bonds issued in the single currency with a notional amount of 500 million euros or more. Redemptions outstripped issuance by 53 billion euros in 2013 and 40 billion euros last year, the data show.

Non-euro area banks have contributed the largest share of total sales since 2011, the Deutsche Bank data show. Canadian issuers led the charge, selling 13 billion euros of bonds with no redemptions this year, according to SocGen data. By contrast, Spanish banks' 19.8 billion euros of sales was dwarfed by 37.5 billion euros of redemptions.

The ECB holds about 25 per cent of euro-denominated benchmark covered bonds sold by euro-area banks, according to SocGen.

"This year's net issuance will be very different from what most people thought at the beginning of the year," said Bernd Volk, head of European covered and agency bond research at Deutsche Bank. "Positive net supply is supported by ECB purchases and is also due to high issuance by banks outside the euro area."

Covered bonds were pioneered in Prussia in 1769, when King Frederick the Great let aristocrats, churches and monasteries raise money by pledging their estates as collateral. The market evolved to become a key source of financing for private housing across Europe.

The securities have historically been attractive to investors because they are guaranteed by the issuer and backed by a pool of assets, such as mortgages and public-sector loans. The notes are also excluded from looming European regulations that will make bondholders share the burden of bank failures by having unsecured debt written off, or bailed-in.

"Investors like the relatively low risk of covered bonds and the fact that they are exempted from bail-in," said ABN Amro Bank NV fixed-income strategist Joost Beaumont in Amsterdam.

While SocGen estimates 2016 redemptions will marginally outstrip sales of euro benchmark covered notes - 149 billion euros versus 145 billion euros - Costa said the market is poised to expand.

"This is the start of a turning point because previously we've had significantly negative net issuance," Ms Costa said. "From 2017 onwards, redemptions will drop off so the covered- bond market could grow again."

BLOOMBERG

    
 

Princes of the Yen : Central Bank Truth Documentary (Video)

Princes of the Yen

2014 ,

"Central banks have the power to create economic, political and social change. This is how they do it." This passage opens the film, and that is precisely what non-partisan political and socio-economic documentarian group QueuePolitelyputs under the microscope in the Princes of the Yen. Based on a book by Professor Richard Werner and directed by Michael Oswald, the film aims to break down and simplify the ways in which central banks influence the world we live in.

The film opens on archival footage from the 1941 Japanese bombing of Pearl Harbor, and works to set the stage for what would become an American-led occupation of post-war Japan where Democracy was imposed upon the nation "as if they'd never heard of it." The commercial banking system of the country was logically in shambles, with most of its assets being comprised of war bonds and loans to industries that had been wrecked by the war - rendering it basically bankrupt.

This shortcoming was alleviated by the Japanese central bank swooping in and buying these worthless assets with newly-created reserves. The first two post-war Japanese central bank governors were appointed by the American occupation hierarchy, and numerous other high-ranking government officials that would assume power in the war's aftermath were very much in line with the American agenda.

Through an economic principal called "window guidance," the Bank of Japan, after being awarded complete autonomy with its economic policies, would maintain strict control over who and what commercial banks were allowed to lend money to. As time went on and the Japanese economy continued the grow at unprecedented rates, these controls catered to the trend because it was of course easiest and most ideal to sustain the financial bubble.

By the 1980's, Japanese bankers had become notorious for pushing loans onto high-risk candidates at bargain interest rates, a practice encouraged by management because the banks themselves needed to hit the lending quotas imposed on them by the Bank of Japan. These risky financial decisions eventually led to a monumental economic crash in the early 90's, which is the inevitable outcome of reckless and greedy practices like these.

ECB cuts deposit rate, due to unveil further measures

The European Central Bank cut one of its interest rates and promised to unveil more policy measures on Thursday to fight stubbornly low inflation, testing the limits of monetary policy and hoping to bolster its credibility. 

PHOTO: AFP

DEC 3, 20159:30 PM

[FRANKFURT] The European Central Bank cut one of its interest rates and promised to unveil more policy measures on Thursday to fight stubbornly low inflation, testing the limits of monetary policy and hoping to bolster its credibility.

Making good on its promise to do what it must to boost inflation "as quickly as possible", the ECB lowered its deposit rate deeper into negative territory and said President Mario Draghi would announce further measures at his 1330 GMT news conference.

With inflation running near zero and likely to miss the bank's target of nearly two per cent for years to come, the ECB had all but committed to action, leaving investors guessing only what measures it would pick from an exceptionally long and sometimes contentious list.

It cut its deposit rate as expected to -0.3 per cent from its existing -0.2 per cent, charging banks more for parking cash with the central bank, reversing its earlier guidance that rates had bottomed out.

It is also seen extending its asset purchases beyond next September and increase monthly buys of mostly government bonds to 75 billion euros from 60 billion euros.

The euro firmed close to 1 per cent on the announcement as some market players expected an even bolder rate cut and as it left its other two key rates, the refinancing rate and the marginal lending rate unchanged.

The bank's governing council was also expected to have discussed more extreme ideas, possibly a two-tier deposit rate that would punish banks parking too much cash with the central bank or the purchase of municipal and corporate debt.

But many of those proposals were unlikely to gain traction as the inflation outlook is deteriorating only modestly and the recovery, though tepid, is proving to be resilient to the emerging market slowdown.

Critics of easing, led by the Governing Council's two German members, argue that monetary policy is already exceptionally loose and the biggest reason inflation is hovering near zero is the fall in oil prices, which is a boost for growth as lower energy costs leave households with more to spend.

The US Federal Reserve's expected interest rate hike this month also complicates the decision. Fed Chair Janet Yellen said on Wednesday she was "looking forward" to a US interest rate rise but an unexpectedly weak manufacturing survey this week has also raised fresh doubts about the Fed's rate path.

Indeed, business activity in the euro zone picked up at its fastest pace since mid-2011 last month, third quarter economic growth was running at a respectable 1.6 per cent and lending is increasing at the quickest rate in four years.

But top ECB officials, including chief economist Peter Praet, have focused their efforts on inflation, warning that missing the target again risked damaging the ECB's credibility and making monetary policy less effective.

The bank is expected to lower its 2017 inflation forecast to 1.6 per cent from 1.7 per cent, a relatively minor adjustment but the second straight cut, supporting calls for action.

Even if oil prices account for part of the problem, core figures, which strip out energy prices, are running at half of the target, an indication that once the one-off effect of the crude price fall passes through, inflation will not rebound, they argue.

Still, the improved economic outlook means the ECB can also afford to save some firepower for later, especially after promising data, including lending growth at a four-year high.

And while critics say that cutting rates breaks the bank's forward guidance, the ECB argued that Switzerland and Denmark moving rates deeper into negative territory actually lowered the floor rates, so it is not the ECB breaking its word but instead "lower bound" moving lower.

Analysts expect the ECB to learn from its mistake and predicted that it would no longer give a specific forward guidance and instead say that rates would stay exceptionally low for an extended period.

It could also make its asset purchases open-ended, removing the reference to an end next September and maintaining the scheme until there is a sustained upswing in inflation.

REUTERS

      

 

FROM A
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GE in talks to sell its commercial lending and leasing business in Germany, France

DEC 3, 20156:11 PM

[BENGALURU] GE said on Thursday it had signed a memorandum of understanding with Banque Federative du Credit Mutuel (BFCM) for the potential sale of its Equipment Finance and Receivable Finance businesses in France and Germany.

The potential transaction, subject to approval by regulatory and anti-trust authorities, would represent an ending net investment of US$7.5 billion, the company said.

In April, GE presented a restructuring plan that aims to shed most of its finance unit and return as much as US$90 billion to shareholders, thereby becoming a "simpler" industrial business instead of a hybrid of banking and manufacturing.

REUTERS

    
 

China-backed AIIB to hold opening ceremony in mid-Jan: state media

DEC 3, 20158:51 PM

[SHANGHAI] The China-backed Asian Infrastructure Investment Bank (AIIB) is expected to hold its opening ceremony in mid-January, Chinese state media on Thursday quoted the bank's deputy head as saying.

China News Agency also quoted Chen Hun as telling a conference at least 50 per cent of members will have ratified the AIIB's constitution after India and Russia sign this month, allowing the bank to begin operations.

Chen also was quoted saying the bank, while waiting for a credit rating, will probably begin issuing unrated bonds that will be "supported" by South Korea. He said he expects South Korea to play an active role in AIIB.

The bank's president-elect Jin Liqun was recently in Seoul, during which he urged Korean institutional investors to support AIIB.

UK bombs Syrian oil field after MPs vote for strikes

DEC 3, 20157:22 PM

[LONDON] Britain joined the US-led bombing campaign over Syria on Thursday, hitting an oil field held by Islamic State jihadists just hours after a decisive parliamentary vote authorised air strikes.

Royal Air Force planes based in Cyprus carried out the "first offensive operation against Daesh terrorist targets inside Syria," the defence ministry said in a statement, using an alternative name for IS.

The strikes with Paveway guided bombs were carried out by four Tornado fighter jets and focused on targets in the Omar oil field in eastern Syria, 30 miles (48 kilometres) from the Iraq border.

The field "represents over 10 per cent of their potential income from oil," the ministry statement said, adding: "Initial analysis of the operation indicates that the strikes were successful".

US President Barack Obama, French President Francois Hollande and Russian President Vladimir Putin's spokesman welcomed Britain's participation.

Momentum to join the strikes grew after last month's terror attack on Paris in which 130 people were killed and Hollande on Thursday hailed a "new response to the call for European solidarity".

Kremlin spokesman Dmitry Peskov told Russian news agencies there should be a single coalition to improve the "effectiveness" of the air strikes.

Prime Minister David Cameron's government was backed by 397 lawmakers with 223 opposing the bombing in a vote late on Wednesday after a sometimes raucous debate lasting more than 10 hours.

A wide range of MPs including main opposition Labour leader Jeremy Corbyn spoke out against air strikes, condemning Mr Cameron's "ill thought-out rush to war" and saying his proposals "simply do not stack up".

But Labour's own chief foreign affairs spokesman Hilary Benn delivered an impassioned speech in favour of bombing, illustrating deep divisions in the party.

In the end 66 of Labour's 231 MPs voted in favour, including 11 members of Mr Corbyn's shadow cabinet.

Mr Cameron also refused to apologise to opposition MPs for reportedly telling fellow Conservatives in a private meeting ahead of the vote that they should not side with "a bunch of terrorist sympathisers".

"Tornados at dawn" read Thursday's front-page headline on Britain's top-selling paper, The Sun, while The Times ran with: "PM wins huge backing for war".

Britain already has eight Tornado fighter jets plus drones involved in the US-led coalition striking IS targets in Iraq, operating out of RAF Akrotiri in Cyprus.

They will be joined by six Typhoon jets, which took off from RAF Lossiemouth in Scotland, and two more Tornado fighters, which took off from RAF Marham in southeast England.

But experts question how much Britain, which has been wary of joining foreign conflicts in recent years after unpopular wars in Afghanistan and Iraq, would add to the campaign against IS in Syria.

"It will not make a big operational difference," said Professor Malcolm Chalmers of military think-tank the Royal United Services Institute (RUSI).

"It is important symbolically, useful operationally, but not transformative." Tim Eaton and Chris Phillips of foreign affairs think-tank Chatham House accused ministers of "knee-jerk reactions...not part of a well-considered long-term strategy to defeat and degrade IS".

Mr Cameron has pledged that Britain joining air strikes on Syria will be matched by a major diplomatic push to resolve the crisis.

The last Syria peace talks in Vienna held last month brought together 17 countries including Russia, the United States, Saudi Arabia and Iran.

The talks set a fixed calendar for a ceasefire followed by a transitional government in six months and elections one year later. Syrian opposition figures have called this unrealistic.

During the debate, the government also faced a string of questions about whether joining the international military action on Syria could make Britain more vulnerable to attacks from IS.

The last major attack on British soil was the July 7, 2005 bombings in which 52 people died.

And in June this year, 30 Britons were among 38 tourists killed in an attack at a holiday resort in Tunisia claimed by IS.

Officials say seven plots have been foiled by intelligence services in the last year alone.

Mr Cameron said this figure showed it was right to take immediate action.

"These terrorists are plotting to kill us and radicalise our children right now," he said. "They attack us because of who we are, not because of what we do".

AFP

    
 

China's generous 1MDB bid seen reaping it big returns in Malaysia 

DEC 3, 20156:20 PM

[KUALA LUMPUR] A generous winning bid from a state-owned Chinese firm for a scandal-ridden Malaysian fund's power assets will help Beijing find favour as it seeks more deals in the country and to extend its influence in Southeast Asia, financial and diplomatic sources say.

China's Southeast Asia push is widely seen as having come at a perfect time for embattled Prime Minister Najib Razak, who chairs the advisory board of state fund 1MDB and has been grappling with international probes and public outrage over allegations of graft at the fund.

The US$2.3 billion offer from China General Nuclear Corp, a surprise winner in the bidding, and its assumption of US$1.8 billion in 1MDB debt will result in Chinese firms having pole positions as key rail, port and road projects come up for grabs, sources said. "Increasingly, Chinese investors will be important players not only for Malaysia but also Southeast Asia," said a person involved in the 1MDB sale process. "They are paying good value to solve a problem. This deal will give them impetus to score big in infrastructure assets," he said. Like other sources interviewed by Reuters, he declined to be identified due to the sensitivity of the matter.

The stakes have been high for Najib to make progress in resolving the 1MDB scandal after the Wall Street Journal reported in July that investigators looking into the fund had found nearly US$700 million was deposited into Najib's private bank account. Reuters has not verified the report.

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Najib has denied taking any money for personal gain.

The biggest single direct foreign investment in Malaysia was far above a rival bid from Tenaga Nasional, banking sources said, and was announced just hours after Najib and Chinese Premier Li Keqiang ended bilateral talks in Kuala Lumpur. 1MDB President Arul Kanda told Reuters, however, there was no government involvement in the deal.

Beijing has been keen to improve relations with Southeast Asian countries as some of them, backed by the United States, object to China's building up of artificial islands in the disputed South China Sea.

Last week also saw Li telling businessmen in Kuala Lumpur that Chinese firms will buy Malaysian treasury bonds to help stabilise its financial markets, and Beijing offering US$10 billion in infrastructure loans to Southeast Asia. "Malaysia is strategically important for China because it...encircles the southern-most reaches of the South China Sea,"said Oh Ei Sun, senior fellow at the S. Rajaratnam School of International Studies in Singapore.

For China, the moves go hand in glove with its ambitions to develop infrastructure along its so-called 21st Century Maritime Silk Road, which extends through the Malacca Strait to India, the Middle East and East Africa.

Chinese Foreign Ministry spokeswoman Hua Chunying declined comment on the 1MDB case but said Malaysia was an important partner for China. "China and Malaysia maintain close economic and trade cooperation. We hope to see Chinese enterprises, in line with commercial principles and on the basis of mutual benefit, legally conduct cooperation with Malaysia," she told a regular press briefing.

Key infrastructure projects that China has said its firms will bid for include a high speed rail project between Malaysia and Singapore that could be finalised next year. The project, estimated by local media as being worth more than US$10 billion, is also expected to attract Japanese and European bidders.

Chinese firms are also set to vie for contracts to upgrade Malaysian ports including one in Malacca, in the south and another in Kuantan, in the east, banking sources said.

Outside Malaysia, other regional targets include a US$31 billion economic zone on China's border with Laos, as well as rail and highway projects in Indonesia and Thailand.

REUTERS