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Category - Fixed Income

Stolen Range Rovers Are Tip of Alarming Iceberg

This article from Bloomberg may be of interest to subscribers. Here is a section: 

The US’s largest car insurer, State Farm Mutual Automobile Insurance Co., reported a $13.4 billion (!) underwriting loss last year, the largest shortfall in its 100-year history; Allstate Corp.’s auto-insurance underwriting loss was $3 billion, while Berkshire Hathaway Inc.’s Geico car-insurance unit lost $1.9 billion.

In the UK, Direct Line Insurance Group Plc’s chief executive departed in January after mounting losses at the motor division forced it to scrap its dividend. The stock has declined more than 50% in the past year.

These woeful results have shaken confidence in the industry’s purported ability to assess risk and forecast accurately. Insurers are belatedly hiking premiums, though often not as quickly as they’d like. Customers who drive Range Rovers and other vehicles prized by thieves, may struggle to get coverage at all.

Soaring used-car prices are the proximate cause of insurers’ woes – a textbook example of how supply chain upheaval can cascade through the economy. Historically, vehicles were a depreciating asset, but suddenly the cost of replacing a stolen or damaged vehicle was far more than insurers had calculated.



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Brazil Takes Steps to Transact in Yuan as China Ties Grow

This article from Bloomberg may be of interest to subscribers. Here is a section: 

The announcement came during a Brazil-China business forum in Beijing on Wednesday in which government officials and company executives from both sides discussed trade and investment opportunities. Much of Brazil’s agricultural and mineral products are shipped to the Asian nation.

Brazilian President Luiz Inacio Lula da Silva was due to be in China for an official state visit this week, but was forced to postpone after he was hospitalized with pneumonia.  

China and Brazil also agreed to settle trade in their own currencies, without the need of an intermediary currency like the US dollar, according to a statement from the Brazilian Trade and Investment Promotion Agency. The expectation is to reduce the costs of commercial transactions with the direct exchange between Brazilian reais and yuan.

Tatiana Rosito, Brazil’s Secretary of International Affairs at the Finance Ministry, says the goal is to boost liquidity of the Chinese currency, giving options to investors and traders.

“It’s not a game changer in relation to the impact on short-term trade, but it has the potential to expand transactions and familiarize agents” with transactions in yuan, she said in a telephone interview.



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MBA Chart of the Week: Estimated Total Commercial Mortgage Maturities

This article from US REO Partners may be of interest. Here is a section: 

This year’s survey, however, collected information on $400 billion of bank-held commercial and multifamily mortgages—23 percent of the outstanding universe. Using this year’s survey results, for the first time we are expanding our loan maturity analysis to include an estimate of the maturity profile of all commercial and multifamily mortgages—including the more than $1.7 trillion on bank balance sheets.

The analysis estimates that of approximately $4.4 trillion of outstanding commercial/multifamily mortgages, $728 billion (16%) matures in 2023 with another $659 billion (15%) maturing in 2024. Hotels/motels see the largest share maturing in 2023 (34%) followed by office (25%). Multifamily is the property type with the smallest share of outstanding mortgage maturing this year (9%).

Among capital sources, 26 percent of the outstanding balance of loans held by credit companies and other investor-driven lenders will mature this year, as will 23 percent of the balances held by depositories and 22 percent held in CMBS. Only 7 percent of life company loans and 2 percent of GSE/FHA loans come due this year.



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Sweden Wrestles With an Economic Crisis Built at Home

This article from Bloomberg may be of interest. Here is a section: 

Sweden has long fallen short on its constitutional pledge to provide an affordable place to live for all of its 10.4 million people, but until recently that was masked by the growing economy which had helped disguise flaws in the system. 

The shortage of affordable accommodation is hitting recruitment. The Stockholm Chamber of Commerce reported last year that three out of four heads of human resources said the housing situation was making it harder for their firms to hire new staff. 

Rents are negotiated annually by landlords and the tenants association. Advocates say the system helps create a rental market in Stockholm where teachers, police officers, street cleaners and other public sector workers can afford to live alongside bankers, software developers and government officials. Yet supply hasn’t kept up with demand for decades. Average waiting times for a rent-controlled apartment is now 9.2 years, but can stretch up to 20 years in some parts of the capital.



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Banking Crisis Raises Concerns About Hidden Leverage in System

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Fund managers are also concerned. A systemic credit event poses the biggest threat to global markets, and the most likely source of one is US shadow banking, according to a survey of investors published last week by Bank of America Corp.

The US government’s top financial regulators signaled in February that they would consider whether any nonbank firms merit tougher oversight as systemically important institutions. 

The Financial Stability Oversight Council will put “nonbank financial intermediation” back on the table as a priority for 2023, according to a statement from the Treasury Department. The Federal Reserve, the Federal Deposit Insurance Corp. and the Financial Stability Board declined to comment for this story. 

European Central Bank Vice President Luis de Guindos warned in an interview with Business Post published on the ECB website Sunday that nonbanks “took a lot of risks” during the era of low interest rates and potential vulnerabilities “can come to the surface” as monetary policy changes. 



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Yellen to chair financial stability council meeting as bank worries persist

This note from MarketWatch may be of interest. Here is a section: 

Treasury Secretary Janet Yellen will convene a meeting of the Financial Stability Oversight Council Friday.

FSOC comprises the heads of the nation's top financial regulators, and was created in the wake of the 2008 financial crisis to enable the government to coordinate efforts at combating systemic risks to the U.S. economy.

The announcement comes amid concerns over the health of the banking sector following the recent failures of Silicon Valley Bank and Signature Bank.

The uncertainty is being felt overseas as well with shares of Germany's Deutsche Bank (DBK.XE) slumping as its credit default swaps widened.

Financial sector equities (XLF) were under pressure Friday, ranking as the worst performing sector in the S&P 500 in morning trade.



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Short Sellers Step Up Bets Against Office Owners on Bank Turmoil

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“What’s changed in the last few weeks is the credit markets,” said Rich Hill, chief of real estate strategy research at Cohen & Steers Capital Management Inc. “It went from a story of work-from-home and the impact on occupancy and the lack of rent growth to also the compounding of tighter financial conditions given everything happening with banks.”

Fears of tighter credit are adding to risks for offices that have been building for some time, Green Street analysts wrote in a Tuesday report. Hedge fund manager Jim Chanos, Marathon Asset Management and Polpo Capital Management founder Daniel McNamara are among those who have been betting for months that landlords will struggle to lure staff back to workplaces. 

“This regional banking crisis is just throwing fuel on the fire,” McNamara said in a telephone interview. “I just don’t see a way out of this without a lot of pain in the office sector.” 



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Private Lenders See Bank Woes Pushing Borrowers to Direct Loans

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“As we keep on telling our LPs, we are not alternative anymore,” said Lockhead. “Every deal that gets done, private credit is in the mix.”



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Why the French Are Angry About a Plan to Retire at 64

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Hardly. The world’s population of people aged 60 years and older is expected to double by 2050, according to the World Health Organization, while fertility rates are in long-term decline. The financial strain is challenging old-age support systems and leaving many countries facing tough choices about raising the age of retirement, cutting benefits or lifting taxes. Pension shortfalls will be the equivalent of about 23% of world output by 2050, the Group of 30 consultancy estimated. One key measure is the old-age dependency ratio — the number of older people compared to the population that is working age. In Europe and North America, that ratio will be about 50 per 100 by 2050, according to UN forecasts, a rise from 30 per 100 in 2019. In short, we’re on a trajectory toward a smaller share of people paying taxes and a higher proportion drawing pensions. By 2035, the basic US system known as Social Security will no longer be able to cover payments, forcing a 20% reduction in benefits, according to its trustees. 



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Powell Stresses Commitment to Cooling Prices as Fed Hikes Rates

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“We are committed to restoring price stability, and all of the evidence says that the public has confidence that we will do so,” Chair Jerome Powell said at a press conference following the Fed’s two-day meeting. “It is important that we sustain that confidence with our actions as well as our words.”

Officials are prepared to raise rates higher if needed, he said.

Powell also emphasized the US banking system is sound and resilient, reiterating what officials said in their post-meeting statement, and said the agency is prepared to use all of its tools to maintain stability.

He also acknowledged recent banking turmoil is “likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes,” but added, “It’s too soon to tell how monetary policy should respond.”

Fed policymakers projected rates would end 2023 at about 5.1%, unchanged from their median estimate from the last round of forecasts in December. The median 2024 projection rose to 4.3% from 4.1%.



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