That 50-year French bond is being quickly followed by a 50-year Italian job. This time, though, it's a corporate, from Telecom Italia, a 500mm Euro issue rated at the low end of investment grade (BBB average of the three agencies). According to the FT, demand for these really long-dated issues is due to "ageing populations, asset-liability mismatches at pension funds and insurance companies, and regulatory changes in several EU countries". Sounds a bit thin to me. (50-year liabilities? Are there suddenly many more 20-year olds buying life insurance policies?).
Venezuela came with a 1bn-Euro deal maturing in 10-years priced at 350 over the US treasury (ie 7.1%). It's rated an average of B by the three rating agencies. The spread is roughly comparable to that of single-B US junk bonds. Venezuela. Isn't that where that guy Chavez is in charge?
In Europe they issued a CDO called Leopard III. Yes. The spread on the AAA piece was 25 over Euribor (I suppose that's roughly like LIBOR) -- the tightest ever for a CDO and, for the first time, below the spread on a US CDO. I like name. Hope it doesn't come back to bite them.
What is a CDO, anyway? Well, it's just another form of the securitized loan I talked about a couple of days ago, where they essentially borrow at a low rate to buy loans that pay a higher rate. They're getting pretty damned complicated these days. They now have what are called CDO-squared (CDOs whose assets are CDOs) and even CDO-cubed. What does it all mean? As our friend Warren B noted, probably nobody really knows. But the essential point, as far as I can see, is leverage: using small amounts of equity to control large amounts of assets. Works great when the asset goes up, not so great on the way down. It's the same thing that caused the great market crash of 1929 and the 10-year depression that followed.
The new McKinsey quarterly is out. There's an interesting piece purporting to debunk the idea that the weak job growth of the last few years (actually they're talking about 2000-3) was due to foreign competition. Rather, they say, it's because of high productivity growth (you need less labor to get the same output), weak domestic demand and the strength of the dollar. Sounds about right to me, though I think you do have to be skeptical of these ivory-tower studies, which rely heavily on assumptions and reasoning that is not necessarily made clear in the published report. ("We estimate that... " "Our research shows that..." and so on). They conclude that protectionism isn't the answer. Rather, focus on stimulating domestic demand and encouraging exchange rates (especially the dollar-pegged Chinese rate, I'm guessing) to reach their natural level.
Venezuela came with a 1bn-Euro deal maturing in 10-years priced at 350 over the US treasury (ie 7.1%). It's rated an average of B by the three rating agencies. The spread is roughly comparable to that of single-B US junk bonds. Venezuela. Isn't that where that guy Chavez is in charge?
In Europe they issued a CDO called Leopard III. Yes. The spread on the AAA piece was 25 over Euribor (I suppose that's roughly like LIBOR) -- the tightest ever for a CDO and, for the first time, below the spread on a US CDO. I like name. Hope it doesn't come back to bite them.
What is a CDO, anyway? Well, it's just another form of the securitized loan I talked about a couple of days ago, where they essentially borrow at a low rate to buy loans that pay a higher rate. They're getting pretty damned complicated these days. They now have what are called CDO-squared (CDOs whose assets are CDOs) and even CDO-cubed. What does it all mean? As our friend Warren B noted, probably nobody really knows. But the essential point, as far as I can see, is leverage: using small amounts of equity to control large amounts of assets. Works great when the asset goes up, not so great on the way down. It's the same thing that caused the great market crash of 1929 and the 10-year depression that followed.
The new McKinsey quarterly is out. There's an interesting piece purporting to debunk the idea that the weak job growth of the last few years (actually they're talking about 2000-3) was due to foreign competition. Rather, they say, it's because of high productivity growth (you need less labor to get the same output), weak domestic demand and the strength of the dollar. Sounds about right to me, though I think you do have to be skeptical of these ivory-tower studies, which rely heavily on assumptions and reasoning that is not necessarily made clear in the published report. ("We estimate that... " "Our research shows that..." and so on). They conclude that protectionism isn't the answer. Rather, focus on stimulating domestic demand and encouraging exchange rates (especially the dollar-pegged Chinese rate, I'm guessing) to reach their natural level.
posted by econoclast at 5:32 PM
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