Rates and reserves increase
Corporates | Kennett Square, PA
Optimism around vaccine rollouts continues alongside improved job market numbers. Inflation continues to put moderate upward pressure on rates, trends around dollar weakening and commodities strengthening continue, and officials advance the transition away from LIBOR.
Increased vaccination rollouts in the U.S. drove much of the market movement this past week. The one-dose Johnson & Johnson vaccine became available in the United States after receiving emergency use authorization from the U.S. Food and Drug Administration. The approval of the Johnson & Johnson vaccine, in addition to those already available from Pfizer and Moderna, has increased the supply of vaccines available in the U.S. President Biden has pushed up the expected timeline for vaccinating every adult in the country from July to May. Despite the President’s announcement, distribution and personnel limitations could cause delays.
On Saturday, the Senate approved the $1.9 trillion COVID-19 relief package. While the approved bill removed the minimum wage increase and reduced income caps on the $1,400 distributions to individuals, the bulk of the legislation largely mirrors the relief package passed by the House last week.
The U.S. job market recovery continues to pick up as well. The Bureau of Labor Statistics released February nonfarm payroll numbers on Friday, which showed the U.S. gaining 394,000 jobs, which was well above the approximately 200,000 increase expectation. Unemployment dropped slightly to 6.2%.
On Thursday, Federal Reserve Chairman Jerome Powell spoke at a Wall Street Journal conference. Powell remarked that, while he expects some inflationary pressure soon, it will likely not be enough to cause central banks to hike interest rates. Markets reacted negatively to Powell’s comments, driving stocks down and treasuries up. Expectations grew that the Fed might implement an “Operation Twist” operation as in the past where it sells short-term bills and buys longer-duration bonds.
Five- and ten-year inflation expectations continued to increase, driving longer-term rates higher. 10-year treasuries climbed as high as 1.60% intraday during the week, the highest rate since February 2020. The increase in long-term interest rates has led to an uptick in pre-issuance hedging amongst Chatham’s corporate clients looking to hedge future fixed-rate debt issuances. Hedging now can lock in today's curve, which protects against the risk of higher-than-expected treasury yields in the future.
(Related insight: Read “Pre-issuance hedging in today’s market”)
On March 5, announcements and guidance by the UK Financial Conduct Authority (FCA), the ICE Benchmark Administration (IBA), the International Swaps and Derivatives Association (ISDA), and Bloomberg, provided additional clarity on the timing of the end of publication of all LIBORs. Most notably, one- and three-month USD LIBOR will be published through June 30, 2023, while all non-USD LIBOR settings (GBP, EUR, CHF, JPY) will be published through December 31, 2021. It is possible, however, that the most common USD LIBOR and GBP LIBOR will be published under a “synthetic” methodology beyond those dates.
(Related insight: Read “LIBOR transition timing update — the regulators have spoken”)
Commodities maintained their steady climb during Q1, with Brent up 21% thus far in 2021. Rebalancing of inventories has been the biggest driver of oil prices. In the U.S., strong demand for oil products has led to a steady decline in inventories, which are hovering around the 5-year average for March. All eyes were on the meeting of OPEC+, as the group met on Friday and decided to maintain production cuts.
(Related insight: Read “Using commodity collars to manage market volatility”)
Spurred on by better-than-expected Q4 GDP results, the Aussie dollar strengthened over the past week. The upward trend could continue as a quick recovery from the global COVID-19 pandemic buoys Australia’s economic recovery. Currencies with strong ties to commodity reserves, such as the Canadian dollar, were also on the rise as oil and other commodity prices increased. Companies with FX risk are evaluating the effectiveness of their hedging programs as the U.S. dollar continues to weaken.
(Related insight: Watch “An Altered Currency Landscape and Impact to Corporate Hedging Programs”)
The Week Ahead
As vaccinations continue, the U.S. will look to slowly get its economy back on track. Texas and Mississippi have already fully re-opened businesses to pre-COVID regulations. February CPI information will be available on Wednesday and weekly jobless claims on Thursday.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0060
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