Deutsche Bank
Who is buying Treasuries, M t C dit d M i ?Mortgages, Credit, and Munis?
December 2014 Peter Hooper, Matthew Luzzetti, and Torsten Slok60 Wall Street
New York New York 10005New York, New York 10005Tel: 212 250 7275
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 114/04/2014.
US Overview
Deutsche Bank 2Torsten Slok, [email protected] +1 212 250-2155 December 2014
Total global AUM is around $117 trnAssets under management in USD trillion,
2013 Estimates
28.9
35.2
Mutual funds
Pension funds
11.7
28
FX reserves
Insurance funds
2.6
6.3
Hedge funds
SWFs
2 2
2.3
Private equity
ETFs
g
2.2
0 10 20 30 40
Private equity
NOTE: An average growth trend has been assumed for Private Equity, Insurance Funds and Pension Funds
Deutsche Bank 3Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: CBO, DB Global Markets ResearchSource: DB estimates, Hedge Fund Research, The City UK, SWF Institute, ICI. DB Global Markets ResearchNOTE: An average growth trend has been assumed for Private Equity, Insurance Funds and Pension Funds
Who is funding the US budget deficit?
2500
$ bln
2500
$ blnRest of the world Fed
2000
2500
2000
2500Other domestic Net issuance of treasuries
1000
1500
1000
1500
0
500
0
500
-1000
-500
-1000
-500
-150007 08 09 10 11 12 13 14
-1500
Deutsche Bank 4Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: CBO, DB Global Markets ResearchSource: FRB, Haver Analytics, DB Global Markets Research
Trading volumes: US government bond market dominates
Daily trading volumes$ bln $ bln
500
600
500
600
400
500
400
500
200
300
200
300
100
200
100
200
0US treasuries UK gilts German bunds
0
Deutsche Bank 5Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Fitch, DB Global Markets Research
US fixed income markets much bigger in sizeSize of treasury marketsbln bln
80009000
10000
8000900010000
4000500060007000
4000500060007000
1000200030004000
1000200030004000
01000
US surie
s
genc
y
govt
)
ranc
ego
vt.)
govt
.)
man
yov
t.)er
ednd
sm
any)
nada
ovt.)
vere
don
dspa
in)
01000
Utre
as
US
ag
Italy
( F r (g
UK
(g
Ger
m(g
oC
ove
bon
(Ger
mC
a (go
Cov bo (Sp
Deutsche Bank 6Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Fitch Ratings, US Treasury, SIFMA, US debt management office, Agency France Tresor, Bundesrepublik Deutscheland, European Covered Bond Council, DB Global Markets Research
Non-Fed sector mainly holding <5yr Treasuries = foreigners and US private sector vulnerable to changes in Fed speak
Marketable debt held outside the Fed Reserve: maturity breakdown
% of GDP % of GDP
50
60
50
60less than 1 1-55-10 >10Total outstanding
40
50
40
50
30 30
10
20
10
20
075 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
0
Deutsche Bank 7Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, BEA , Haver Analytics, DB Global Markets Research75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
The Fed holds +40% of long Treasuries
Fed holdings of treasury securities outstanding (% of total securities outstanding by maturity)% %total securities outstanding by maturity)
4550
4550Fed share of total: 0-5 years
Fed share of total: 0-10 years
303540
303540Fed share of total: 10+ years
Fed share of total: 5+ years
202530
202530
51015
51015
05
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 1405
Deutsche Bank 8Torsten Slok, [email protected] +1 212 250-2155 December 2014
Sources: IMF, Treasury, Haver Analytics and DB Global Market ResearchSource: FRB, Haver Analytics, DB Global Markets Research
Auction outcomes
Deutsche Bank 9Torsten Slok, [email protected] +1 212 250-2155 December 2014
Primary dealers mainly holding < 3yr couponsy y g y
Primary dealer positions in coupon treasuries by maturity sector
$ bln $ bln
150 150<3yr 3yr-6yr 6yr-11yr >11yr Total
50
100
50
100
50
0
50
0
-100
-50
0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4
-100
-50
Jan-
2010
Apr-
2010
Jul-2
010
Oct
-201
0Ja
n-20
11Ap
r-20
1Ju
l-201
1O
ct-2
01Ja
n-12
Apr
-12
Jul-1
2O
ct-1
2Ja
n-13
Apr
-13
Jul-1
3O
ct-1
3Ja
n-14
Apr
-14
Jul-1
4O
ct-1
4
Deutsche Bank 10Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Foreign participation in 10y and 30y auctions stableg p p y y
10 and 30 yr auction amounts awarded to foreigners % %(% of total issued)
4045
4045
253035
253035
101520
101520
05
10
9 9 0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4
0510
Jul-0
9O
ct-0
9Ja
n-10
Apr
-10
Jul-1
0O
ct-1
0Ja
n-11
Apr
-11
Jul-1
1O
ct-1
1Ja
n-12
Apr
-12
Jul-1
2O
ct-1
2Ja
n-13
Apr
-13
Jul-1
3O
ct-1
3Ja
n-14
Apr
-14
Jul-1
4O
ct-1
4
Deutsche Bank 11Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: ODM, Haver Analytics, DB Global Markets Research
Direct bidding trending down for 10s…g g
US 10 Year Notes Bidder Participation for % of Direct Bidder Amount Accepted50
%50
%
404550
404550
253035
253035
10152025
10152025
05
10
0510
May
-03
Oct
-03
Mar
-04
Aug
-04
Jan-
05Ju
n-05
Nov
-05
Apr
-06
Sep-
06Fe
b-07
Jul-0
7D
ec-0
7M
ay-0
8O
ct-0
8M
ar-0
9A
ug-0
9Ja
n-10
Jun-
10N
ov-1
0A
pr-1
1Se
p-11
Feb-
12Ju
l-12
Dec
-12
May
-13
Oct
-13
Mar
-14
Aug
-14
Deutsche Bank 12Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, Bloomberg Finance LP, DB Global Markets Research
…and direct bidding for 2s also lower…g
U.S. 2 Year Notes Bidder Participation for % of Direct Bidder Amount Accepted45
%45%
p
35
40
35
40
25
30
25
30
10
15
20
10
15
20
0
5
10
0
5
10
0
Jun-
03D
ec-0
3Ju
n-04
Dec
-04
Jun-
05D
ec-0
5Ju
n-06
Dec
-06
Jun-
07D
ec-0
7Ju
n-08
Dec
-08
Jun-
09D
ec-0
9Ju
n-10
Dec
-10
Jun-
11D
ec-1
1Ju
n-12
Dec
-12
Jun-
13D
ec-1
3Ju
n-14
Dec
-14
0
Deutsche Bank 13Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, Bloomberg Finance LP, DB Global Markets Research
…is China behind direct bidding on 10s? g
50%
60USD blnUS 10 Year Notes Bidder Participation for % of Direct Bidder
Amount Accepted (ls)China Gross Purchases of US Treasury Bonds & Notes (rs)
40
4550
China Gross Purchases of US Treasury Bonds & Notes (rs)
25
30
35
30
40
15
20
25
20
30
5
10
15
10
02003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0
Deutsche Bank 14Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, Bloomberg Finance LP, DB Global Markets Research
Bid-to-cover ratios up for 2s and down for 10s
Treasury auction results: bid-to-cover ratioRatio Ratio
5 5
2-yr 10-yr
4 4
3 3
2 2
11994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
1
Deutsche Bank 15Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: U.S. Treasury, Bloomberg finance LP, DB Global Markets Research
…and indirect bidding stable for 2s and 10s
Indirect bidding for Treasuries at Treasury auctions% %
70
80
70
802-yr 10-yr
50
60
70
50
60
70
30
40
50
30
40
50
10
20
30
10
20
30
0
10
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150
10
Deutsche Bank 16Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: U.S. Treasury, Bloomberg Finance LP, DB Global Markets Research
What are foreignWhat are foreign central banks doing?central banks doing?
Deutsche Bank 17Torsten Slok, [email protected] +1 212 250-2155 December 2014
Foreign official holdings of Treasuries moving sideways…
Foreign US Treasury holdings:4500$bn
4500$bn
3500
4000
4500
3500
4000
4500
Official Private
2500
3000
2500
3000
1500
2000
1500
2000
0
500
1000
0
500
1000
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
Deutsche Bank 18Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, Haver Analytics, DB Global Markets Research
...and Japan has stepped up purchases recently...
Chinese and Japanese US treasury holdingsUSD bln USD bln
1200
1400
1200
1400China Japan
800
1000
800
1000
400
600
400
600
0
200
9 09 9 0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4
0
200
May
-200
Aug
-200
Nov
-200
Feb-
201
May
-201
Aug
-201
Nov
-201
Feb-
201
May
-201
Aug
-201
Nov
-201
Feb-
201
May
-201
Aug
-201
Nov
-201
Feb-
201
May
-201
Aug
-201
Nov
-201
Feb-
201
May
-201
Aug
-201
Nov
-201
Deutsche Bank 19Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, Haver Analytics, DB Global Markets Research
China’s foreign reserves have started falling...
$bn, q/q chg. $bn, q/q chg.Chi ’ f i
160
200
160
200China’s foreign reserves
80
120
80
120
-40
040
-40
040
-120-80
40
-120-80
40
-16004 05 06 07 08 09 10 11 12 13 14
-160
Deutsche Bank 20Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: PBC, SAFE, Haver Analytics, DB Global Markets Research
…despite a record-high trade balance surplus
China's trade balance$ bln $ blnChina's trade balance
40
50
$ bln
40
50
$ bln
20
30
20
30
10
0
10
10
0
10
-30
-20
-10
-30
-20
-10
-402003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-40
Deutsche Bank 21Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF, Haver Analytics, DB Global Markets Research
…and the monthly data shows that China's FX reserves are now around $3.8trn
China's FX reserves declining4.5$ trn
4.5$ trn
3 5
4.0
3 5
4.0
3.0
3.5
3.0
3.5
2.0
2.5
2.0
2.5
1.0
1.5
1.0
1.5
0.52005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0.5
Deutsche Bank 22Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: PBC, Haver Analytics, DB Global Markets ResearchNote: data for Jan and Feb 2014 was not available in PBC
Custody holdings fell a lot in October…y g
Rolling 4 week change in Fed custody holdings
100120
$bn
100120
$bnGSE Treasury Total
20406080
20406080
-40-20
020
-40-20020
-100-80-60
-100-80-60
Jan-
09A
pr-0
9Ju
l-09
Oct
-09
Jan-
10A
pr-1
0Ju
l-10
Oct
-10
Jan-
11A
pr-1
1Ju
l-11
Oct
-11
Jan-
12A
pr-1
2Ju
l-12
Oct
-12
Jan-
13A
pr-1
3Ju
l-13
Oct
-13
Jan-
14A
pr-1
4Ju
l-14
Oct
-14
Jan-
15
Deutsche Bank 23Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Bloomberg Finance LP, DB Global Markets Research
…and overall Fed custody holdings moving sideways
Fed custody holdings of Treasuries and agencies for foreign central banks
$bn $bng
35004000
35004000Agency debt
Treasury securities
250030003500
250030003500
Total
100015002000
100015002000
0500
1000
05001000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Deutsche Bank 24Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Bloomberg Finance LP, DB Global Markets Research
In real effective terms the Chinese Yuan is well above where it was in 2002
R l ff ti h t f Y b k t f 58 i
July 2005=100 July 2005=100
Real effective exchange rate of Yuan vs. a basket of 58 currencies
150 150
130
140
130
140
110
120
110
120
100
110
100
110
902000 2002 2004 2006 2008 2010 2012 2014
90
Deutsche Bank 25Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: BIS, Haver Analytics, DB Global Markets Research
FX reserves: $8trn in EM and $4trn in DM…
Foreign reserves: Emerging vs Developed markets$ bln $ bln
7000
8000
7000
8000Developed markets Emerging markets
5000
6000
7000
5000
6000
7000
3000
4000
3000
4000
1000
2000
1000
2000
01995 1997 1999 2001 2003 2005 2007 2009 2011 2013
0
Deutsche Bank 26Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF COFER, Haver Analytics, DB Global Markets Research
…and as a share of GDP emerging markets holding what corresponds to 27% of EM GDP in reserves
International reserves held by Emerging Markets% of GDP % of GDP
30
% of GDP
30
% of GDP
20
25
20
25
15
20
15
20
10 10
595 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
5
Deutsche Bank 27Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: CBO, DB Global Markets ResearchSource: IMF COFER , Haver Analytics, DB Global Markets Research
China’s reserves as a share of reserves held by:China s reserves as a share of reserves held by:
2000M12 2004M12 2010M12 2011M6 2012M9 2013M9 2013M12
All countriesAll countries9% 16% 31% 31% 29% 32.0% 32.7%
Advanced i 14% 30% 92% 96% 83% 97 3% 100%economies 14% 30% 92% 96% 83% 97.3% 100%
Emerging/Developing 23% 36% 46% 47% 45% 47 7% 48 6%Developing economies
23% 36% 46% 47% 45% 47.7% 48.6%
Deutsche Bank 28Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF, PBC, Haver Analytics, DB Global Markets Research
Unallocated (meaning undisclosed) share of total world reserves risingg
US dollars Euro Others currencies Unallocated
100% 100%
60%
80%
60%
80%
40% 40%
20% 20%
0%99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0%
Deutsche Bank 29Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF COFER, Haver Analytics, DB Global Markets Research
Central bank appetite for US bonds much lower than in 2009-2013bonds much lower than in 2009-2013
m/m chg, 12m sum
m/m chg, 12m sum
Foreign net purchases ($bln) of US Treasuries: official holders
500600700
500600700
300400500
300400500
Bonds Bills
100200
100200
-200-100
0
-200-1000
200
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
200
Deutsche Bank 30Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, Haver Analytics, DB Global Markets Research
On a yoy basis central banks are buying fewer dollar assetsare buying fewer dollar assets…
Year-over-year change in world USD reserves $ bln $ bln
400
500
400
500
300
400
300
400
100
200
100
200
-100
0
-100
0
-20000 01 02 03 04 05 06 07 08 09 10 11 12 13 14
-200
Deutsche Bank 31Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF COFER, Haver Analytics, DB Global Markets Research
...and foreigners more broadly have less appetite for all US assets...Net foreign buying of all US securities
(12-month rolling sum)1200
$bn
1200
$bn
Long term public & private debt
800
1200
800
1200Long-term public & private debtShort-term public & private debtEquities
800 800
400 400
0 0
-4001990199219941996199820002002200420062008201020122014
-400
Deutsche Bank 32Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, Haver Analytics, DB Global Markets Research
…with the level of purchases lower for Treasuries, MBS, and Credit…
Net foreign buying of US long-term debt securities (12-month rolling sum)
$Mln $Mln
800
1000
800
1000Treasury bonds & notes
GSE MBS & agency debt
600
800
600
800Corporate & other bonds
200
400
200
400
0 0
-2001990199219941996199820002002200420062008201020122014
-200
Deutsche Bank 33Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Treasury, Haver Analytics, DB Global Markets Research
Who is buying Treasuries?Who is buying Treasuries?
Deutsche Bank 34Torsten Slok, [email protected] +1 212 250-2155 December 2014
OverviewFramework for thinking about demand for fixed income
-The key driver of rates is the economy. But different buyers have different price sensitivities:p
P i iti itL HighPrice sensitivityLow High
Fed Foreign central banks
Money market funds
Mutual funds
Households BanksPension/insurance
Deutsche Bank 35Torsten Slok, [email protected] +1 212 250-2155 December 2014
Foreigners, Fed, and mutual funds have increased their holdings of Treasuries
Holders of Treasury debt securities
Q3 2014 Q1 2007 Q1 2003
R t f ld 47 7% 44 3% 36%Rest of world 47.7% 44.3% 36%Fed 19.2% 15.6% 17.5%
Mutual funds 8.6% 5.2% 7.6%Mutual funds 8.6% 5.2% 7.6%
Households/Hedge funds 5.7% 6.1% 8.4%
Government retirement funds 3.5% 4.7% 5.9%
Private pension funds 2.6% 2.8% 3.0%
Commercial banks 3.5% 2.2% 4.0%
Insurance companies 2.2% 3.7% 4.5%
Investment banks 0.4% -0.8% 0.5%
GSEs 0 5% 0 3% 0 7%GSEs 0.5% 0.3% 0.7%
ABS issuers 0.2% 1.3% 0.0%
Others 5.9% 13.5% 12.3%
Deutsche Bank 36Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Fed buying Treasuries has been eating into share of Treasuries held by others
Holdings of treasuries as % of treasury debt outstanding
60
%
60
%
50
60
50
60Foreigners BanksPension+insurers Mutual fundsHouseholds Federal Reserve
30
40
30
40Others
20
30
20
30
0
10
0
10
01955 1961 1967 1973 1979 1985 1991 1997 2003 2009
0
Deutsche Bank 37Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
70% of Treasuries are held by foreigners and the Fed
Holdings of treasuries as % of treasury debt outstanding
% %Federal Reserve
70
80
70
80
%US domestic real money, banks, and householdsForeigners
50
60
70
50
60
70
30
40
50
30
40
50
During QE domestic real money
10
20
30
10
20
30During QE domestic real money “sold” their Treasuries to the Fed
0
10
0
10
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Deutsche Bank 38Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Most Treasuries held by foreigners
Holders of US Treasuries,% outstandingHousehold/Corp Mutual funds Foreign
90%100%
90%100%
Fed Banks and brokers PensionInsurance Other
70%80%90%
70%80%90%
40%50%60%
40%50%60%
10%20%30%
10%20%30%
0%10%
90 95 00 05 100%10%
Deutsche Bank 39Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Treasury net issuance down recently
300
$bn, 3m MA
300
$bn, 3m MAGross issuance of Treasury notes & bonds
f &250 250
Net issuance of Treasury notes & bonds
150
200
150
200
50
100
50
100
0
50
0
50
-501980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
-50
Deutsche Bank 40Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Bureau of Public Debt, Haver Analytics, DB Global Markets Research
Global rebalancing is needed – China needs more consumption and the US less imports.
Private consumption as a share of GDP% %
p pThis process will take many years
80 80China Germany Japan US
60
70
60
70
50
60
50
60
40 40
301995 2000 2011 2012 2013
30
Deutsche Bank 41Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: CAO, EUROSTAT, BEA, CNBS , Haver Analytics, DB Global Markets Research
Fed holdings of MBS and Treasuries
Treasuries outstanding and MBS outstanding held by the FedUSD bln USD bln
3500
4000
4500
3500
4000
4500Mortgage Backed Securities (MBS)Treasury securities
2500
3000
3500
2500
3000
3500y
1500
20002500
1500
20002500
500
1000
500
1000
000 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0
Deutsche Bank 42Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Repo outstanding highly correlated with US fixed income daily traded volume
Primary dealer total financing vs total daily traded volume across US fixed income$trn $bln
US fixed income daily traded volume
6
7
1000
1200Repo outstanding (ls) Daily traded volume(rs)
4
5800
1000
3
4
400
600
1
2
200
400
01996 1998 2000 2002 2004 2006 2008 2010 2012
0
Deutsche Bank 43Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: SIFMA, DB Global Markets Research
Who is buying GSEWho is buying GSE MBS and agency debt?MBS and agency debt?
Deutsche Bank 44Torsten Slok, [email protected] +1 212 250-2155 December 2014
Fed holds 22% of all outstanding agency and GSE-backed debt securities
Holders of agency and GSE-backed debt securities
Q3 2014 Q1 2007 Q1 2003
Commercial banks 22 4% 18 3% 18 6%Commercial banks 22.4% 18.3% 18.6%Fed 22.2% 0.0% 0.0%Rest of world 11.4% 20.1% 11.4%Mutual funds 14.9% 9.7% 13.6%Insurance companies 5.7% 7.6% 8.0%GSEs 3 7% 10 5% 20 8%GSEs 3.7% 10.5% 20.8%Government retirement funds 3.0% 3.0% 3.6%Private pension funds 2.9% 3.1% 3.4%Households 0.1% 9.7% 3.0%Investment banks 1.4% 2.2% 2.3%ABS issuers 0 0% 5 0% 5 6%ABS issuers 0.0% 5.0% 5.6%Others 12.3% 10.4% 9.7%
* Agency and GSE-backed debt securities consists of GSE debt and Agency and GSE-backed mortgage pools.
Deutsche Bank 45Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics , DB Global Markets Research
Fed holds 20% of mortgages
Holdings of GSEs as % of GSE debt outstanding% %
70
80
90
70
80
90Fed Banks
Insurance companies Mutual funds
50
60
70
50
60
70Foreigners Others
30
40
30
40
0
10
20
0
10
20
01955 1961 1967 1973 1979 1985 1991 1997 2003 2009
0
Deutsche Bank 46Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Mortgage originations moving down recently
Total new mortgages1400$bn
1400
$bn
1200 1200
800
1000
800
1000
400
600600
800
200
400
400
099 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
200
Deutsche Bank 47Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: MBA, Haver Analytics, DB Global Markets Research
Trading volumes in MBS declining, steady for Treasuries
Turn over in treasuries & agenciesaverage daily trading volume ($bn)
600
$ bln
600
$ bln
T MBS A
500
600
500
600Treasury MBS Agency
300
400
300
400
100
200
100
200
0
100
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0
100
199
199
199
199
200
200
200
200
200
200
200
200
200
200
20 20 20 20Y
TD 2
0
Deutsche Bank 48Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: SIFMA, DB Global Markets Research* As of March 2014
Primary dealer inventory of IG and high yield bonds currently 20% of what it was in 2007
Primary dealer positions, $bn
300
$ bln
300
$ bln
C t b d
bo ds cu e y 0% o a as 00
250
300
250
300Corporate bonds
200 200
100
150
100
150
50 50
001 02 03 04 05 06 07 08 09 10 11 12 13 14
0
Deutsche Bank 49Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Primary dealer inventory of spread product currently 20% of what it was in 2007
Primary dealer positions by asset class, $bn$ bln $ bln
p oduc cu e y 0% o a as 00
250
300
250
300GSE Corporate
200
250
200
250
100
150
100
150
50
100
50
100
001 02 03 04 05 06 07 08 09 10 11 12 13 14
0
Deutsche Bank 50Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Who is buying Corporate and Who is buying GSE MBS and agency debt?
Who is buying CorporateForeign Bonds?
Who is buying Corporate and Foreign Bonds?and Foreign Bonds?
Deutsche Bank 51Torsten Slok, [email protected] +1 212 250-2155 December 2014
Holders of HY and HG credit
Holders of corporate and foreign bonds Q3 2014 Q1 2007 Q1 2003
Rest of world 24.90% 23.70% 17.90%Life insurance companies 20.10% 17.30% 22.80%
Mutual funds 19.50% 7.50% 7.20%Other 15.00% 22.30% 21.70%
Households/Hedge funds 8 00% 15 10% 17 90%Households/Hedge funds 8.00% 15.10% 17.90%Commercial banks 6.70% 8.70% 8.20%
Private pension funds 5.10% 3.40% 3.90%Funding corporations 0.70% 0.70% 1.10%
Deutsche Bank 52Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Mutual funds buying more credit in recent yearsHoldings of Corporate bonds as % of corporate bonds outstanding
% %
60
70
60
70Households Banks
Life insurance companies Mutual funds
Foreigners
40
50
40
50Foreigners
20
30
20
30
0
10
0
10
1955 1961 1967 1973 1979 1985 1991 1997 2003 2009
Banks include US charted depository institutes, foreign banking offices in US, bank holding companies, and Banks in U S Possessions
Deutsche Bank 53Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Researchin U.S. Possessions
Net issuance of corporate and foreign bonds
Net issuance of corporate & foreign bonds$ bln $ bln
Nonfinancial
1500 1500
Nonfinancial Rest of the worldFinancial
500
1000
500
1000
0
500
0
500
-500 -500
-10002000 2002 2004 2006 2008 2010 2012 2014
-1000
Deutsche Bank 54Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Distribution of corporate credit ratings
Global corporate rating distribution (issuer count)7000 7000
5000
6000
5000
6000AAA AA A BBB BB B CCC and below
4000
5000
4000
5000
2000
3000
2000
3000
0
1000
0
1000
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Deutsche Bank 55Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: CBO, DB Global Markets ResearchSource: S&P and DB Global Markets Research
Who is buying MUNI problemsmunicipal securities MUNI problems
and loans?
Deutsche Bank 56Torsten Slok, [email protected] +1 212 250-2155 December 2014
Holders of munis
Holders of Municipal securities and loans Q4 2013 Q1 2007 Q1 2003
Households/Hedge funds 42.9% 50.5% 37.0%Mutual funds 25.5% 23.9% 32.8%
I i 13 1% 11 7% 11 9%Insurance companies 13.1% 11.7% 11.9%Commercial banks 12.2% 6.1% 7.2%
Rest of world 2.0% 1.1% 0.7%Security brokers and dealers 0.4% 1.5% 1.1%
Other 3.9% 5.1% 9.3%
Deutsche Bank 57Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Munis mainly held by households/mutual funds but banks have been buying more recently
Holdings of Municipal securities by agent as % of municipal securities outstanding
60
%
60
%Households BanksInsurance companies Mutual fundsForeigners Others
Break in data
40
50
40
50
Foreigners Others
20
30
20
30
0
10
20
0
10
20
01955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
0
Deutsche Bank 58Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics , DB Global Markets Research
Market not worried about muni situation
% %Treasury 10Y
4.0
4.5
4.0
4.5Treasury 10Y
BVAL 10Y AAA Muni index
3.0
3.5
3.0
3.5
2.0
2.5
2.0
2.5
1.0
1.5
1.0
1.5
Jan-
10
May
-10
Sep
-10
Jan-
11
May
-11
Sep
-11
Jan-
12
May
-12
Sep
-12
Jan-
13
May
-13
Sep
-13
Jan-
14
May
-14
Sep
-14
Deutsche Bank 59Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Bloomberg Finance LP, FRB, Haver Analytics, DB Global Markets Research
Muni CDS not showing signs of distress
Muni CDS level400bps
400bpsIllinois 5Y California 5Y MCDX 5Y New York 5Y
300
350
300
350
200
250
200
250
100
150
100
150
0
50
0 0 0 0 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4
0
50
May
-10
Jul-1
0Se
p-10
Nov
-10
Jan-
11M
ar-1
1M
ay-1
1Ju
l-11
Sep-
11N
ov-1
1Ja
n-12
Mar
-12
May
-12
Jul-1
2Se
p-12
Nov
-12
Jan-
13M
ar-1
3M
ay-1
3Ju
l-13
Sep-
13N
ov-1
3Ja
n-14
Mar
-14
May
-14
Jul-1
4Se
p-14
Nov
-14
Deutsche Bank 60Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Bloomberg Finance LP, DB Global Markets Research
State and local government problems closely linked to the overall macro outlook
% y/y % y/yRetail sales (1Q lead)State and local general sales taxes
10
15
10
15
State and local general sales taxes
5
10
5
10
0 0
-10
-5
-10
-5
-1500 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
-15
Deutsche Bank 61Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Census, Haver Analytics, DB Global Markets Research
Improving macro picture helping state & local govt
% y/y % y/yFederal employee withholding receipts (ls)State and local personal income taxes (rs)
12
16
20
30
4
810
20
0
4
10
0
-8
-4
-20
-10
-1200 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
-30
Deutsche Bank 62Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Census, Haver Analytics, Treasury, DB Global Markets Research
State and local govt problems mainlydealt with via workforce reduction
Surveyed cities response to their fiscal crisis in various waysy
Human services cuts
Public safety cuts
Debt renegotiation
Employee health benefit modifications
Across the board cuts
W kf d ti
Delay/cancelation of capital projects
Cuts in general services
0% 10% 20% 30% 40% 50% 60% 70% 80%
Workforce reduction
Deutsche Bank 63Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: NLC, DB Global Markets Research
State budget is mainly confronted with the problem of cuts in state-aidthe problem of cuts in state aid
State Actions Since FY 2010
8%Other
21%
18%
Cut funds for state-required services
Transfer programs
26%
21%
Cut reimbursement or other transfers
Reduce/limit local authority
37%
39%
Cut state-shared revenues
Cut state aids
3 %
0% 10% 20% 30% 40% 50%
Deutsche Bank 64Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: NLC report ‘’ City Fiscal Conditions in 2013’’, DB Global Markets Research
Local government expenditures and revenues
Expenditures Revenuesp
Types of spending by local governments, 2012Social
Sources of revenues for local governments, 2012
Aid from Federal govt,
Education,Administatio
Social services,
13%
4%
Aid from State govt 29%
Other revenues,
24%Education,
36%Administatio
n, interst and others,
14%
govt, 29%
Utility 9%
Environment9%
Public safety, 10%
Sales and other taxes,
revenues, 9%
Utility, 11%, 9%Property
taxes, 27%7%
Deutsche Bank 65Torsten Slok, [email protected] +1 212 250-2155 December 2014 2010 DB Blue template
Source: Census, Haver Analytics, DB Global Markets Research
Some states rely heavily on property taxes
In which states does Govt rely mostly on property taxes?
Fiscal Year 2010
State Fraction of tax revenue coming fromState Fraction of tax revenue coming from property taxes
New Hampshire 64.6%N J 48 4%N.J. 48.4%
Vermont 45.8%Rhode Island 45.6%
Texas 45.2%Illinois 43.6%Fl id 42 9%Florida 42.9%
Wyoming 42.5%Connecticut 42.0%
Note: Includes residential and commercial real estate (mostly local revenue) as well as personalproperty taxes on cars, boats, etc. (mostly state revenue).
Deutsche Bank 66Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Tax foundation calculations based on Census Bureau’s data, DB Global Markets Research
State Collections Per Capita RankN.J. $2,663 1Conn. $2,473 2
State and Local Property Tax Collections Per Capita, Top 15 FY2010
St t C ll ti P C it R kN.H. $2,440 3Wyo. $2,285 4N.Y. $2,136 5Vt. $2,056 6R.I. $2,018 7
State Collections Per Capita RankNew Jersey $2,819 1Wyoming $2,633 2
Connecticut $2 522 3R.I. $2,018 7Mass. $1,874 8Ill. $1,782 9Alaska $1,728 10Maine $1,640 11Wis $1 633 12
Connecticut $2,522 3New Hampshire $2,463 4
New Jersey $2,280 5Vermont $2,166 6Wis. $1,633 12
Fla. $1,589 13Tex. $1,475 14Calif. $1,465 15
$ ,Rhode Island $2,083 7
Massachusetts $1,986 8Alaska $1,865 9Illinois $1,827 10Maine $1,786 11
Wisconsin $1,698 12C l d $1 601 13Colorado $1,601 13
Texas $1,562 14Florida $1,507 15
Deutsche Bank 67Torsten Slok, [email protected] +1 212 250-2155 December 2014 2010 DB Blue template
Source: U.S. Census Bureau, Tax Foundation, DB Global Markets Research
Asset allocation for Households/Hedge funds,
Institutional Investors and ForeignersInstitutional Investors, and Foreigners
Deutsche Bank 68Torsten Slok, [email protected] +1 212 250-2155 December 2014
Households’/hedge funds’ asset allocation
100% 100%
Treasury Agency & GSEs Munis Credit* Equity** Other
80% 80%
60% 60%
20%
40%
20%
40%
0%
20%
0%
20%
52 57 62 67 72 77 82 87 92 97 02 07 12*Credit includes corporate & foreign bonds**Equities includes corporate equities, mutual fund shares, life insurance reserves and pension funds reserves
Deutsche Bank 69Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Pension funds’ asset allocation
100% 100%
Treasury Agency & GSEs Munis Credit* Equity** Other
80% 80%
40%
60%
40%
60%
20%
40%
20%
40%
0%92 94 96 98 00 02 04 06 08 10 12 14
0%
Pension funds incl. Private, State& local govt.retirement and Federal govt. retirement fundsCredit includes corporate and foreign bondsEquities includes corporate equities and mutual fund shares
Deutsche Bank 70Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Insurance companies’ asset allocation
100% 100%
Treasury Agency and GSEs Munis Credit* Equity** Other
80% 80%
60% 60%
40% 40%
0%
20%
0%
20%
0%94 96 98 00 02 04 06 08 10 12 14
0%
Insurance sector includes both life and non-life insurance*Credit includes foreign and corporate bonds; **Equities include mutual fund shares and corporate equities
Deutsche Bank 71Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Mutual funds’ asset allocation
100% 100%
Treasury Agency & GSEs Munis Credit* Equity** Other
80% 80%
60% 60%
20%
40%
20%
40%
0%
20%
0%
20%
08 09 10 11 12 13 14Mutual funds incl. traditional mutual funds, money mkt. MFs, exchange traded MFs & open ended MFs*Credit incudes corporate and foreign bonds; **Equity includes corporate equites and mutual fund shares
Deutsche Bank 72Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Asset allocation of foreigners in US assets
100% 100%
Treasury Agency & GSEs Munis Credit* Equities** Other
80% 80%
60% 60%
20%
40%
20%
40%
0%
20%
0%
20%
92 97 02 07 12*Credit is Corporate bonds held by Foreign sector; **Equities is calculated as sum of corporate equities and mutual fund shares
Deutsche Bank 73Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Banks’ asset allocation
90%100%
90%100%
Treasury Agency & GSEs Munis Credit* Equity** Other
70%80%90%
70%80%90%
40%50%60%
40%50%60%
10%20%30%40%
10%20%30%40%
-10%0%
10%
-10%0%10%
89 91 93 95 97 99 01 03 05 07 09 11 13Banks incl. all US charted depository instituions and brokers and dealers*Credit includes corporate and foreign bonds; **Equities includes corporate equities and mutual fund shares
Deutsche Bank 74Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Who is buying Corporate and Who is buying GSE MBS and agency debt?
O tl kForeign Bonds?Outlook
Deutsche Bank 75Torsten Slok, [email protected] +1 212 250-2155 December 2014
US 10y fair value is currently 2.7% in the weekly model
6%
6%
Actual Model predicted forecast
15-yr average 1993-20085 5
Actual Model-predicted forecast
4 4
2
3
2
3
1 1Equation:
T10 = c T2 5Y implied inflation Euro risk Fed holdings of long term tryCoeff. 2.8 0.2 0.5 -0.00 -1.7
(29 15) (21 4) (14 2) ( 42 1) ( 6 6)
Note: Explanatory variables used in the model are 2y treasury yield and Aruoba-Diebold-Scotti Business Conditions Index
003 04 05 06 07 08 09 10 11 12 13 14
0 (29.15) (21.4) (14.2) (-42.1) (-6.6)
Deutsche Bank 76Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, BDlt, BDE, Bbk, Haver Analytics, DB Global Markets Research
Monthly model suggests 10y rates should be 3.6%
10y tsy monthly model% %
89
89Actual Estimated
567
567
345
345
Equation: T10 = c IP YoY Inflation exp Unemp( 1)
12
12
T10 = c IP_YoY Inflation exp Unemp(-1)Coeff. -0.3 0.02 2.84 -0.44 (-0.4) (1.74) (13.5) (-15.1)Note: t-stats in parentheses
095 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0
Deutsche Bank 77Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, BLS, Haver Analytics, DB Global Markets Research
The quarterly model suggests 10y fair value is 2.4%
10yr yield forecast model with fiscal variables% %
7 7Actual Model-predicted forecast
5
6
5
6
4 4
2
3
2
3Equation: T10 = c Debt to GDP Output gap Inflation expectations Coeff. 6.0 -0.03 0.10 0.33
(8 12) ( 6 8) (2 40) (0 89)
12000 2002 2004 2006 2008 2010 2012 2014
1
(8.12) (-6.8) (2.40) (0.89)Note: t-stats in parentheses
Deutsche Bank 78Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, BEA, Haver Analytics, DB Global Markets Research
GDP forecast suggests 10y rates in the US are too low
% %Nominal GDP growth (% y/y) 10y treasury yield (%)
12
15
12
15
9
12
9
12
6 6
3 3
053 58 63 68 73 78 83 88 93 98 03 08 13
0
Deutsche Bank 79Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB,BEA, DB Global Markets ResearchSource: BEA, FRB , DB Global Markets Research
Outstanding amount of risk-free assets globally
Outstanding amounts of marketable potentially safe assets (percent of total)
Gold11% Corporate debt11% Corporate debt
(investment grade)11%
Covered bonds4%
ABS MBS th
AAA/AA OECD government securities
U S d b
ABS,MBS, other securitization
17%
securities46%
U.S agency debt3%
Supranational d bt
A/BBB OECD government securities
debt1%
7%
Data for government and corporate debt are as of 2011:Q2; supranational debt, covered bonds, and gold, as of end-2010; and U.S. agency debt and securitization, as of 2011:Q3. ABS = asset-backed securities; MBS = mortgage-backed securities; OECD = Organization for Economic Cooperation and Development
Deutsche Bank 80Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF, DB Global Markets ResearchOECD = Organization for Economic Cooperation and Development.
Holders of risk-free assets globally
Holdings of government securities worldwide,by investor type, end 2010
Other22%
Banks34%
Cental banks i l di
34%
including reserve
managers22%Insurance
Sovereign wealth fundsPension funds
7%
Insurance companies
15%
1%7%Note: Banks include commercial, investment, and development banks; data for pension funds include only direct holdings; SWF holdings are an IMF staff estimate; reserve manager holdings are an IMF staff estimate based on a representative allocation of total official reserves to government securities and own government bond holdings by the Federal Reserve, Bank of England, and Bankof Japan "Other" is estimated as a remainder based on BIS data on total outstanding government securities worldwide
Deutsche Bank 81Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF, DB Global Markets Researchof Japan. Other is estimated as a remainder based on BIS data on total outstanding government securities worldwide.
US government debt mainly held by foreigners
Sovereign debt holdings,by type and location of investor(In percent of total,June 2011)
United States$
3.018.7
Domestic banks**
Total outstanding marketable debt *= $ 9.3 trillion
48.2
Domestic banks
Insurance,pensionsand mutual fundsOther
11 8
Federal reserve
Nonresidents11.8
18.2*Excludes $5 trillion of nonmarketable public debt securities held mostly in intragovernmental accounts.**Domestic depository institutions.
Deutsche Bank 82Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF, DB Global Markets Research
Fewer sovereign risk-free assets outstanding…Fewer sovereign risk-free assets outstanding…Historical Overview of S&P Sovereign Debt ratings of Selected OECD Countries, 1970-January 2012
Country
Year of First Rating 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 2012
Austria 1975 NR AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+Austria 1975 NR AAA AAA AAA AAA AAA AAA AAA AAA AAA AABelgium 1988 NR NR NR NR AA+ AA+ AA+ AA+ AA+ AA AACanada 1949 AAA AAA AAA AAA AAA AA+ AA+ AAA AAA AAA AAADenmark 1981 NR NR NR AA+ AA AA+ AA+ AAA AAA AAA AAAFinland 1972 NR AAA AAA AAA AAA AA- AA+ AAA AAA AAA AAAFrance 1975 NR AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+France 1975 NR AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+Germany 1983 NR NR NR AAA AAA AAA AAA AAA AAA AAA AAAGreece 1988 NR NR NR NR BBB- BBB- A- A BB+ CC CCIceland 1989 NR NR NR NR A A A+ AA- BBB- BBB- BBB-Ireland 1988 NR NR NR NR AA- AA AA+ AAA A BBB+ BBB+Italy 1988 NR NR NR NR AA+ AA AA AA A+ A BBB+Italy 1988 NR NR NR NR AA+ AA AA AA- A+ A BBB+Japan 1959 NR1 AAA AAA AAA AAA AAA AAA AA- AA AA- AA-Luxembourg 1994 NR NR NR NR NR AAA AAA AAA AAA AAA AAANetherlands 1988 NR NR NR NR AAA AAA AAA AAA AAA AAA AAANorway 1958 NR1 AAA AAA AAA AAA AAA AAA AAA AAA AAA AAAPort gal 1988 NR NR NR NR A AA AA AA A BBB BBPortugal 1988 NR NR NR NR A AA- AA AA- A- BBB- BBSpain 1988 NR NR NR NR AA AA AA+ AAA AA AA- ASweden 1977 NR NR AAA AAA AAA AA+ AA+ AAA AAA AAA AAASwitzerland 1988 NR NR NR NR AAA AAA AAA AAA AAA AAA AAATurkey 1992 NR NR NR NR NR B+ B+ BB- BB BB BBU it dUnited Kingdom 1978 NR NR AAA AAA AAA AAA AAA AAA AAA AAA AAAUnited States 1941 AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+ AA+
AAA A Noninvestment gradeAA BBB
Deutsche Bank 83Torsten Slok, [email protected] +1 212 250-2155 December 2014
Note: The Organization for Economic Cooperation and Development (OECD) was established in 1961. Countries selected constituted the OECD membership in 1970. Ratings shown are S&P's long-term foreign currency ratings. NR = not rated.1Sovereign rating suspended; see Bhatia (2002).
Source: S&P , IMF, DB Global Markets Research
d f i k f t t t di ll…and fewer risk-free assets outstanding more generally
Distribution of Sovereign Debt Ratings for OECD countries, Today
BB CC
Distribution of Sovereign Debt Ratings for OECD countries, Before crisis
A12%
BBB8%
BB4% 4%
12%
AAA
A8%AA
20%
AAA52%
AA24%
AAA68%
Deutsche Bank 84Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: IMF, DB Global Markets Research
Treasury issuance down as a share of total fixed income issuanceshare of total fixed income issuance
Change in debt outstandingUS$trn US$trn
Open market Munis Other loans Trsy
4
5
4
5
p yCorp & frn Mortgages GSE-backed Bank loansCons. credit Total
2
3
4
2
3
4
0
1
0
1
-2
-1
-2
-1
-3
1996 1998 2000 2002 2004 2006 2008 2010 2012-3
Deutsche Bank 85Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
The composition of fixed income issuance has changed recently: More spread product fewer treasuriesrecently: More spread product, fewer treasuries
Change in debt outstandingUS$trn US$trnO k t M i Oth l
2.0 2.0
Open market Munis Other loansTrsy Corp & frn MortgagesGSE-backed Bank loans Cons. creditTotal
1.0
1.5
1.0
1.5
0.0
0.5
0.0
0.5
-1.0
-0.5
-1.0
-0.5
-1.52007 2008 2009 2010 2011 2012 2013 2014
-1.5
Deutsche Bank 86Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: FRB, Haver Analytics, DB Global Markets Research
Holders of U.S. equities
6%3%3%
US residents
Advanced markets6%
Advanced markets
Financial centers
China
Other emerging
90%
g gmarketsMiddle East oilproducersOthers
Deutsche Bank 87Torsten Slok, [email protected] +1 212 250-2155 December 2014
Note: Data for 2009. Source: TIC and IMF, DB Global Markets Research
Holders of U.S. debt
5%
5%4%
US residents
11%
5%Advanced markets
Financial centers11%
China
73% Other emerging markets
Middle East oilproducersproducersOthers
Deutsche Bank 88Torsten Slok, [email protected] +1 212 250-2155 December 2014
Data for 2009. Source: TIC and IMF, DB Global Markets Research
Financial markets in advanced economies are six times bigger than in emerging marketsgg g g
Absolute size of capital markets, 2009US$ trn US$ trn
150 150Debt securities Stock market cap
GDP at current prices$122trn
90
120
90
120
30
60
30
60
0
30
AE G7 T t l EM0
30
AE G7 Total EMsNote: AE equals G7 plus other AE.** Total Ems is the sum of EM in LatAm, MENA, Africa and Europe
Deutsche Bank 89Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Adapted from IMF, DB Global Markets Research
Recent developments in pownership of p
government debtgovernment debt
Deutsche Bank 90Torsten Slok, [email protected] +1 212 250-2155 December 2014
High spread euro area constitutes 11% of the advanced economy government debt universe. Traditional reserve
currencies (US Japan UK and Switzerland) make up 68%Advanced Economy Sovereign Debt Universe
(trillion U.S. dollars, end-2012)$ trn $ trn
currencies (US, Japan, UK, and Switzerland) make up 68%.
30.030
$ trn
30
$ trn
20
25
20
25
Total US $44 trillion
10
15
10
15
6.1 5.03.05
10
5
10
0Traditional
reserve countriesLow-spread euro
areaHigh-spread euro
areaOther advanced
economies
0
Deutsche Bank 91Torsten Slok, [email protected] +1 212 250-2155 December 2014
reserve countries area area economiesSource: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
China is the biggest foreign holder of Japanese JGBs
Foreign Holdings of Government Debt by Region 1/ 2/Japan
90Yen trn
90Yen trn
China US
70
80
70
80China USEuro Area Other EuropeOther Advanced Offshore CentersDeveloping
50
60
50
60
30
40
30
40
10
20
10
20
02004 2005 2006 2007 2008 2009 2010 2011
0
11/ Excluding foreign official loans and SMP holdings of foreign central banks.
Deutsche Bank 92Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research2/ Regional groups are based on country classifications of BIS international banking statistics.
Foreign holdings of high spread euro area government debt rising
Foreign Holdings of Advanced Economy Sovereign Debt, 2004-2014 Q2, High spread euro area
euro area government debt rising
90%
100%
80%
90%Greece Ireland Italy Portugal Spain
60%
70%
80%
60%
70%
40%
50%
60%
40%
50%
20%
30%
40%
20%
30%
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
Deutsche Bank 93Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Foreign holdings of low spread euro area government debt rising in GermanyForeign Holdings of Advanced Economy Sovereign Debt,
2004-2014 Q2, Low spread euro area
euro area government debt rising in Germany
80%
90%
80%
90%Austria Finland France Germany Netherlands
60%
70%
60%
70%
50%
60%
50%
60%
30%
40%
30%
40%
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
Deutsche Bank 94Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Foreign holdings of traditional reserve countries government debt rising in United States
Foreign Holdings of Advanced Economy Sovereign Debt, 2004-2014 Q2, Traditional reserve countries
government debt rising in United States
%40%45%
%40%45%Japan Switzerland United Kingdom United States
25%30%35%
25%30%35%
10%15%20%
10%15%20%
0%5%
10%
0%5%10%
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
Deutsche Bank 95Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Who owns different countries’ government debt?
Investorbase of Advanced Economy Government Debt at end-2013 (% of total)
Domestic central bank Domestic banks Domestic nonbanks
100% 100%
Domestic central bank Domestic banks Domestic nonbanksForeign official Foreign banks Foreign nonbanks
60%
80%
60%
80%
20%
40%
20%
40%
0%
eece
rtuga
lel
and
land
sra
nce
Sta
tes
man
yst
ralia
eden
nlan
dus
tria
mar
kor
way
Spa
ingd
omna
dagi
umer
land
alan
dve
nia
Italy
publ
icK
orea
apan
0%
Gre
Por Ire
Net
herl Fr
Uni
ted
SG
erm
Aus Sw
eFi
nA
uD
en No S
Uni
ted
Kin
gC
aB
elS
witz
eN
ew Z
eaS
lov
Cze
ch R
ep K J
Deutsche Bank 96Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Sovereign investor base estimates by Arslanalp and Tsuda, DB Global Markets Research
Half of foreign central bank holdingsof government bonds are Treasuries
Foreign Central Bank Holdings of Advanced Economy Government Debt Securities, 2004-14 (in billion USD)9 000 9000
of government bonds are Treasuries
, ( )
7,000
8,000
9,000
7000
8000
9000Other United States United KingdomJapan Germany FranceCanada Australia
5,000
6,000
,
5000
6000
3,000
4,000
3000
4000
1,000
2,000
1000
2000
02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(June)
0
Deutsche Bank 97Torsten Slok, [email protected] +1 212 250-2155 December 2014
Source: Sovereign investor base estimates by Arslanalp and Tsuda (2012), DB Global Markets Research
Peter HooperManaging Director, Chief EconomistDeutsche Bank Securities, Inc.+1 (212) [email protected]
Peter Hooper joined Deutsche Bank Securities in 1999 as Chief USPeter Hooper joined Deutsche Bank Securities in 1999 as Chief US Economist. He became Chief Economist and co-head of global economics in 2006. Prior to joining Deutsche Bank, Hooper enjoyed a distinguished 26-year career at the Federal Reserve Board in Washington, D.C. While rising to senior levels of the Fed staff, he held numerous positions, including as an economist on the FOMC. Hooper and his team produce weekly and quarterly publications for Deutsche Bank with a focus on US and global economic developments and Fed policy; he also comments on US and global economic and financial developments in the news mediadevelopments in the news media.
Hooper currently serves as a member of the Economic Advisory Panel of the Federal Reserve Bank of New York, a member and former chairman of the Economic Advisory Committee of the American Bankers Association, a founding member of the US Monetary Policy Forum a member of thea founding member of the US Monetary Policy Forum, a member of the Economic Leadership Council for the University of Michigan, and a member of the Forecasters’ Club of New York. Hooper earned a BA in Economics (cum laude) from Princeton University and an MA and Ph.D. in Economics from University of Michigan He has published numerous
Deutsche Bank 98Torsten Slok, [email protected] +1 212 250-2155 December 2014
in Economics from University of Michigan. He has published numerous books, journal articles, and reviews on economics and policy analysis.
Torsten Slok, Ph.D.Chief International Economist, Managing DirectorDeutsche Bank Securities, Inc.
Torsten Slok joined Deutsche Bank Securities in the fall of 2005. Mr. Slok’s Economics team has been ranked Top 3 by Institutional Investor for the
past three years. Slok currently serves as a member of the Economic Club of New York Prior to joining the firm Mr Slok worked at the OECD in Paris in the Money and Prior to joining the firm, Mr. Slok worked at the OECD in Paris in the Money and
Finance Division and the Structural Policy Analysis Division. Before joining the OECD he worked for four years at the IMF in the Division responsible for writing the World Economic Outlook and the Division responsible for China, Hong Kong, and MongoliaMongolia. Mr. Slok studied at University of Copenhagen and Princeton University. He has
published numerous journal articles and reviews on economics and policy analysis, including in Journal of International Economics, Journal of International Money and Fi d Th E t i J lFinance, and The Econometric Journal.
Deutsche Bank 99Torsten Slok, [email protected] +1 212 250-2155 December 2014
Matthew [email protected]
Matthew Luzzetti received a Ph.D. in Economics from theUniversity of California, Los Angeles, focusing onmacroeconomics. Prior to that he worked as a researchmacroeconomics. Prior to that he worked as a researchanalyst at the Federal Reserve Bank of Philadelphia. Mattjoined Deutsche Bank in September 2012 and is part ofDB’s top II ranked economics team.
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22/12/2014 11:00:54 2010 DB Blue template
Torsten Slok, Ph.D.Chief International Economist, Managing DirectorDeutsche Bank Securities, Inc.
Torsten Slok joined Deutsche Bank Securities in the fall of 2005. Mr. Slok’s Economics team has been top-ranked by Institutional Investor in fixed
income and equities for the past five years. Slok currently serves as a member of the Economic Club of New York Prior to joining the firm Mr Slok worked at the OECD in Paris in the Money and Prior to joining the firm, Mr. Slok worked at the OECD in Paris in the Money and
Finance Division and the Structural Policy Analysis Division. Before joining the OECD he worked for four years at the IMF in the Division responsible for writing the World Economic Outlook and the Division responsible for China, Hong Kong, and MongoliaMongolia. Mr. Slok studied at University of Copenhagen and Princeton University. He has
published numerous journal articles and reviews on economics and policy analysis, including in Journal of International Economics, Journal of International Money and Fi d Th E t i J lFinance, and The Econometric Journal.
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Deutsche Bank
Appendix 1
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Risks to Fixed Income Positions
Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises ininflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to
i B t t t i dit thi li t t ti l ti (i l di h i treceivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currencyconversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing housesare also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track The choice of the proper fixing (or metric) is particularlyactual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differsfrom the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.
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